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HCL Infosystems hosted its annual Analyst meet today. Key highlights are a) substantial growth
in Nokia business post dual sim launch b) SI business in slow growth mode in the near term; c)
efficiency programs have yielded Rs200m annualized cost savings and d) several senior hires
heading important roles.
Analyst meet highlighted both opportunities and challenges that HCLI faces
HCLI hosted its annual Analyst and Investor meet earlier in the day. On the whole, it was a
mix of several opportunities as well as major challenges that the company faces.
On the plus side, Nokia is emerging from a market share slump on new product introductions
(particularly dual sim). HCLI has also eliminated Rs200m of annualized base cost through
efficiency programs. SI revenues appear to be at their trough, but recovery is likely to be
gradual. The induction of new leadership also appears to be a good move, given the
somewhat indifferent performance of the company over the past couple of years.
However, several challenges still remain. The company faces write-offs from project overruns,
which it is still in the process of ascertaining. While Nokia volumes have shot up, margins are
likely to come under pressure from Jan-11. Profitability issues in consumer PC are being fixed
but scale up is still a big challenge. Dividend payout will be contingent on cash flow
generation, and hence HCLI did not commit to maintaining dividends.
With the near-term outlook for the company being somewhat clouded, particularly on SI write
offs, we reiterate our Hold recommendation
Nokia business on a roll post dual sim launch but margins may be headed south
Nokia has launched four dual sim variants in the past few months. Management said that the
company has seen a significant uptick in volumes and market share post the launch. Volumes
for May-August 2011 were up 38% over the four prior months. While the distribution
agreement has been extended to Dec-2014, the revised agreement entails taking over certain
additional activities (not elaborated), which can reduce margins.
The comments are broadly in line with our assumptions - we have assumed Sept-11 handset
volume growth of 15% qoq. However, there could be potential for positive surprise if the
strong sales volumes are sustained through the quarter. On the other hand, we have
assumed a margin contraction from Jan-12, when the current agreement comes to an end.
Another positive highlight was the spin off of non-Nokia distribution into a separate subsidiary
DigiLife to avoid conflicts of interest with the own branded IT products. The company has
recently signed up with Hitachi for national distribution (except North) of TVs and with Emtec
(memory cards and USB sticks). The company is targeting additional categories for
distribution.
System Integration business still not out of the woods
Management reiterated that the SI business remains challenged on slow execution on large
projects. It has visibility of Rs4.5bn of revenues from current order book of Rs43.4bn. Of
these Rs1bn is expected from transaction based pricing projects, which comprise Rs23bn of
order book.
Management believes revenues have troughed in 4Q11 at Rs820m, and expects steady
progress through FY12. The HCLI is still estimating losses on project overruns and expects to
recognize these in 1Q12. The company is facing issues in getting new orders - Rs5-6bn of
orders that were anticipated in 4Q11 have not yet been given out by clients.
Consumer PC business restructuring complete; focus on new products
HCLI has eliminated one level of distribution in the consumer PC business. Management
expects margin savings of 2-3%, in addition to channel inventory cycle becoming shorter.
The company is now putting its efforts to release contemporary products soon, particularly in
the notebook segment, spanning price points. Management also plans to bundle services with
box sales to create differentiation.
The Android OS based tablet launched by HCLI recently is being positioned as a solution to
facilitate B2B selling, rather than participate in the highly competitive consumer segment.
HCL Care and Learning are big focus areas
HCL Care is an integrated offering for field services, third party repair, handset repair and
remote support. It generated Rs510m revenues in FY11 with gross margin of 35-40%. HCLI
believes growth prospects in this segment are quite significant.
HCLI has signed up 3100 classrooms for its Digischool offering. It has set aggressive internal
targets for growth. The CDC business (hardware training centres) has been consolidated with
closure of unviable centres. HCLI now has 60 CDCs versus about 150 at its peak.
While growth potential is good for the HCL Care and Learning, we believe they are still quite
small to make any significant impact in the medium term.
Infusion of new talent for key roles in the leadership team
The current CEO Mr. Harsh Chitale was appointed in October 2010. Since then, he has
driven positive initiatives on cost consolidation, overseas expansion and business
restructuring, which are seeing results coming to bear.
HCLI showcased the new leadership team, which comprises of several new hires which have
been assigned key leadership roles including Distribution and Marketing services, Consumer
computing and Mobility solutions.
While we appreciate the new management team's efforts to address internal inefficiencies
and competitive positioning in major business as well as create new profitable growth
engines, we believe the transformation will be reflected in the financials over an extended
period given significant legacy issues in SI as well as Nokia business (margin concerns).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
HCL Infosystems hosted its annual Analyst meet today. Key highlights are a) substantial growth
in Nokia business post dual sim launch b) SI business in slow growth mode in the near term; c)
efficiency programs have yielded Rs200m annualized cost savings and d) several senior hires
heading important roles.
Analyst meet highlighted both opportunities and challenges that HCLI faces
HCLI hosted its annual Analyst and Investor meet earlier in the day. On the whole, it was a
mix of several opportunities as well as major challenges that the company faces.
On the plus side, Nokia is emerging from a market share slump on new product introductions
(particularly dual sim). HCLI has also eliminated Rs200m of annualized base cost through
efficiency programs. SI revenues appear to be at their trough, but recovery is likely to be
gradual. The induction of new leadership also appears to be a good move, given the
somewhat indifferent performance of the company over the past couple of years.
However, several challenges still remain. The company faces write-offs from project overruns,
which it is still in the process of ascertaining. While Nokia volumes have shot up, margins are
likely to come under pressure from Jan-11. Profitability issues in consumer PC are being fixed
but scale up is still a big challenge. Dividend payout will be contingent on cash flow
generation, and hence HCLI did not commit to maintaining dividends.
With the near-term outlook for the company being somewhat clouded, particularly on SI write
offs, we reiterate our Hold recommendation
Nokia business on a roll post dual sim launch but margins may be headed south
Nokia has launched four dual sim variants in the past few months. Management said that the
company has seen a significant uptick in volumes and market share post the launch. Volumes
for May-August 2011 were up 38% over the four prior months. While the distribution
agreement has been extended to Dec-2014, the revised agreement entails taking over certain
additional activities (not elaborated), which can reduce margins.
The comments are broadly in line with our assumptions - we have assumed Sept-11 handset
volume growth of 15% qoq. However, there could be potential for positive surprise if the
strong sales volumes are sustained through the quarter. On the other hand, we have
assumed a margin contraction from Jan-12, when the current agreement comes to an end.
Another positive highlight was the spin off of non-Nokia distribution into a separate subsidiary
DigiLife to avoid conflicts of interest with the own branded IT products. The company has
recently signed up with Hitachi for national distribution (except North) of TVs and with Emtec
(memory cards and USB sticks). The company is targeting additional categories for
distribution.
System Integration business still not out of the woods
Management reiterated that the SI business remains challenged on slow execution on large
projects. It has visibility of Rs4.5bn of revenues from current order book of Rs43.4bn. Of
these Rs1bn is expected from transaction based pricing projects, which comprise Rs23bn of
order book.
Management believes revenues have troughed in 4Q11 at Rs820m, and expects steady
progress through FY12. The HCLI is still estimating losses on project overruns and expects to
recognize these in 1Q12. The company is facing issues in getting new orders - Rs5-6bn of
orders that were anticipated in 4Q11 have not yet been given out by clients.
Consumer PC business restructuring complete; focus on new products
HCLI has eliminated one level of distribution in the consumer PC business. Management
expects margin savings of 2-3%, in addition to channel inventory cycle becoming shorter.
The company is now putting its efforts to release contemporary products soon, particularly in
the notebook segment, spanning price points. Management also plans to bundle services with
box sales to create differentiation.
The Android OS based tablet launched by HCLI recently is being positioned as a solution to
facilitate B2B selling, rather than participate in the highly competitive consumer segment.
HCL Care and Learning are big focus areas
HCL Care is an integrated offering for field services, third party repair, handset repair and
remote support. It generated Rs510m revenues in FY11 with gross margin of 35-40%. HCLI
believes growth prospects in this segment are quite significant.
HCLI has signed up 3100 classrooms for its Digischool offering. It has set aggressive internal
targets for growth. The CDC business (hardware training centres) has been consolidated with
closure of unviable centres. HCLI now has 60 CDCs versus about 150 at its peak.
While growth potential is good for the HCL Care and Learning, we believe they are still quite
small to make any significant impact in the medium term.
Infusion of new talent for key roles in the leadership team
The current CEO Mr. Harsh Chitale was appointed in October 2010. Since then, he has
driven positive initiatives on cost consolidation, overseas expansion and business
restructuring, which are seeing results coming to bear.
HCLI showcased the new leadership team, which comprises of several new hires which have
been assigned key leadership roles including Distribution and Marketing services, Consumer
computing and Mobility solutions.
While we appreciate the new management team's efforts to address internal inefficiencies
and competitive positioning in major business as well as create new profitable growth
engines, we believe the transformation will be reflected in the financials over an extended
period given significant legacy issues in SI as well as Nokia business (margin concerns).
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