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HCLI's 2QFY11 sales were robust in PCs (+14% yoy) and Office Automation (+50% yoy), but
subdued in Telecom (-14% yoy). Its EBIT margin should continue to improve (+27bp yoy in 2Q)
led by SI execution, upscaling of new ventures and the sale of loss-making Infinet. We believe the
risk of a dividend cut is receding.
2QFY11 results: yoy improvement in top line and EBIT margin
Consolidated revenues were up 2.8% yoy (5.3% qoq) to Rs31.1bn (1.4% above our estimate),
driven by a 43.3% yoy uptick in the PC business to Rs10.0bn (RBS est Rs9.0bn), with
Telecom/Office Automation down 9.7% yoy to Rs21.0bn (RBS est Rs21.5bn). The EBIT margin
(ex-FX) was up 26bp yoy (59bp qoq) to 2.5% (RBS est 2.2%), due to a better mix and improved
margin in PCs. FX gains were Rs34m (vs Rs65m in 2QFY10), while the tax rate was up 114bp
yoy to 29.2%, resulting in yoy flat PAT of Rs560m (RBSe Rs493m ex-FX).
Most businesses should start delivering, but telecom remains a cause for concern
Revenue growth in the core PC business of 14.0% was heartening, given the recent market share
slide. In our view, 50% yoy growth in Office Automation signals a strong demand pick-up, but the
base effect should catch up in 3Q. We believe Handset Distribution (-14.2% yoy) remains the key
worry. A positive surprise came from the Learning business, with annualised revenues reaching
Rs1bn, though we think some of this growth was driven by bulk orders.
More conservative on SI execution and Nokia, but new businesses to partly offset this
We turn more cautious on System Integration (SI) execution, as revenue growth continues to lag
order inflow (4.1x book/bill ratio). The failure of Nokia’s dual-sim phone should impact market
share in the near term, but we expect stable volumes supported by other launches. Our forecasts
factor in upscaling of Learning and the acquisition of 20% of TechMart, Nokia’s Middle East and
Africa distributor. Net-net, we cut FY11F revenues 0.4% and FY12F 3.5%.
Earnings downgraded but the risk of an absolute dividend cut seems to be reducing
We cut our EPS by 17% for both FY11F and FY12F, factoring in a likely margin decline in
1HFY11, due to sizeable investments in new businesses and Consumer PC business losses, and
our cautious view on SI execution (FY11F/12F revenue forecasts cut by 15%/22% ). The dividend
payout looks set to fall from 78% in 2QFY11 (92% in 1Q), raising the potential to sustain its
absolute dividend. Buy maintained, with a DCF-based TP of Rs120 (from Rs141)
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
HCLI's 2QFY11 sales were robust in PCs (+14% yoy) and Office Automation (+50% yoy), but
subdued in Telecom (-14% yoy). Its EBIT margin should continue to improve (+27bp yoy in 2Q)
led by SI execution, upscaling of new ventures and the sale of loss-making Infinet. We believe the
risk of a dividend cut is receding.
2QFY11 results: yoy improvement in top line and EBIT margin
Consolidated revenues were up 2.8% yoy (5.3% qoq) to Rs31.1bn (1.4% above our estimate),
driven by a 43.3% yoy uptick in the PC business to Rs10.0bn (RBS est Rs9.0bn), with
Telecom/Office Automation down 9.7% yoy to Rs21.0bn (RBS est Rs21.5bn). The EBIT margin
(ex-FX) was up 26bp yoy (59bp qoq) to 2.5% (RBS est 2.2%), due to a better mix and improved
margin in PCs. FX gains were Rs34m (vs Rs65m in 2QFY10), while the tax rate was up 114bp
yoy to 29.2%, resulting in yoy flat PAT of Rs560m (RBSe Rs493m ex-FX).
Most businesses should start delivering, but telecom remains a cause for concern
Revenue growth in the core PC business of 14.0% was heartening, given the recent market share
slide. In our view, 50% yoy growth in Office Automation signals a strong demand pick-up, but the
base effect should catch up in 3Q. We believe Handset Distribution (-14.2% yoy) remains the key
worry. A positive surprise came from the Learning business, with annualised revenues reaching
Rs1bn, though we think some of this growth was driven by bulk orders.
More conservative on SI execution and Nokia, but new businesses to partly offset this
We turn more cautious on System Integration (SI) execution, as revenue growth continues to lag
order inflow (4.1x book/bill ratio). The failure of Nokia’s dual-sim phone should impact market
share in the near term, but we expect stable volumes supported by other launches. Our forecasts
factor in upscaling of Learning and the acquisition of 20% of TechMart, Nokia’s Middle East and
Africa distributor. Net-net, we cut FY11F revenues 0.4% and FY12F 3.5%.
Earnings downgraded but the risk of an absolute dividend cut seems to be reducing
We cut our EPS by 17% for both FY11F and FY12F, factoring in a likely margin decline in
1HFY11, due to sizeable investments in new businesses and Consumer PC business losses, and
our cautious view on SI execution (FY11F/12F revenue forecasts cut by 15%/22% ). The dividend
payout looks set to fall from 78% in 2QFY11 (92% in 1Q), raising the potential to sustain its
absolute dividend. Buy maintained, with a DCF-based TP of Rs120 (from Rs141)
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