HCL Infosystems: Tough times

The slowdown in the Indian industry has taken a toll on the topline and operating margins for HCL Infosystems. The company has reported a 4% decline in revenues on a YoY basis. However, the net profits have climbed down even more sharply. The bottomline has registered a sharp 17% decline. This is inspite of a large other income component for Rs 28 m. Had the other income been equal to Rs 4 m (the other income figure in 2QFY01) the bottomline would have fallen by a sharp 30%.

(Rs m)	2QFY01	2QFY02	Change
Sales	2,826	2,719	-3.8%
Other Income	4	28	658.9%
Expenditure	2,600	2,558	-1.6%
Operating Profit (EBDIT)	226	161	-29.1%
Operating Profit Margin (%)	8.0%	5.9%	-
Interest	10	6	-
Depreciation	31	29	-5.7%
Profit before Tax	189	154	-18.7%
Tax	14	8	-45.7%
Profit after Tax/(Loss)	175	146	-16.6%
Net profit margin (%)	6.2%	5.4%
Diluted number of shares	31.9	31.9
Diluted Earnings per share*	21.9	18.3
P/E (x)		5.6
*(annualised)

The bleak performance is due to the fact the PC markets are witnessing a downturn. Revenues from PC sales constitute about 56% of HCL Infosystems total. The company is the largest PC manufacturer in India with an 8.6% market share according to IDC. According to MAIT, PC markets have shown a decline for 4% for 1HFY02 in unit terms (though IDC contests this and claims that the markets have actually grown). However, the real cause for concern is the fact that the realisations have come down quite sharply in 1HFY02. The drop in realisations for 1HFY02 was a significant 20% as compared to 6% in FY01.

At the current market price of Rs 103, the stock is trading at a P/E multiple of 6x its 2QFY02 estimated earnings. In light of the tough market environment impacting the financials adversely, the stock may see a decline in valuations.