HCL Infosystems: Call forward

HCL Infosystems will lose volumes as Nokia too will distribute handsets

The HCL Infosystems stock crashed 30 per cent in Monday's trading to Rs 180.10 as the terms of the company's fresh agreement with Nokia, do not appear to be as favourable as they were before. The current agreement, which expires in 2006, has been renewed for a further period of five years.

However, according to answers provided by the management in a Q&A session with analysts, posted on the company website, it appears that HCL would not be an exclusive distributor for Nokia.

The management says that Nokia, would "add certain areas for billing by them, so as to maintain a balanced channel mix', adding that 'the volume would eventually be shared approximately equally'.

The bifurcation of territories is proposed to be started as a pilot project in two cities and would take 12-14 months to become fully effective. The management claims that higher volumes in the future would compensate for the loss of share to Nokia.

The office automation and telecommunication segment (which includes handset distribution business) contributed Rs 5,779 crore to HCL's revenues of Rs 7750 crore for the year ended June 2005, thereby accounting for nearly 75 per cent of the consolidated top line.

The segment accounted for Rs 146.28 crore of the profit before tax and interest (PBIT), approximately 51.2 per cent of the total PBIT.

Within this, the handsets' business is estimated to have margins of around 2 per cent. While not highly profitable, the handsets business nonetheless contributes to HCL's profits.

The HCL Infosystems management claims that the higher volumes in the future would compensate for the loss of share to Nokia.

As for the PC business, the management believes that with the penetration of personal computers still very low, there is good potential for growth, given the increasing availability of low-cost broadband and multilingual software.

The PBIT margin for this segment was 7.14 per cent in June 2005 , which fell to 4.6 per cent in December 2005 quarter.

At the current price, the stock trades at 12.4 times trailing 12-month diluted EPS, and 10.6 times estimated June 2006 earnings. Analysts believe that the stock is fully valued.

Wyeth: Arm-twisting

The fear of MNC pharma companies setting up wholly owned subsidiaries, and diverting some key businesses to these subsidiaries is worrying investors once again, a few years after the Pfizer episode.

It is now Wyeth's turn to set up a wholly owned subsidiary Wyeth Pharmaceuticals India, which will launch its blockbuster product Prevenar, a pneumococcal 7-valent conjugate vaccine to combat meningitis and blood infections, through the wholly owned subsidiary. Prevenar has global sales of over $1 billion.

Earlier, the German parent of Merck had announced that it was divesting the domestic listed company's life science and analytics business to the parent's wholly owned subsidiary in India.

In CY05, Merck's chemical division (which comprises analytics and reagents, life science products and pigments) contributed about 44.35 per cent of total revenues of Rs 405.78 crore, and almost 36.3 per cent of the segment profit.

Analysts say MNC players prefer wholly owned subsidiaries as it gives them more operational flexibility, in terms of taking a more long-term approach to certain products or segments they wish to ramp up, given that domestic market is quite sensitive to prices.

Wyeth, USA, plans to compensate its listed Indian arm by about Rs 22.6 crore for the vaccine to its wholly owned subsidiary.

However, this strategy of MNC players is definitely a dampener for domestic investors as growth opportunities in these stocks for the medium-to-long-term are in new product introductions from the parent's portfolio.

These investor concerns have led to the Wyeth stock dipping almost 21 per cent since the announcement was made last week. This stock closed at Rs 602.8 on Monday.

With contributions from Shobhana Subramanian and Amriteshwar Mathur