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HCLI's 3Q11 revenues (-3.0% yoy) showed challenges with handset and SI businesses. But
EBITDA (+5bp yoy) was better than expected due to strength in core PC margins. Management
gave a dim view on SI execution and handset sales, but cost/cash flow focus is positive, given
margin/balance sheet stress.
Revenues trended worse than expected; Nokia and core PC are the main factors
Consolidated revenues were down 3.0% yoy (-12.4% qoq) at Rs27.3bn, 3.6% lower than RBS
est of Rs28.3bn. Lower revenue surprise came in primarily in the Computer Systems
segment, 7.1% lower than RBS estimates.
Computer Systems segment revenues were down 6.6% yoy (-13.1% qoq) to Rs8.7bn (RBS
est. Rs9.4bn). System integration (SI) business of Rs1.3bn was down 46% yoy, but was
better than our forecast of Rs1bn. Core computer systems revenues were down 6.1% yoy
Rs6.4bn (RBS est. Rs7.1bn), due to weakness in the consumer PC business. Overseas
revenues were down 22% to Rs740m (RBS est Rs1bn), while Learning Services revenues
were up a healthy 21% to Rs290m (RBS est Rs240m).
Telecom/Office Automation segment revenues were down 1.5% yoy (-11.8% qoq) to
Rs18.6bn (RBS est. Rs18.8bn). Handset distribution revenues were down much sharper than
expected by 7.5% yoy (-17.0% qoq) to Rs14.3bn (RBS est. Rs14.7bn). Digital entertainment
revenues were down 6.7% to Rs1.5bn (RBS est Rs1.7bn). Office automation (OA) revenues
were up a modest 7.3% yoy to Rs1.8bn (RBS est. 1.9bn).
Margin recovery in the PC segment came as a positive surprise
Consolidated EBITDA margin was up 5bp yoy (+13bp qoq) to 2.9% (RBS est 2.7%). In
absolute terms, EBITDA was down 1.5% yoy (-8.2% qoq) at Rs798m (RBS est Rs752m).
The surprise came in the Computer segment, where EBIT margin came in at 5.2% (-51bp yoy
and +69bp qoq). This is despite a lower base of typically higher margin SI revenues.
Management attributed the qoq increase to seasonal strength and lower price competition in
enterprise PC sales and higher growth in Services business.
Telecom/OA EBIT margin was down 41bp yoy (-29bp qoq) to 2.4%, amongst the lowest ever
reported by the company. Management cited pressure in the handset sales as the key factor
in margin compression.
Tax rate came down to 22.4% (29.2% in 2Q11), due to lower revenues from fully taxable SI
and handset business, higher contribution from the Uttaranchal plant, that enjoys tax benefits
as well as higher dividend income.
Consequently, PAT was down 11.3% yoy (-4.8% qoq) to Rs533m (RBS est. Rs463m).
Near-term revenue prospects are not encouraging
As outlined in our recently published report (Increasing headwinds dated 21 April 2011),
management admitted significant near-term execution challenges for SI projects, particularly
with the public sector. Management expects revenue trends in this segment to be subdued in
the near-term. On the other hand, order booking remains buoyant at Rs7.5bn for the quarter,
taking the pending order book to Rs48.5bn (5.3x LTM sales).
Nokia market share also continues to slip, and management does not see any traction until
any meaningful product launches, particularly the dual sim phone, for which Nokia has guided
a launch in the June quarter. We assume further volume slippage in the June quarter, and
stability thereafter.
Our current forecasts broadly factor the above trends, hence we believe a material upgrade in
the earnings trajectory would be difficult to achieve.
Focus on cost and cash flows positive, but balance sheet stress continues
HCLI management said that it is taking a detailed view on rationalizing cost bases, including
overheads for SI in the context of near-term revenue pressures. Management believes this
could start yielding visible results over the next 4-5 quarters.
Management also spoke of changing the focus of SI business from capital intensive,
milestone based projects to those with more predictable execution and revenue streams.
However, net working capital deployment during the quarter spiked sharply to 44 days sales
(34 days in 3Q10) and we believe this could normalize only when the SI business returns to a
normalized state.
While valuations at 9.5x FY12F EPS are undemanding and supported by 7% dividend yield,
given the business challenges, we do not see near-term triggers for the stock.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
HCLI's 3Q11 revenues (-3.0% yoy) showed challenges with handset and SI businesses. But
EBITDA (+5bp yoy) was better than expected due to strength in core PC margins. Management
gave a dim view on SI execution and handset sales, but cost/cash flow focus is positive, given
margin/balance sheet stress.
Revenues trended worse than expected; Nokia and core PC are the main factors
Consolidated revenues were down 3.0% yoy (-12.4% qoq) at Rs27.3bn, 3.6% lower than RBS
est of Rs28.3bn. Lower revenue surprise came in primarily in the Computer Systems
segment, 7.1% lower than RBS estimates.
Computer Systems segment revenues were down 6.6% yoy (-13.1% qoq) to Rs8.7bn (RBS
est. Rs9.4bn). System integration (SI) business of Rs1.3bn was down 46% yoy, but was
better than our forecast of Rs1bn. Core computer systems revenues were down 6.1% yoy
Rs6.4bn (RBS est. Rs7.1bn), due to weakness in the consumer PC business. Overseas
revenues were down 22% to Rs740m (RBS est Rs1bn), while Learning Services revenues
were up a healthy 21% to Rs290m (RBS est Rs240m).
Telecom/Office Automation segment revenues were down 1.5% yoy (-11.8% qoq) to
Rs18.6bn (RBS est. Rs18.8bn). Handset distribution revenues were down much sharper than
expected by 7.5% yoy (-17.0% qoq) to Rs14.3bn (RBS est. Rs14.7bn). Digital entertainment
revenues were down 6.7% to Rs1.5bn (RBS est Rs1.7bn). Office automation (OA) revenues
were up a modest 7.3% yoy to Rs1.8bn (RBS est. 1.9bn).
Margin recovery in the PC segment came as a positive surprise
Consolidated EBITDA margin was up 5bp yoy (+13bp qoq) to 2.9% (RBS est 2.7%). In
absolute terms, EBITDA was down 1.5% yoy (-8.2% qoq) at Rs798m (RBS est Rs752m).
The surprise came in the Computer segment, where EBIT margin came in at 5.2% (-51bp yoy
and +69bp qoq). This is despite a lower base of typically higher margin SI revenues.
Management attributed the qoq increase to seasonal strength and lower price competition in
enterprise PC sales and higher growth in Services business.
Telecom/OA EBIT margin was down 41bp yoy (-29bp qoq) to 2.4%, amongst the lowest ever
reported by the company. Management cited pressure in the handset sales as the key factor
in margin compression.
Tax rate came down to 22.4% (29.2% in 2Q11), due to lower revenues from fully taxable SI
and handset business, higher contribution from the Uttaranchal plant, that enjoys tax benefits
as well as higher dividend income.
Consequently, PAT was down 11.3% yoy (-4.8% qoq) to Rs533m (RBS est. Rs463m).
Near-term revenue prospects are not encouraging
As outlined in our recently published report (Increasing headwinds dated 21 April 2011),
management admitted significant near-term execution challenges for SI projects, particularly
with the public sector. Management expects revenue trends in this segment to be subdued in
the near-term. On the other hand, order booking remains buoyant at Rs7.5bn for the quarter,
taking the pending order book to Rs48.5bn (5.3x LTM sales).
Nokia market share also continues to slip, and management does not see any traction until
any meaningful product launches, particularly the dual sim phone, for which Nokia has guided
a launch in the June quarter. We assume further volume slippage in the June quarter, and
stability thereafter.
Our current forecasts broadly factor the above trends, hence we believe a material upgrade in
the earnings trajectory would be difficult to achieve.
Focus on cost and cash flows positive, but balance sheet stress continues
HCLI management said that it is taking a detailed view on rationalizing cost bases, including
overheads for SI in the context of near-term revenue pressures. Management believes this
could start yielding visible results over the next 4-5 quarters.
Management also spoke of changing the focus of SI business from capital intensive,
milestone based projects to those with more predictable execution and revenue streams.
However, net working capital deployment during the quarter spiked sharply to 44 days sales
(34 days in 3Q10) and we believe this could normalize only when the SI business returns to a
normalized state.
While valuations at 9.5x FY12F EPS are undemanding and supported by 7% dividend yield,
given the business challenges, we do not see near-term triggers for the stock.
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