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We see more challenges for HCLI post 4Q11 from review of SI contracts that have seen
delays/cost overruns, while handset business margins could fall from CY11. We see RoEs
being depressed over the medium term, and hence stay at Hold despite the sharp stock price
correction.
SI likely to continue to be the bug-bear in the near term
4Q11 SI revenues dipped 36.4% qoq to Rs820m, the lowest since FY07. HCLI plans to
review financial implications of cost escalations and the early termination of some SI projects
in 1Q12. We believe this will have a material impact on FY12 financials. We are also
sceptical on new order signings in the near term due to negative publicity on the MTNL
Commonwealth Games contract. Hence, we lower FY12/13F SI revenues by 43%/38%.
Nokia contract renewal and volume pick-up are positives, but we see risks to margins
HCLI renewed its distribution contract with Nokia until December 2014. According to HCLI,
new commercial terms will kick in from January 2012. Given the financial stress Nokia faces,
we expect talks to be tough. We believe handset volumes were up qoq for the first time in six
quarters. We expect more near-term upside from dual SIM phones and raise FY12/13F
handset revenues by 11% each, but expect margins to decline from 3Q12. In the long term,
the transition to Windows OS from Symbian presents both upside and downside risks.
Dividend payout sustained in FY11, but for how long?
Surprisingly to us, HCLI retained its quarterly dividend payout of Rs2/share despite EPS of
Rs0.52. While management attributed the payout to healthy underlying cash flows, due to
working capital management, we doubt its sustainability, particularly in the context of our weak
earnings projections for FY12. We cut FY12F DPS to Rs5/share (from Rs8 in FY11).
Outlook remains clouded; we do not see catalysts despite a sharp correction
HCLI’s near-term earnings trajectory still looks very unclear at this stage, given the number of
moving parts we see (weak SI, Office Automation and Digital Entertainment revenues). We lower
FY12/13F revenues by 5-6% and EPS by 48%/36% and maintain our Hold rating despite the
stock correcting 21% in the past three months. While the stock looks attractive to us on dividend
yield (even after lower DPS assumptions), we do not believe our medium-term projections of
RoEs staying below the cost of equity justify the fundamental investment case.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
We see more challenges for HCLI post 4Q11 from review of SI contracts that have seen
delays/cost overruns, while handset business margins could fall from CY11. We see RoEs
being depressed over the medium term, and hence stay at Hold despite the sharp stock price
correction.
SI likely to continue to be the bug-bear in the near term
4Q11 SI revenues dipped 36.4% qoq to Rs820m, the lowest since FY07. HCLI plans to
review financial implications of cost escalations and the early termination of some SI projects
in 1Q12. We believe this will have a material impact on FY12 financials. We are also
sceptical on new order signings in the near term due to negative publicity on the MTNL
Commonwealth Games contract. Hence, we lower FY12/13F SI revenues by 43%/38%.
Nokia contract renewal and volume pick-up are positives, but we see risks to margins
HCLI renewed its distribution contract with Nokia until December 2014. According to HCLI,
new commercial terms will kick in from January 2012. Given the financial stress Nokia faces,
we expect talks to be tough. We believe handset volumes were up qoq for the first time in six
quarters. We expect more near-term upside from dual SIM phones and raise FY12/13F
handset revenues by 11% each, but expect margins to decline from 3Q12. In the long term,
the transition to Windows OS from Symbian presents both upside and downside risks.
Dividend payout sustained in FY11, but for how long?
Surprisingly to us, HCLI retained its quarterly dividend payout of Rs2/share despite EPS of
Rs0.52. While management attributed the payout to healthy underlying cash flows, due to
working capital management, we doubt its sustainability, particularly in the context of our weak
earnings projections for FY12. We cut FY12F DPS to Rs5/share (from Rs8 in FY11).
Outlook remains clouded; we do not see catalysts despite a sharp correction
HCLI’s near-term earnings trajectory still looks very unclear at this stage, given the number of
moving parts we see (weak SI, Office Automation and Digital Entertainment revenues). We lower
FY12/13F revenues by 5-6% and EPS by 48%/36% and maintain our Hold rating despite the
stock correcting 21% in the past three months. While the stock looks attractive to us on dividend
yield (even after lower DPS assumptions), we do not believe our medium-term projections of
RoEs staying below the cost of equity justify the fundamental investment case.
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