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HCL Infosystems: Repositioning - Views on News from Equitymaster
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  • Feb 10, 2001

    HCL Infosystems: Repositioning

    Being a pioneer no longer suffices. HCL Infosystems (HCL) one is one such example. The company promoted by the Shiv Nadar group was one of the pioneers in the branded Personal Computers (PC) market in India. Even then its revenues stagnated for a continuous 3 years (1995-1997). But that was 1997. Cut to 2001 and HCL Infosystems finds place in the prestigious NSE Fifty Index. How did this happen? Let’s take a look.

    HCL Infosystems started operations in 1990. Due to its quality and service the company soon became a market leader in the PC segment. However, the company faced a double whammy. The branded PCs are priced for the premium sector and therefore, were out of reach of the retail customers. Therefore, when the business segment started stagnating HCL had tough times. The primary reason for the stagnation in revenues was the fierce competition from multinationals like Hewlett-Packard and Compaq on one hand and local assemblers on the other hand, which had resulted in falling margins and almost flat volume growth.

    Faced with this scenario, the management decided to change its strategy and made a thrust towards software. The move towards software was started about four years ago in 1997. Ever since, the company has been making conscious efforts to increase the contribution of software services. The strategy showed results. The contribution from services to its revenues increased to 23% in the first half of fiscal year 2001, as compared to 12% in fiscal year 2000. Encouraged by this, the company is now looking to be an end-to-end (E2E) solution provider.

    (Rs m) 1QFY01 2QFY01 Change
    Sales 2,926 2,826 -3.40%
    Other Income 21 4 -82.60%
    Expenditure 2,703 2,600 -3.80%
    Operating Profit (EBDIT) 222 226 1.90%
    Operating Profit Margin (%) 7.60% 8.01%  
    Interest 4 10 160.00%
    Depreciation 27 31 14.70%
    Profit before Tax 212 189 -11.00%
    Tax 20 14 -30.00%
    Profit after Tax/(Loss) 192 175 -9.10%
    Net profit margin (%) 6.60% 6.20%  
    Diluted number of shares 31.9 31.9  
    Diluted Earnings per share* 24.1 21.9  

    But success in software did not mean that the company overlooked its hardware business. The company still had a market share of 15.5% in PCs during fiscal 2000. However, worries on the volume growth continue to haunt it. HCL managed to push its PC volumes by a mere 12.5% in a year when PC shipments, according to International Data Corporation (IDC) estimates, crossed the one million mark and the home PC segment grew by a significant 88% in unit terms. The overall PC market grew by 37% during the period.

    The company plans to offer solutions right from IT consulting to hardware to facilities management. This is a strategy that has one of the best chances of success. As increasing number of large organisations (Fortune 500) are looking towards outsourcing their IT needs, they are looking at partners who can take care of all their IT requirements. But the space is clearly divided amongst hardware and software companies. Infosys can provide software solutions but it is definitely not into hardware. But HCL Infosystems, is in the unique position to offer both software and hardware solutions together.

    Another market that has just started to grow is the application service provider (ASP) market. Due to the nature of the services, the industry in going to be a low margin one. The only way companies can make profits are by cutting costs.

    HCL has the advantage of in house hardware, thus resulting in low infrastructure costs. HCL is going to leverage in this space through HCL Infinet, a subsidiary, which provides services in the B2B and B2C space. HCL Infinet’s offerings include Internet services, virtual private network and co-location web hosting. The division will soon start B2B exchanges and ASP services. Once this is done the company will be able to provide B2B infrastructure (datacentres, hardware software network support services), its software (like ERP and CRM) and a platform to transact on for its clients. It will score over its competitors in the areas of infrastructure cost and experience in facilities management.

    Due to a drop in PC sales HCL’s topline dropped in 2QFY01. However, the services have shown a healthy growth of 50% year on year. The increased contribution of services has managed to improve HCL’s margins by 40 basis points.

    HCL Infosystems plans to increase its services revenues to 25% of its total revenues in the next couple of years. With for hardware, the contribution of services is expected to increase to 50% in about five years time.

    The positive for the company is that it has been and still is a leader in its area of operations in face of severe competition. Its foray into services will serve as the icing on the cake.



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