Part of the HCL group, 58% stake owned by HCL Corp, Shiv Nadar and related entities.
Earlier was focused on Hardware (Tablets, PCs, Laptops), Distribution of Enterprise & Consumer products (mainly Nokia Handsets) and Systems Integration.
Hardware business was unable to compete with low cost scale manufacturers, and systems integration division faced execution challenges given large PSU client base where decision making ground to a halt in 2009-11
Has been undergoing a prolonged restructuring exercise. This has seen a complete change in management team (Harsh Chitale, earlier MD, left in September 2014 followed by several other key personnel and has since been replaced with Premkumar Seshadri and other experienced industry hands).
About 1,600 crore of receivables from PSUs are yet to be liquidated and appear to be reducing by about INR 200 cr a quarter, profitability here fluctuates dramatically quarter on quarter. Management suggests another 18months are needed to eliminate these receivables.
Hardware inventories are obsolete and have mostly been liquidated.
The two growth engines of the company going forward are:
- Distribution
Consumer distribution
The company has a strong distribution channel reach in Urban, Tier I,II and III cities/towns. Apart from distribution, value added services such as servicing, repairs, etc are performed on behalf of OEMs. Currently, this division is dominated by Telecom products of Microsoft (erstwhile Nokia), with some limited (though growing contribution) from consumer electricals and home appliances). Recent client wins include Lenovo and Dell.
Enterprise distribution
Here the company offers technical pre sales consulting, and distributes servers, storage and other enterprise hardware.
The overall distribution division brought in INR 5,400 crs revenues for the y.e. June 2014 at a margin of ~1.6%. Most of this is consumer telecom. This may decrease in FY15 owing to restructuring in Microsoft Phone products.
2.Services
Consumer services
This includes back end services provided to consumers on behalf of partner OEMs.
Enterprise services
This includes solutions around S4N (Servers, Storage, Security, Software and Networks), infrastructure management, data management, break fix services, etc. The company provides these mainly to Indian entities with some overseas clientele (e.g. Govt of Singapore)
This division brough in revenues of INR 720 cr in FY14 at an 8.3% EBIT margin and is likely to grow to atleast 800 cr by June 15 driven by strong growth in Enterprise solutions.
3.Other divisions:
HCL Care - Operates HCL Touch outlets facilitating walk in repairs of consumer electronics. ~300 outlets pan India
HCL Learning - Provides content based online learning solutions to schools, colleges, students studying for entrance exams, etc. Tries to operate on an asset light basis.
Investment case
- Experienced management team could aggressively leverage existing distribution network to push new OEM products and increase turnover. Reddington has a turnover which is 6x HCL-I’s, although this does include substantial export sales
- Asset light nature of core distribution and services businesses distribution business has a negative working capital cycle with no inventory/receivables risk0
- Scope to cross sell enterprise services to hardware customers and vice versa
- Overhang from PSU receivables should steadily reduce, such clients (BSNL/MTNL) are said to honour payments albeit with a delay. Once this is resolved,
- Distressed valuation of <16% sales, and <1x book after reducing goodwill
Concerns
- Pace and profitability of receivables liquidation is unpredictable. This could impact quarterly earnings and reflect in market price for some time.
- Limited velocity of windows phone sales. However, the company could at some point end it’s exclusive arrangement with Microsoft and push other more popular OEMs’ handsets/products.
- There appear to be limited differentiators w.r.t. the services business and the company has to compete with the Wipros, Infosys and Mindtrees of the world. However management is experienced in this area and the HCL parentage could help it scale up to some extent from a low base.
- Learning division also appears to enjoy limited differentiation, however this has broken even and could entail some optionality.
- Timeline for turnaround execution is unknown and management is not very forthcoming in terms of what scale they aspire to grow the business to. However they appear to be executing silently with strategic tie ups being announced every quarter (most recent being Dell)
Your views appreciated. Please excuse any inaccuracies in the above note.
Disclosure: Currently invested and evaluating addition/hold.
