Perhaps no other Indian technology company has provided as much returns to shareholders in the last year as HCL Infosystems (HCL Infosys), the largest personal computer (PC) maker in the country. Apart from the overall rally that was witnessed in the whole of 2003, HCL Infosys' shareholders were rewarded due to an impressive performance from the company. This was mainly aided by its office automation and telecommunication business that raked in a YoY growth of over 90% for the quarter ending December 2003.
Note: Returns are calculated on Rs 100 invested on March 17, 2003
Also aiding HCL's growth were its computer systems (PCs) & other related products and Internet & related services businesses. These grew YoY by 56% and 61% respectively in the December quarter. HCL Infosys is India's largest dealer for Nokia handsets and has gained tremendously from the rising demand for the same. As seen in the graph below, Nokia sales contribute to around 58% of the company's 1HFY04 revenues, up from 51% during FY03. With telephone penetration in India still at one of the lowest in the developing world, growth prospects for HCL are promising.
In recent times, the company has also benefited from the excise duty cuts announced by the government in its mini-budget. For instance, the government halved the excise duty on computers to 8% and also abolished the special additional duty of 4%. Customs duty on mobile handsets was also reduced from 10% to 5%. Also, the reduction in peak customs duty from 25% to 20% has benefited the company in growing sales of its office automation products like copiers, duplicators and projection systems. While these sops would help improve HCL Infosys' margins (as the company would spend lesser amounts on raw materials), they would also benefit the company in growing sales of its products (as the company would pass on these benefits to customers).
More importantly, organised players like HCL Infosys have been affected by the presence of huge black and unorganized market. This reduction of customs and excise duties should narrow the price difference and the organised players are likely to gain market share. This is an extremely critical factor, as it would make organised players competitive.
At the current price of Rs 760, the stock is trading at a P/E multiple of 16.4x annualised 1HFY04 earnings. The company has benefited from rising demand for PC and telecom products. While this is likely to continue as companies make larger investments in upgrading their hardware systems, HCL Infosys is also likely to benefit from the recent cuts in excise and customs duty. However, the growth of the company is highly dependent on rapidly changing technology. If it fails to keep pace with the same, valuations might be affected going forward. Investors, to that extent, need to apply caution.
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