HCL Tech

HCLI's 4Q08 results were a mixed bag. The telecom/office automation segment grew 4.3% qoq, as the business transition to Nokia was completed last quarter. System Integration order wins of Rs1.2bn in the last five months were a positive surprise and came to more than our orderbook estimates for the whole of FY09. While modest topline growth in the PC business was on the lines we expected, given the slowdown in industry PC shipments and weak consumer sentiment, the 70bp qoq margin slippage was a negative. Management attributed this to increased price competition. A forex loss of Rs71m also impacted reported earnings. We believe the stock could remain rangebound in the near term with these mixed results and potentially weak profitability numbers in the September 2008 quarter, due to further rupee depreciation.However, the SI order wins and qoq growth in the telecom segment are directional positives and underline our forecast of recovering revenue growth. Current valuations and a dividend yield of about 7% provide a good medium-term entry point. 

Consolidated revenues grew 4.4% qoq (1.6% yoy) to Rs31.1bn, 6.1% ahead of our estimates. The surprise came mainly from the telecom/office automation segment, where revenues grew by 4.3% qoq (5.9% ahead of our estimates). The PC segment grew modestly 4.5% yoy (3.4% qoq), due to the recent slowdown in industry PC shipments and the highbaseeffect of the system integration business from the previous year. 

EBITDA margins, at 3.4%, declined 71bp qoq (36bp below our estimates). The PC segment’s EBIT margins (ex-forex) slipped from 6.2% last quarter to 5.5%, mainly due to higher price competition, according to management. The telecom segment’s margins, at 3.1%, were in line with expectations. 

Reported PAT was down 23.2% yoy (-20.1% qoq) at Rs651m (13.3% below our estimates),mainly due to forex losses of Rs71m during the quarter. Excluding FX, normalised PBT was down 12.2% yoy (-11.9% qoq), 3.6% below our estimates.