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4Q11 results surprised negatively, with SI inflicting maximum damage. A grim near term outlook
for SI (more write offs to come) implies a bleak start to FY12. The Nokia contract extension was
the only bright spot, but we await the fine print. Despite a sharp correction, we do not see near
term catalysts for the stock.
Revenues significantly below our estimates, led by 78% yoy drop in SI revenues
4Q11 consolidated revenues were down 18.4% qoq to Rs26.15bn, 8.1% below our
estimate of Rs28.47bn.
The miss is primarily on Computer Systems, where revenues are down 25.5% yoy at
Rs8.29bn and 17.1% below our estimate of Rs10.01bn.
Within Computer Systems, System Integration revenues were down from a record Rs3.7bn in
4Q10 to Rs820m in 1Q12. While the yoy decline was expected, we were surprised that the
revenues have fallen off from the previous quarter's level of Rs1.29bn, which had already seen a
significant impact of implementation delays.
Core computer systems revenues were down 3% yoy at Rs7.2bn. We wait more
clarity on the reasons for the decline in terms of market share and industry shipment
changes.
Telecom/Office Automation revenues were down 15.6% yoy to Rs17.68bn (3.8% lower than
RBS est).
Within Telecom/OA, Core distribution revenues (mainly Nokia reselling) declined by
19% yoy, which was marginally better than expected (only 1.3% qoq decline). Nokia
had launched dual sim phones in India during the quarter. We await more clarity on its impact
on overall revenues.
The smaller, but more profitable sub-segments of Office Automation and Digital
Entertainment both declined by 21% each yoy, which was again a significant
negative surprise.
Margin erosion appears to be largely due of SI, compounded by business mix
Consolidated EBIT margin fell to just 0.2% from 2.9% yoy (RBS est 2.6%). In
absolute terms, EBIT declined by 95% yoy to Rs47m.
The erosion in margins appears was primarily due to an EBIT loss of Rs77m in the
Computer Systems segment. The primary reason cited by management is the major delays in
large SI projects in terms of implementation and collection of receivables.
Telecom/OA EBIT was also down by 25.9% yoy to Rs370m. We attribute this to a sharp
decline in the more profitable OA and Digital Entertainment revenues in this segment.
As a result of weak EBIT, Net Income of Rs115m was down 82.9% yoy (RBS est
Rs565m). This builds in FX loss of Rs27m and tax write back of Rs46m.
HCLI surprisingly maintained the quarterly dividend at Rs2/share, despite EPS of only
Rs0.5 during the quarter.
Nokia contract extended till Dec 2014 - we await more clarity on the fine print
Amidst the grim results reading, HCLI announced the extension of distribution agreement
with Nokia till Dec 2014, in line with our base case assumption of the contract being renewed.
No further details were given on the terms of renewal of the deal. We await more
clarity on whether there are any changes to the commercial terms or geographic
engagement with Nokia.
SI issues could continue to plague the company for some time to come
Management highlighted that the delays in execution and collection of receivables in SI will likely
continue in the near term, as a result of delays in decision making by clients.
The company is reviewing the additional cost impact of these days on a case by case
basis, and expects to finalize the assessment by the end of 1QFY12.
We believe SI revenues are largely driven by major turnkey projects and hence,
additional provisions could be material.
In addition, negative publicity continues to cloud the company with respect to the
Common Wealth Games contract awarded by MTNL - where the Comptroller & Auditor General
has alleged shortcomings in selection criteria and price negotiations by MTNL in a recent report.
Despite the stock correction, we do not see any near term catalysts
With margin pains likely to continue into 1Q12, we expect significant earnings
pressure in FY12 versus consensus forecasts.
Despite the stock correcting by 29% over the past 3 months versus a 7% decline in
the BSE Sensex, we do not see any near term catalysts, even as the Nokia contract extension
comes as a respite.
We will look to revise our forecasts after getting more clarity on the across the board
weakness in revenues and profitability.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
4Q11 results surprised negatively, with SI inflicting maximum damage. A grim near term outlook
for SI (more write offs to come) implies a bleak start to FY12. The Nokia contract extension was
the only bright spot, but we await the fine print. Despite a sharp correction, we do not see near
term catalysts for the stock.
Revenues significantly below our estimates, led by 78% yoy drop in SI revenues
4Q11 consolidated revenues were down 18.4% qoq to Rs26.15bn, 8.1% below our
estimate of Rs28.47bn.
The miss is primarily on Computer Systems, where revenues are down 25.5% yoy at
Rs8.29bn and 17.1% below our estimate of Rs10.01bn.
Within Computer Systems, System Integration revenues were down from a record Rs3.7bn in
4Q10 to Rs820m in 1Q12. While the yoy decline was expected, we were surprised that the
revenues have fallen off from the previous quarter's level of Rs1.29bn, which had already seen a
significant impact of implementation delays.
Core computer systems revenues were down 3% yoy at Rs7.2bn. We wait more
clarity on the reasons for the decline in terms of market share and industry shipment
changes.
Telecom/Office Automation revenues were down 15.6% yoy to Rs17.68bn (3.8% lower than
RBS est).
Within Telecom/OA, Core distribution revenues (mainly Nokia reselling) declined by
19% yoy, which was marginally better than expected (only 1.3% qoq decline). Nokia
had launched dual sim phones in India during the quarter. We await more clarity on its impact
on overall revenues.
The smaller, but more profitable sub-segments of Office Automation and Digital
Entertainment both declined by 21% each yoy, which was again a significant
negative surprise.
Margin erosion appears to be largely due of SI, compounded by business mix
Consolidated EBIT margin fell to just 0.2% from 2.9% yoy (RBS est 2.6%). In
absolute terms, EBIT declined by 95% yoy to Rs47m.
The erosion in margins appears was primarily due to an EBIT loss of Rs77m in the
Computer Systems segment. The primary reason cited by management is the major delays in
large SI projects in terms of implementation and collection of receivables.
Telecom/OA EBIT was also down by 25.9% yoy to Rs370m. We attribute this to a sharp
decline in the more profitable OA and Digital Entertainment revenues in this segment.
As a result of weak EBIT, Net Income of Rs115m was down 82.9% yoy (RBS est
Rs565m). This builds in FX loss of Rs27m and tax write back of Rs46m.
HCLI surprisingly maintained the quarterly dividend at Rs2/share, despite EPS of only
Rs0.5 during the quarter.
Nokia contract extended till Dec 2014 - we await more clarity on the fine print
Amidst the grim results reading, HCLI announced the extension of distribution agreement
with Nokia till Dec 2014, in line with our base case assumption of the contract being renewed.
No further details were given on the terms of renewal of the deal. We await more
clarity on whether there are any changes to the commercial terms or geographic
engagement with Nokia.
SI issues could continue to plague the company for some time to come
Management highlighted that the delays in execution and collection of receivables in SI will likely
continue in the near term, as a result of delays in decision making by clients.
The company is reviewing the additional cost impact of these days on a case by case
basis, and expects to finalize the assessment by the end of 1QFY12.
We believe SI revenues are largely driven by major turnkey projects and hence,
additional provisions could be material.
In addition, negative publicity continues to cloud the company with respect to the
Common Wealth Games contract awarded by MTNL - where the Comptroller & Auditor General
has alleged shortcomings in selection criteria and price negotiations by MTNL in a recent report.
Despite the stock correction, we do not see any near term catalysts
With margin pains likely to continue into 1Q12, we expect significant earnings
pressure in FY12 versus consensus forecasts.
Despite the stock correcting by 29% over the past 3 months versus a 7% decline in
the BSE Sensex, we do not see any near term catalysts, even as the Nokia contract extension
comes as a respite.
We will look to revise our forecasts after getting more clarity on the across the board
weakness in revenues and profitability.
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