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We recently spoke to HCLI management to get a business update ahead of the quarter
close. Management highlighted delays in getting sign-off for milestones in government SI
projects. If this situations continues, we see a 2-5% risk to our FY11F EPS.
Delays in signoffs on government SI projects could hurt near-term revenues
HCLI's System Integration business is heavily dependent on Government/quasigovernment
contracts. For instance of the Dec-10 closing order book of Rs42bn, we
estimate nearly 80% of the total contract value is attributable to such clients.
While management had earlier cited delays in tendering processes due to the current
political/media spotlight on corruption scandals, the projects currently being executed are
also now getting impacted in terms of getting sign-offs on completion of milestones.
Risk to our relatively conservative SI revenue growth forecasts for FY11
Management had earlier guided to a 30%+ growth rate for the SI business in FY11,
implying a nearly 68% revenue jump in 2HFY11 versus 1HFY11.
Our stance was relatively conservative by comparison, building in 18% growth in FY11,
implying a more modest 45% growth in 2HFY11 versus 1HFY11, building in strong
seasonality in the 2H.
We believe the current trends pose risk to our forecasts. Management said that qoq
growth will be difficult to achieve. We believe it reflects fairly low visibility, given that 3Q is
seasonally strong, due to year end budget flush by Government departments.
Delays could impact FY11F EPS by 2-5%; we are watchful of longer-term impact
We currently forecast Rs3bn of quarterly revenues in 2HFY11. We estimate a 2-5% risk to our
FY11F EPS, depending on the timeline of resolution of the current situation.
If this run-rate falls to Rs2bn during the current quarter (versus Rs2.2bn in 2QFY11), and
subsequently recovers to Rs3bn in 4Q11, our FY11F EPS would get impacted by c2%.
If the quarterly revenue run-rate does not recover in 4Q11, our FY11F EPS would be
impacted by c5%.
Given that management has not yet seen any signs of resolution of these delays so far, we
remain watchful of the current situation impacting FY12 revenues as well.
However, order booking momentum remains intact - an announced Rs3bn order with the Air
Force and Rs1.6bn on an APDRP contract means that the company is on track for our order
inflow estimate of Rs5bn for the quarter.
Management sees no major impact of the events in Japan on PC business
Management said that the aftermath of the Japan earthquake has caused some disruption in
its supply chain of components in Hard Disk Drive, motherboard, and flash memory.
However, it believes that alternative suppliers can offset this shortfall, and hence should not
disrupt production.
Management said that there could be some peripheral impact on costs as a result, but
believes it could be difficult to quantify at this point in time.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
We recently spoke to HCLI management to get a business update ahead of the quarter
close. Management highlighted delays in getting sign-off for milestones in government SI
projects. If this situations continues, we see a 2-5% risk to our FY11F EPS.
Delays in signoffs on government SI projects could hurt near-term revenues
HCLI's System Integration business is heavily dependent on Government/quasigovernment
contracts. For instance of the Dec-10 closing order book of Rs42bn, we
estimate nearly 80% of the total contract value is attributable to such clients.
While management had earlier cited delays in tendering processes due to the current
political/media spotlight on corruption scandals, the projects currently being executed are
also now getting impacted in terms of getting sign-offs on completion of milestones.
Risk to our relatively conservative SI revenue growth forecasts for FY11
Management had earlier guided to a 30%+ growth rate for the SI business in FY11,
implying a nearly 68% revenue jump in 2HFY11 versus 1HFY11.
Our stance was relatively conservative by comparison, building in 18% growth in FY11,
implying a more modest 45% growth in 2HFY11 versus 1HFY11, building in strong
seasonality in the 2H.
We believe the current trends pose risk to our forecasts. Management said that qoq
growth will be difficult to achieve. We believe it reflects fairly low visibility, given that 3Q is
seasonally strong, due to year end budget flush by Government departments.
Delays could impact FY11F EPS by 2-5%; we are watchful of longer-term impact
We currently forecast Rs3bn of quarterly revenues in 2HFY11. We estimate a 2-5% risk to our
FY11F EPS, depending on the timeline of resolution of the current situation.
If this run-rate falls to Rs2bn during the current quarter (versus Rs2.2bn in 2QFY11), and
subsequently recovers to Rs3bn in 4Q11, our FY11F EPS would get impacted by c2%.
If the quarterly revenue run-rate does not recover in 4Q11, our FY11F EPS would be
impacted by c5%.
Given that management has not yet seen any signs of resolution of these delays so far, we
remain watchful of the current situation impacting FY12 revenues as well.
However, order booking momentum remains intact - an announced Rs3bn order with the Air
Force and Rs1.6bn on an APDRP contract means that the company is on track for our order
inflow estimate of Rs5bn for the quarter.
Management sees no major impact of the events in Japan on PC business
Management said that the aftermath of the Japan earthquake has caused some disruption in
its supply chain of components in Hard Disk Drive, motherboard, and flash memory.
However, it believes that alternative suppliers can offset this shortfall, and hence should not
disrupt production.
Management said that there could be some peripheral impact on costs as a result, but
believes it could be difficult to quantify at this point in time.
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