buy - hdfc securities software - 4qfy19... · 2019-05-31 · results review 4qfy19. 31 may 2019....

RESULTS REVIEW 4QFY19 31 MAY 2019

Sonata Software BUY

HDFC securities Institutional Research is also available on Bloomberg HSLB <GO>& Thomson Reuters

IP-led growth strategy on trackWe maintain BUY on Sonata based on inline 4QFY19. Robust growth in IP-led revenue (+41% YoY) and margin expansion in IITS (~483 bps in FY19) is encouraging. Our TP of Rs 480 (+34% upside) is based on 16x FY21E EPS. HIGHLIGHTS OF THE QUARTER

International IT services (IITS) revenue increased 6.6% QoQ (organic ~3%) to USD 43.5mn, in-line with our est of USD 43.7mn. Growth was led by IP-led revenue (+21.1% QoQ). Acquisition of Scalable Data and Sopris will strengthen Sonata’s Microsoft Dynamics AX capability, which has grown at 8qtr CQGR of 9.6%.

IITS margin expanded 483bps YoY to 23.5% in FY19 fueled by growth in IP-led business, high utilisation (86%) and operational efficiency. However, with limited margin levers available, the desired range is 22-24%. It is still second highest in the Tier-2 IT pack.

Total Revenue was down 1% QoQ to Rs 8.36bn due to 4.7% decline in Domestic Product & Services (DPS) revenue. DPS performance is measured on absolute EBITDA, which stood at Rs 0.21bn (+8.7% QoQ).

IP-led and Digital grew by 9.7/21.1% QoQ and stood at 36.0/21.7% of revenue. ~61% of the incremental revenue of IITS came from IP-Led services. IP-led focus

has been a successful strategy for Sonata (8qtr CQGR of 10.3%) and also led to strong margin performance.

Near-term outlook: We expect revenue growth to continue supported by IP-led, Dynamics AX and integration of Scalable Data. IITS margins will be stable and salary hike impact will come in 1Q and 3QFY20E.

STANCE: Growth at reasonable valuations Sonata’s platformation strategy to provide IT services around IPs like Rezopia, Halosys, Brick & Click and Retina, is yielding results. Growth in IP-led revenues is improving employee productivity and aiding margin expansion. Microsoft Dynamic 365 is in hyper growth phase and Sonata being a preferred development partner is reaping benefits. Sonata strategic acquisition of Sopris and Scalable Data will enhance Dynamics 365 offerings and will support growth. We expect IITS’ USD revenue to grow 15/11% with margin of 22.6/23.0% in FY20/21E. We like Sonata’s IP-focussed business model, strong relationship with top-clients, high RoE (~35%) and dividend yield of ~3%. The stock trades at a P/E of 11.9x FY21E, which is reasonable (~10% discount to tier-2 IT median). Risks include high client concentration, slow down in Dynamics 365 and drop in margins due to onsite investments.

Financial Summary YE March (Rs bn) 4QFY19 4QFY18 YoY (%) 3QFY19 QoQ (%) FY17 FY18 FY19P FY20E FY21E Net Revenues 8.36 6.26 33.5 8.44 (1.0) 23.71 24.54 29.61 32.59 35.04 EBITDA 0.88 0.64 39.1 1.00 (11.4) 1.92 2.31 3.36 3.74 4.18 APAT 0.64 0.54 18.7 0.64 0.8 1.56 1.93 2.49 2.80 3.11 Diluted EPS (Rs) 6.2 5.2 18.7 6.2 0.8 15.1 18.6 24.0 26.9 29.9 P/E (x) 23.7 19.2 14.9 13.3 11.9 EV / EBITDA (x) 18.0 14.2 10.4 9.0 7.9 RoE (%) 29.3 31.0 35.1 34.2 33.8

Source: Company, HDFC sec Inst Research # Consolidated

INDUSTRY IT CMP (as on 31 May 2019) Rs 356 Target Price Rs 480 Nifty 11,923 Sensex 39,714 KEY STOCK DATA Bloomberg SSOF IN No. of Shares (mn) 105 MCap (Rs bn) / ($ mn) 37/536 6m avg traded value (Rs mn) 43 STOCK PERFORMANCE (%) 52 Week high / low Rs 429/265 3M 6M 12M Absolute (%) 5.3 16.2 (4.5) Relative (%) (5.4) 6.5 (16.9) SHAREHOLDING PATTERN (%) Dec-18 Mar-19 Promoters 28.17 28.17 FIs & Local MFs 7.85 9.87 FPIs 15.22 13.83 Public & Others 48.76 48.13 Pledged Shares 0.00 0.00 Source : BSE

Amit Chandra [email protected] +91-22-6171-7345 Apurva Prasad [email protected] +91-22-6171-7327 Akshay Ramnani [email protected] +91-22-6171-7334

SONATA SOFTWARE : RESULTS REVIEW 4QFY19

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Quarterly Consolidated Financials Snapshot (Rs mn) Particulars 4QFY19 4QFY18 YoY (%) 3QFY19 QoQ (%) IITS Net Revenues (USD mn) 43.5 37.4 16.3 40.8 6.6 Net Revenues 8,356 6,258 33.5 8,440 (1.0) Inventory Costs 5,157 3,740 37.9 5,393 (4.4) Employee Costs 1,525 1,288 18.5 1,404 8.6 Other Operating Expenses 789 595 32.6 644 22.5 EBITDA 884 635 39.1 998 (11.4) Depreciation 40 30 34.6 30 35.9 EBIT 844 606 39.4 969 (12.8) Interest Cost 7 10 (27.5) 11 (33.0) Other Income 84 119 (29.3) (47) (277.2) PBT 921 715 28.9 911 1.2 Tax 268 172 55.7 271 (1.4) Minority Interest 0 0 NM 0 NM RPAT 654 543 20.4 639 2.2 E/o (adj for tax) 9 0 NM 0 NM APAT 644 543 18.7 639 0.8 Source: Company, HDFC sec Inst Research Margin Analysis (%) Particulars 4QFY19 4QFY18 YoY (bps) 3QFY19 QoQ (bps) Inventory Cost % Net Revenue 61.7 59.8 196 63.9 (218) Employee Cost % Net Revenue 18.3 20.6 (232) 16.6 161 SG&A and Other Expenses % Net Revenues 9.4 9.5 (7) 7.6 181 EBITDA Margin (%) 10.6 10.2 43 11.8 (124) EBIT Margin (%) 10.1 9.7 42 11.5 (137) Tax Rate (%) 29.0 24.0 501 29.8 (74) APAT Margin (%) 7.7 8.7 (96) 7.6 14 Source: Company, HDFC sec Inst Research

IITS’ revenue grew 6.6% QoQ (~3% Organic) and DPS revenue grew 38.0% YoY to Rs 5.36bn in INR terms IITS’ EBITDA% was 22.5% following a high margin of 28.4% in 3Q FY19 IITS EBITDA% was at 23.5% (vs. 18.6% in FY18) Higher other income was partly due to lower forex loss of Rs 33mn vs. (loss of Rs 66mn in 3Q) APAT stood at Rs 0.64bn up 0.8% QoQ (vs. our exp of Rs 0.64bn) Tax rate for FY20 would be ~29%

SONATA SOFTWARE: RESULTS REVIEW 4QFY19

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Segmental Revenue & EBITDA Mix Particulars (Rs mn) 4QFY19 4QFY18 YoY (%) 3QFY19 QoQ (%) FY19 FY18 YoY (%) IITS Net Revenues 3,041 2,418 25.8 2,840 7.1 11,205 9,285 20.7 DPS Revenue 5,366 3,887 38.0 5,632 (4.7) 18,628 15,468 20.4 Inter segment (52) (47) NM (32) NM (224) (214) NM Total Revenue# 8,356 6,258 33.5 8,440 (1.0) 29,609 24,539 20.7

EBITDA (Rs mn) 4QFY19 4QFY18 YoY (%) 3QFY19 QoQ (%) FY19 FY18 YoY (%) IITS * 683 479 42.5 807 (15.4) 2,629 1,730 52.0 DPS 212 158 34.2 195 8.7 751 603 24.5 Inter segment (11) (2) (4) (24) (23) Total EBITDA 884 635 39.1 998 (11.4) 3,356 2,310 45.3

EBITDA Margin (%) 4QFY19 4QFY18 YoY (bps) 3QFY19 QoQ (bps) FY19 FY18 YoY (bps) IITS 22.5 19.8 264 28.4 (597) 23.5 18.6 483 DPS 4.0 4.1 (11) 3.5 49 4.0 3.9 13 Total EBITDA Margin (%) 10.6 10.2 43 11.8 (124) 11.3 9.4 192 Source: Company, HDFC sec Inst Research, *IITS EBITDA excludes other income and income tax refunds, # Reported revenue

IITS Vertical Revenue Mix (% Contribution) 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 3QFY19 4QFY19 OPD 29.0% 28.0% 28.0% 28.0% 28.0% 27.0% 26.0% TTL 27.0% 28.0% 27.0% 27.0% 29.0% 28.0% 28.0% CPG & Retail 26.0% 27.0% 25.0% 25.0% 26.0% 26.0% 27.0% Others 18.0% 17.0% 20.0% 20.0% 17.0% 19.0% 19.0% Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Source: Company, HDFC Sec Inst Research

IITS Vertical-wise Revenue Growth (Growth % QoQ; USD) 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 3QFY19 4QFY19 OPD 7.7% -0.9% 0.0% 1.1% 3.4% 0.6% 2.7% TTL 7.4% 6.5% -3.6% 1.1% 11.1% 0.7% 6.6% CPG & Retail 20.7% 6.6% -7.4% 1.1% 7.6% 4.3% 10.7% Others 11.4% -3.0% 17.6% 1.1% -12.1% 16.6% 6.6% Total 11.4% 2.7% 0.0% 1.1% 3.4% 4.3% 6.6% Source: Company, HDFC Sec Inst Research

DPS business is lumpy in nature due to closure of large deal in a particular quarter. The best way to measure its performance is on absolute EBITDA basis, which was up 8.7% QoQ and 24.5% in FY19 IITS EBITDA% normalized at 22.5% in the quarter but FY19 improvement has been significant (+483bps). The benefits of IP-led shift and cost rationalisation is reflecting in margins OPD/Travel/Retail has grown at an eight quarter CQGR of 3.0/4.9/4.9% respectively Out of the total 159 customers 104/15/12 are in Retail/OPD/Travel respectively


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IITS Service Line Break-up (% Contribution) 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 3QFY19 4QFY19 ADM 23.0% 23.0% 24.0% 26.0% 25.0% 25.0% 24.0% Testing 18.0% 19.0% 18.0% 17.0% 17.0% 17.0% 17.0% IMS 17.0% 17.0% 19.0% 17.0% 16.0% 16.0% 16.0% AX 19.0% 20.0% 19.0% 18.0% 20.0% 20.0% 22.0% BI 7.0% 8.0% 7.0% 8.0% 8.0% 8.0% 8.0% E-commerce 6.0% 5.0% 5.0% 6.0% 7.0% 6.0% 6.0% ERP 5.0% 4.0% 4.5% 4.0% 4.0% 4.0% 4.0% Rezopia/Mobility/Cloud 5.0% 4.0% 3.5% 4.0% 3.0% 4.0% 3.0% Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Source: Company, HDFC Sec Inst Research IITS Service Line Growth (Growth %, QoQ) 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 3QFY19 4QFY19 ADM 11.4% 2.7% 4.3% 9.5% -0.5% 4.3% 2.4% Testing 5.5% 8.4% -5.3% -4.5% 3.4% 4.3% 6.6% IMS 5.2% 2.7% 11.8% -9.6% -2.6% 4.3% 6.6% AX 24.5% 8.1% -5.0% -4.2% 14.9% 4.3% 17.3% BI -2.5% 17.3% -12.5% 15.5% 3.4% 4.3% 6.6% E-commerce 33.7% -14.4% 0.0% 21.3% 20.7% -10.6% 6.6% ERP 11.4% -17.9% 12.5% -10.2% 3.4% 4.3% 6.6% Rezopia 11.4% -17.9% -12.5% 15.5% -22.4% 39.1% -20.0% Total 11.4% 2.7% 0.0% 1.1% 3.4% 4.3% 6.6% Source: Company, HDFC Sec Inst Research

Broad based growth across service lines is driven by IP-led revenue (21.7% of rev, up 10.3% 8-qtr CQGR) Growth in 4Q was powered by AX (22% of rev, up 17.3% QoQ) led by acquisition of Sopris and Scalable Data Microsoft Dynamics AX has growth at an 8-quarter CQGR of 9.6% (company average is 4.5%) ADM/Testing has grown at an 8 Qtr CQGR of 3.9/4.5%


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IITS Geographic Revenue Mix (% Contribution) 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 3QFY19 4QFY19 USA 59.0% 59.0% 58.0% 60.0% 58.0% 56.0% 55.0% Europe 27.0% 27.0% 28.0% 29.0% 30.0% 32.0% 32.0% RoW 14.0% 14.0% 14.0% 11.0% 12.0% 12.0% 13.0% Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Source: Company, HDFC Sec Inst Research IITS Geographic Revenue Growth (% QoQ) 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 3QFY19 4QFY19 USA 9.5% 2.7% -1.7% 4.6% 0.0% 0.7% 4.7% Europe 15.7% 2.7% 3.7% 4.7% 7.0% 11.3% 6.6% RoW 11.4% 2.7% 0.0% -20.6% 12.8% 4.3% 15.5% Total 11.4% 2.7% 0.0% 1.1% 3.4% 4.3% 6.6% Source: Company, HDFC Sec Inst Research IITS Onsite-Offshore Split IT services revenue break-up (%) 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 3QFY19 4QFY19 Offshore 55.0% 55.0% 59.0% 56.0% 58.0% 58.0% 57.0% Onsite 45.0% 45.0% 41.0% 44.0% 42.0% 42.0% 43.0% Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Source: Company, HDFC Sec Inst Research IITS Onsite-Offshore Growth IT services revenue growth (% QoQ) 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 3QFY19 4QFY19 Offshore 7.5% 2.7% 7.3% -4.1% 7.1% 4.3% 4.8% Onsite 16.6% 2.7% -8.9% 8.5% -1.3% 4.3% 9.2% Total 11.4% 2.7% 0.0% 1.1% 3.4% 4.3% 6.6% Source: Company, HDFC Sec Inst Research

Growth was broad based across geographies with USA/Europe/RoW up 4.7/6.6/15.5% QoQ Onsite growth was +9.2% QoQ, onsite outpaced offshore growth which was up 4.8% QoQ


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IITS Client Concentration Client concentration (%) 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 3QFY19 4QFY19 Top 5 60.0% 62.0% 61.0% 61.0% 61.0% 61.0% 61.0% Top-10 69.0% 71.0% 69.0% 70.0% 69.0% 69.0% 68.0% Non-top 10 31.0% 29.0% 31.0% 30.0% 31.0% 31.0% 32.0% Top 20 78.0% 79.0% 79.0% 80.0% 77.0% 78.0% 76.0% Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Source: Company, HDFC Sec Inst Research IITS Client Concentration Growth Client concentration (% growth) 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 3QFY19 4QFY19 Top 5 9.6% 6.1% -1.6% 1.1% 3.4% 4.3% 6.6% Top-10 9.8% 5.6% -2.8% 2.5% 2.0% 4.3% 5.1% Non-top 10 15.1% -4.0% 6.9% -2.2% 6.9% 4.3% 10.1% Top 20 10.0% 4.0% 0.0% 2.3% -0.4% 5.7% 3.9% Total 11.4% 2.7% 0.0% 1.1% 3.4% 4.3% 6.6% Source: Company, HDFC Sec Inst Research

Top 5/10 clients grew strongly for the second consecutive quarter Growth in tail accounts (Non-Top 10) was also robust at 10.1% QoQ Added 3 new customers in 4QFY19 (vs. 9 in 3Q) in IITS business


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IITS Rev Growth Trend IITS EBITDA, Margin Trend

Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research

IITS Headcount IITS Debtor Days


IITS revenue/EBITDA has grown at CQGR of 4.5/9.7% over the last eight quarter IITS EBITDA margin will be in the range of 22-24% hearon, near term headwinds to margins are wage hike in (1Q & 3Q FY20), margin expansion to come from higher revenue growth with increased productivity Avg. revenue per employee in 4Q was USD 45,207, +3.8/-0.1% QoQ/YoY, Avg. revenue per employee for FY19 was USD 44,784 up 1.5% YoY IITS debtor days are among the lowest in the industry at 40-42 days

29.2

31.2

30.3

30.7

32.7

36.4

37.4

37.4

37.8

39.1

40.8

43.5

(5)

(1)

3

7

11

15

0 5

10 15 20 25 30 35 40 45 50

1QFY

17

2QFY

17

3QFY

17

4QFY

17

1QFY

18

2QFY

18

3QFY

18

4QFY

18

1QFY

19

2QFY

19

3QFY

19

4QFY

19

Revenue (USD mn) QoQ growth (RHS)(USD mn) (%, QoQ)

342 41

4

394

325

335 41

3 503

479 57

0

568

807

683

9

14

19

24

29

34

50

150

250

350

450

550

650

750

850

1QFY

17

2QFY

17

3QFY

17

4QFY

17

1QFY

18

2QFY

18

3QFY

18

4QFY

18

1QFY

19

2QFY

19

3QFY

19

4QFY

19

EBITDA EBITDA margin (RHS)(Rs mn) (%)

3,14

4

3,14

7

3,16

1

3,21

3 3,41

8

3,46

4

3,29

6

3,31

3 3,45

4 3,67

9 3,81

2

3,88

62,500

2,700

2,900

3,100

3,300

3,500

3,700

3,900

4,100

1QFY

17

2QFY

17

3QFY

17

4QFY

17

1QFY

18

2QFY

18

3QFY

18

4QFY

18

1QFY

19

2QFY

19

3QFY

19

4QFY

19

Nos

60 60

48

52

47

40

39

40 41 42 40 41

0

10

20

30

40

50

60

70

1QFY

17

2QFY

17

3QFY

17

4QFY

17

1QFY

18

2QFY

18

3QFY

18

4QFY

18

1QFY

19

2QFY

19

3QFY

19

4QFY

19

Days


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DPS Quarterly Revenue Trend DPS EBITDA Margin Trend


DPS’ Headcount DPS’ Debtor Days


DPS EBITDA has grown at a CQGR of 5.2% over the last eight quarter DPS’ debtor days have gone up to 47 days (vs. 42 in 3Q) increase in debtor days is largely attributable to timing difference of collection

4,89

3

2,95

5

4,15

7 4,86

1

4,28

1

1,99

7

5,30

3

3,88

7

4,37

1

3,25

9

5,63

2

5,36

6

0

1,000

2,000

3,000

4,000

5,000

6,000

1QFY

17

2QFY

17

3QFY

17

4QFY

17

1QFY

18

2QFY

18

3QFY

18

4QFY

18

1QFY

19

2QFY

19

3QFY

19

4QFY

19

(Rs mn)

142

142 14

9

141 15

1

140 15

4

158 16

7 177 19

5 212

0

1

2

3

4

5

6

7

8

50 70 90

110 130 150 170 190 210 230

1QFY

17

2QFY

17

3QFY

17

4QFY

17

1QFY

18

2QFY

18

3QFY

18

4QFY

18

1QFY

19

2QFY

19

3QFY

19

4QFY

19

EBITDA EBITDA margin (RHS)(Rs mn)

(%)

147

156

153

153

157

164 16

3

163

161

157

155 156

135

140

145

150

155

160

165

170

1QFY

17

2QFY

17

3QFY

17

4QFY

17

1QFY

18

2QFY

18

3QFY

18

4QFY

18

1QFY

19

2QFY

19

3QFY

19

4QFY

19

(Nos)

69

110

95

76 81

59

38 49

55

48

42 47

0

20

40

60

80

100

120

1QFY

17

2QFY

17

3QFY

17

4QFY

17

1QFY

18

2QFY

18

3QFY

18

4QFY

18

1QFY

19

2QFY

19

3QFY

19

4QFY

19

Days


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IITS’ Segment Estimates IITS (Rs million) FY17 FY18 FY19P FY20E FY21E Revenue (USD million) 121.4 143.9 161.2 185.6 206.6 % Growth 12.6 18.6 12.0 15.1 11.3 Revenue 8,218 9,285 11,205 12,992 14,464 % Growth 16.3 13.0 20.7 15.9 11.3 EBITDA 1,438 1,730 2,629 2,941 3,327 EBITDA Margin (%) 17.5 18.6 23.5 22.6 23.0 Source: Company, HDFC sec Inst Research

DPS’ Segment Estimates DPS (Rs million) FY17 FY18 FY19P FY20E FY21E Revenue 15,774 15,468 18,628 19,598 20,578 % Growth 26.2 (1.9) 20.4 5.2 5.0 EBITDA 583 603 751 804 854 EBITDA Margin (%) 3.7 3.9 4.0 4.1 4.2 Source: Company, HDFC sec Inst Research

Change In Estimates Particulars Earlier estimates Revised estimates % change FY20E Revenue (Rs mn) 31,390 32,590 3.8 EBITDA (Rs mn) 3,633 3,744 3.1 EBITDA margin (%) 11.6 11.5 (9) bps APAT 2,698 2,796 3.6

FY21E Revenue (Rs mn) 34,266 35,042 2.3 EBITDA (Rs mn) 4,069 4,181 2.7 EBITDA margin (%) 11.9 11.9 6 bps APAT 3,014 3,111 3.2 Source: Company, HDFC sec Inst Research


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Peer Set Comparison

Company MCap (Rs bn)

CMP (Rs)

TP (Rs) RECO

EPS (Rs) P/E (x) RoE (%) FY18 FY19P FY20E FY21E FY18 FY19P FY20E FY21E FY18 FY19P FY20E FY21E

TCS 8,243 2,197 2,410 BUY 68.8 83.9 90.4 100.5 31.9 26.2 24.3 21.9 30.1 36.1 37.1 39.1 Infosys 3,210 738 755 NEU 33.8 36.4 37.5 41.9 21.8 20.3 19.7 17.6 24.5 23.7 23.2 23.6 Wipro 1,634 287 250 SELL 14.0 15.8 16.5 17.9 20.4 18.1 17.3 16.0 16.5 17.3 16.9 17.0 HCL Tech 1,521 1,093 1,250 BUY 64.7 73.9 78.7 86.5 16.9 14.8 13.9 12.6 25.3 26.0 24.5 23.8 TechM 669 760 652 SELL 43.2 48.9 49.6 54.3 17.6 15.6 15.3 14.0 21.5 22.0 21.1 21.0 Tier-1 IT Median 20.4 18.1 17.3 16.0 24.5 23.7 23.2 23.6

LTI 310 1,785 2,095 BUY 66.9 87.3 93.0 104.6 26.7 20.4 19.2 17.1 33.2 34.6 30.1 28.6 Mphasis 185 994 1,330 BUY 45.4 57.7 62.0 73.8 21.9 17.2 16.0 13.5 14.6 20.0 20.8 21.8 LTTS 183 1,762 1,860 BUY 45.5 68.0 71.4 93.0 38.7 25.9 24.7 18.9 27.7 32.0 27.5 30.0 Mindtree 160 978 1,040 NEU 32.3 44.2 51.6 57.8 30.2 22.1 18.9 16.9 21.4 24.9 24.9 25.0 Hexaware * 107 360 430 BUY 16.8 19.6 21.4 26.1 21.5 18.4 16.9 13.8 26.6 26.5 25.0 26.6 Cyient 63 561 595 NEU 38.6 43.6 47.2 51.6 14.5 12.9 11.9 10.9 18.1 19.5 19.5 19.0 Tata Elxsi 54 872 945 NR 38.5 46.6 46.0 52.4 22.6 18.7 18.9 16.6 37.0 34.5 27.7 26.5 Zensar 57 250 305 BUY 10.6 13.8 16.0 19.1 23.6 18.1 15.6 13.1 15.1 17.0 17.1 17.8 Persistent 46 582 645 NEU 40.6 45.9 44.1 49.5 14.3 12.7 13.2 11.7 16.0 15.7 14.2 14.7 eClerx 36 933 815 SELL 74.1 61.7 67.8 74.1 12.6 15.1 13.8 12.6 24.1 18.1 18.2 19.6 Sonata 37 356 480 BUY 18.6 24.0 26.9 29.9 19.2 14.8 13.2 11.9 31.0 35.1 34.2 33.8 Intellect 32 256 313 BUY 3.7 8.1 11.0 15.9 NM 31.7 23.3 16.1 6.7 11.1 12.6 15.9 Majesco 15 523 715 BUY (1.5) 18.3 26.4 34.8 NM 28.5 19.8 15.0 NM 8.4 10.4 12.4 HGS 14 666 770 NR 96.5 72.5 86.4 96.4 6.9 9.2 7.7 6.9 14.3 9.8 10.7 10.9 Mastek 11 475 657 BUY 27.8 40.6 44.7 52.2 17.1 11.7 10.6 9.1 13.7 16.1 14.8 15.4 Tier-2 IT Median 20.5 17.8 16.1 13.2 18.1 19.5 19.9 21.5

Company MCap (USD bn)

CMP USD TP RECO

EPS (USD) P/E (x) RoE (%) FY18 FY19E FY20E FY21E FY18 FY19E FY20E FY21E FY18 FY19E FY20E FY21E

Accenture 114 179 NA NR 5.6 6.5 7.3 8.0 32.1 27.6 24.4 22.4 41.7 42.0 39.9 36.7 Cognizant 34 60 NA NR 2.5 3.6 3.9 4.3 23.6 16.6 15.3 13.9 14.1 19.0 18.2 19.1 Capgemini^ 20 104 NA NR 4.9 4.4 6.5 7.2 21.3 23.8 15.9 14.5 11.5 10.1 13.3 13.5 Global IT Median 23.6 23.8 15.9 14.5 14.1 19.0 20.9 20.6

Source: HDFC sec Inst Research, Bloomberg, *Dec YE, ^CMP and EPS in EUR terms


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Consolidated Income Statement YE March (Rs bn) FY17 FY18 FY19P FY20E FY21E IITS USD Revenue (mn) 121.4 143.9 161.2 185.6 206.6 Growth (%) 12.6 18.6 12.0 15.1 11.3 Net Revenues 23.71 24.54 29.61 32.59 35.04 Growth (%) 22.2 3.5 20.7 10.1 7.5 Total Operating Expenses 21.79 22.23 26.25 28.85 30.86 EBITDA 1.92 2.31 3.36 3.74 4.18 EBITDA (%) 8.1 9.4 11.3 11.5 11.9 EBITDA Growth (%) (0.2) 20.6 45.3 11.6 11.7 Depreciation 0.11 0.12 0.13 0.15 0.16 EBIT 1.81 2.19 3.23 3.60 4.02 Other Income 0.55 0.47 0.30 0.37 0.40 Interest 0.09 0.05 0.03 0.04 0.04 PBT 2.26 2.60 3.49 3.93 4.38 Tax (incl deferred) 0.69 0.68 1.01 1.14 1.27 Minority Int. and associate profit -0.01 0.00 0.00 0.00 0.00 RPAT 1.56 1.93 2.49 2.80 3.11 EO (Loss) / Profit (Net Of Tax) 0.08 0.01 0.03 0.00 0.00 APAT 1.49 1.91 2.47 2.80 3.11 APAT Growth (%) (4.1) 28.8 28.8 13.4 11.3 EPS 14.3 18.4 23.7 26.9 29.9 EPS Growth (%) (4.1) 28.8 28.6 13.4 11.3

Source: Company, HDFC sec Inst Research

Consolidated Balance Sheet YE March (Rs bn) FY17 FY18 FY19P FY20E FY21E SOURCES OF FUNDS Share Capital - Equity 0.10 0.10 0.10 0.10 0.10 Reserves 5.80 6.43 7.58 8.57 9.66 Total Shareholders' Funds 5.90 6.53 7.68 8.67 9.77 Minority Interest 0.00 (0.00) 0.00 0.00 0.00 Total Debt 0.35 0.41 0.52 0.52 0.52 Net Deferred Taxes (0.05) (0.12) (0.12) (0.12) (0.12) Long-term Provisions & Others 0.14 0.10 0.11 0.11 0.11 TOTAL SOURCES OF FUNDS 6.36 6.93 8.19 9.18 10.28 APPLICATION OF FUNDS 0.00 0.00 0.00 0.00 0.00 Net Block 0.38 0.33 0.54 0.56 0.58 CWIP 0.00 0.00 0.01 0.01 0.01 Goodwill & Other Intangible Assets 0.80 0.81 1.45 1.45 1.45 Investments 0.00 0.00 0.00 0.00 0.00 LT Loans & Advances, Others 0.80 0.85 0.63 0.72 0.81 Total Non Current Assets 1.99 1.99 2.63 2.73 2.85 Inventories 0.00 0.00 0.00 0.00 0.00 Debtors 5.20 3.96 8.11 7.14 7.68 Cash & Equivalents 3.81 5.46 3.46 4.89 5.61 Other Current Assets 0.93 0.80 0.96 1.11 1.27 Total Current Assets 9.94 10.22 12.53 13.14 14.56 Creditors 4.48 4.32 5.87 5.53 5.92 Other Current Liabilities & Provns 1.09 0.96 1.09 1.16 1.21 Total Current Liabilities 5.58 5.29 6.97 6.69 7.13 Net Current Assets 4.37 4.94 5.56 6.45 7.43 TOTAL APPLICATION OF FUNDS 6.36 6.93 8.19 9.18 10.28



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Consolidated Cash Flow YE March (Rs bn) FY17 FY18 FY19P FY20E FY21E Reported PBT 2.26 2.60 3.49 3.93 4.38 Non-operating & EO items (0.37) (0.15) (0.27) (0.37) (0.40) Interest expenses 0.08 0.04 0.03 0.04 0.04 Depreciation 0.11 0.12 0.13 0.15 0.16 Working Capital Change 0.41 0.90 (0.90) 0.46 (0.36) Tax paid (0.65) (0.55) (1.01) (1.14) (1.27) OPERATING CASH FLOW ( a ) 1.85 2.98 1.48 3.07 2.55 Capex (0.10) (0.06) (0.99) (0.16) (0.18) Free cash flow (FCF) 1.75 2.91 0.49 2.90 2.37 Investments 0.00 0.00 0.00 0.00 0.00 Non-operating income 0.17 0.10 0.27 0.37 0.40 INVESTING CASH FLOW ( b ) 0.07 0.03 (0.71) 0.21 0.22 Debt Issuance (1.21) (0.21) 0.11 0.00 0.00 Interest expenses (0.08) (0.04) (0.03) (0.04) (0.04) FCFE 0.46 2.66 0.57 2.86 2.33 Share capital Issuance 0.00 0.00 0.00 0.00 0.00 Dividend (0.44) (1.15) (1.56) (1.81) (2.01) FINANCING CASH FLOW ( c ) (1.73) (1.40) (1.48) (1.84) (2.05) NET CASH FLOW (a+b+c) 0.19 1.61 (0.72) 1.43 0.72 Non-operating and EO items (1.32) 0.04 (1.28) 0.00 0.00 Closing Cash & Equivalents 3.81 5.46 3.46 4.89 5.61


Key Ratios FY17 FY18 FY19P FY20E FY21E PROFITABILITY (%) EBITDA Margin 8.1 9.4 11.3 11.5 11.9 APAT Margin 6.6 7.8 8.4 8.6 8.9 RoE 29.3 31.0 35.1 34.2 33.8 RoIC or Core RoCE 48.4 109.6 48.4 59.5 61.1 RoCE 19.1 24.3 30.3 29.4 29.3 EFFICIENCY Tax Rate (%) 31.7 26.3 29.0 29.0 29.0 Fixed Asset Turnover (x) 17.3 17.0 16.6 16.8 16.5 Inventory (days) 0 0 0 0 0 Debtors (days) 67 68 74 80 80 Other Current Assets (days) 14 12 12 12 13 Payables (days) 75 71 82 70 70 Other Current Liab & Provns (days) 17 14 13 13 13 Cash Conversion Cycle (days) (10) (5) (9) 9 11 Net Debt/EBITDA (x) (1.8) (2.2) (0.9) (1.2) (1.2) Net Debt/Equity (x) (0.6) (0.8) (0.4) (0.5) (0.5) Interest Coverage (x) 19.5 45.5 95.2 91.7 96.0 PER SHARE DATA EPS (Rs/sh) 14.3 18.4 23.7 26.9 29.9 CEPS (Rs/sh) 16.1 19.7 25.2 28.3 31.5 DPS (Rs/sh) 9.3 10.5 12.8 14.8 16.5 BV (Rs/sh) 56.9 63.0 74.0 83.5 94.1 VALUATION P/E 23.7 19.2 14.9 13.3 11.9 P/BV 6.3 5.7 4.8 4.3 3.8 EV/EBITDA 18.0 14.2 10.4 9.0 7.9 OCF/EV (%) 5.4 9.1 4.2 9.1 7.8 FCF/EV (%) 5.1 8.9 1.4 8.6 7.2 FCFE/mkt cap (%) 1.2 7.2 1.5 7.7 6.3 Dividend Yield (%) 2.6 2.9 3.6 4.1 4.6



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Rating Definitions BUY : Where the stock is expected to deliver more than 10% returns over the next 12 month period NEUTRAL : Where the stock is expected to deliver (-)10% to 10% returns over the next 12 month period SELL : Where the stock is expected to deliver less than (-)10% returns over the next 12 month period

Date CMP Reco Target 23-May-18 338 BUY 380

6-Jul-18 284 BUY 380 16-Aug-18 327 BUY 375 10-Oct-18 334 BUY 421 5-Nov-18 313 BUY 445

30-Nov-18 305 BUY 445 8-Jan-19 308 BUY 440 9-Feb-19 334 BUY 466 1-Apr-19 338 BUY 457 9-Apr-19 347 BUY 465

31-May-19 356 BUY 480

RECOMMENDATION HISTORY

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Sonata Software TP


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Disclosure: We, Amit Chandra, MBA, Apurva Prasad, MBA & Akshay Ramnani, CA authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. HSL has no material adverse disciplinary history as on the date of publication of this report. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Research Analyst or his/her relative or HDFC Securities Ltd. does not have any financial interest in the subject company. Also Research Analyst or his relative or HDFC Securities Ltd. or its Associate may have beneficial ownership of 1% or more in the subject company at the end of the month immediately preceding the date of publication of the Research Report. 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buy - hdfc securities software - 4qfy19... · 2019-05-31 · results review 4qfy19. 31 may 2019....

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