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We see near-term headwinds to HCLI's SI business due to execution delays and Nokia's volumes
expected to be under pressure. We lower our FY11/12F EPS 12%/11%. Consensus downgrades
should follow, but a 7% dividend yield and strong order book give some comfort of a back-ended
recovery. Hold, from Buy.
Downgrading to Hold on SI/handset business headwinds
We believe a general slowdown in decision making in the public sector has negative implications
for HCLI’s System Integration (SI) business, which executes large turnkey contracts in this space.
We believe HCLI derives 75-80% of revenues from such projects and, hence, such a slowdown
could have a material impact. We lower SI revenue forecasts for FY11/12 by 34%/23%. We also
see Nokia continuing to lose market share in a period of transition to Window Mobile OS from
Symbian, when new product introduction could slow down. Our channel checks confirm that the
competition has caught up on product breadth and is aggressively ramping up distribution, key
areas of strength for Nokia historically. We lower our FY11/12F domestic handset revenues by
3%/7% to reflect these challenges.
Longer-term picture looks better, given the order book strength
We believe on a long-term basis, the SI business has good growth potential, given a large order
backlog (4.1x LTM revenues) and the opportunities available in the domestic SI space. Nokia’s
commitment to increase the pace of innovation to compete with the Asian white label ecosystem
bodes well in the medium term for the introduction of new products. Overseas expansion and
learning are longer-term growth drivers, though they are at a small base now.
Dividend yield provides support, we anticipate opportunities to enter at lower prices
We lower our EPS forecasts for FY11/12F by 12%/11%, building in slippage in SI execution and
the handset business. We see downgrades to earnings forecasts, particularly on FY11F EPS,
where we are now about 14% below Bloomberg consensus estimates. We believe, given the
weak earnings outlook for the remainder of FY11 (June-end), there will be opportunities to enter
the stock at lower levels, despite a 7% dividend yield. A key event risk for HCLI is the review of
the distribution contract with Nokia by August 2010 (with potential upside/downside implications).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
We see near-term headwinds to HCLI's SI business due to execution delays and Nokia's volumes
expected to be under pressure. We lower our FY11/12F EPS 12%/11%. Consensus downgrades
should follow, but a 7% dividend yield and strong order book give some comfort of a back-ended
recovery. Hold, from Buy.
Downgrading to Hold on SI/handset business headwinds
We believe a general slowdown in decision making in the public sector has negative implications
for HCLI’s System Integration (SI) business, which executes large turnkey contracts in this space.
We believe HCLI derives 75-80% of revenues from such projects and, hence, such a slowdown
could have a material impact. We lower SI revenue forecasts for FY11/12 by 34%/23%. We also
see Nokia continuing to lose market share in a period of transition to Window Mobile OS from
Symbian, when new product introduction could slow down. Our channel checks confirm that the
competition has caught up on product breadth and is aggressively ramping up distribution, key
areas of strength for Nokia historically. We lower our FY11/12F domestic handset revenues by
3%/7% to reflect these challenges.
Longer-term picture looks better, given the order book strength
We believe on a long-term basis, the SI business has good growth potential, given a large order
backlog (4.1x LTM revenues) and the opportunities available in the domestic SI space. Nokia’s
commitment to increase the pace of innovation to compete with the Asian white label ecosystem
bodes well in the medium term for the introduction of new products. Overseas expansion and
learning are longer-term growth drivers, though they are at a small base now.
Dividend yield provides support, we anticipate opportunities to enter at lower prices
We lower our EPS forecasts for FY11/12F by 12%/11%, building in slippage in SI execution and
the handset business. We see downgrades to earnings forecasts, particularly on FY11F EPS,
where we are now about 14% below Bloomberg consensus estimates. We believe, given the
weak earnings outlook for the remainder of FY11 (June-end), there will be opportunities to enter
the stock at lower levels, despite a 7% dividend yield. A key event risk for HCLI is the review of
the distribution contract with Nokia by August 2010 (with potential upside/downside implications).
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