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HCL Infosys: Change in portfolio

Apr 22, 2002

HCL Infosystems has the distinction of being India’s largest PC manufacturer. According to IDC, HCL Infosys held 8.6% of the market share in volume terms for the calendar year 2001. The company however, is not limiting its focus to hardware but is gradually changing its portfolio to a judicious mix of services and hardware sales. According to the company, its revenue streams in the future will include hardware sales, IT infrastructure services, call centre consulting, technical help desks (call centres), software services, internet services and IT consulting. The increased contribution to revenues from services will not only improve operating margins but will also add pace to the topline growth.

Of the aforesaid service areas, we believe that IT infrastructure services and the company’s interest in the call centre business are likely to be the areas of swift growth. HCL Infosys’s in depth experience with manufacturing and managing hardware makes it one of the most experienced players to provide IT infrastructure services.

HCL Infosystems provides end-to-end solutions in the area of IT infrastructure services. The service offering is not limited to setting up infrastructure, but the company’s portfolio extends to offering support services, networking services and security solutions that addresses almost the entire IT infrastructure requirement of corporates. The company also provides disaster recovery services.

HCL Info: End to end support
Infostructure services
InfoSupport InfoNet InfoSafe
Operating systems Network design consulting Security policy
Database systems Implementation Security solutions design
Middleware Network assessment Implementation
Network management Managed security services

Increasingly there is a trend to outsource IT infrastructure management. Companies like HCL Infosystems and Wipro that have years of experience in the business of facilities management (onsite IT infrastructure support) are likely to be adept at providing a part of these services from a remote location as well. What makes these two companies very strong contenders for the emerging business opportunity is the fact they are both ISPs (Internet service providers). Thus, they have a much greater control on the availability of bandwidth, which is one of the key inputs for this industry. The advantage of this is two fold. Not only HCL Infosys be able maintain a greater control on the quality of services, it will also help the company offer competitive pricing.

Then of course, there is the call centre business that the company has entered into. Here too, HCL Infosystems has not limited to itself to providing call centre services. While it does have technical helpdesk services, it also helps companies set up call centres. For this the company has tied up with Stratasoft, USA. HCL Infosys will address the entire spectrum from creation of facility, recruitment & training, providing technology, help establish process transitions, system integration, on going audit of the call center practices and on going infrastructure support.

On call center consulting front, the company has already signed up 10 clients. Work on some of these projects is likely to start in the near future. The technical helpdesk is part of the company’s ISP subsidiary HCL Infinet. The order wins include domestic and international customers (mainly from the US). Currently, the total capacity is 130 seats.

HCL after clocking double digit growth rates in FY98, FY99 and FY00 slowed down in FY01. And from the numbers that have come in so far it is likely to close the year with a dip in topline. The reason for concern is the fact that the operating margins have fallen steeply during the fiscal. Therefore, the decline in bottomline is likely to be steeper.

(Rs m) FY98 FY99 FY00 FY01 9mFY02
Net Sales 6,558.6 8,933.5 10,653.9 10,858.7 8,587.5
% growth 10.7% 36.2% 19.3% 1.9% -5.8%
OPM (%) 5.8% 9.1% 8.0% 7.7% 5.3%
Net profit after tax 261.8 349.3 730.7 583.7 373.8
% growth 413% 33.5% 109.2% -20.1% -31.9%
NPM (%) 4.0% 3.9% 6.9% 5.0% 4.4%
FDEPS* 8.2 11.0 22.9 18.3 15.6
* (annualised)

HCL earns around 55% of its revenues from PC sales. FY02 has been a bad year, considering the fact that MAIT (Manufacturers Association of Information Technology) expects PC sales to decline 12% in volumes during the fiscal. The PC manufacturers have been doubly hit due to realisations (Rs per PC) declining sharply as a consequence of a price war triggered by intense competition. The average realisation per PC declined to Rs 27,520 a drop of 20% as compared to the corresponding period last year in 1HFY02.

Realisations and volume growth from the PC markets is likely to remain subdued. And improvement looks tough considering the fact the company will have to compete with players like Dell in the future.

Dell offers flexibility of configuration that is not available with other branded players. Dell is famous for its online ordering system through which retail customers can select the configuration of their PCs through the Dell website. Dell will no doubt introduce this kind of a system in India too. This offers two advantages. Firstly, the production begins after an order is received and therefore, the inventory costs are reduced. Secondly, bulk ordering helps companies purchase parts at lower rates.

However, companies like HCL Infosystems have the advantage of a better reach. In January 2001, HCL Infosys tied up with the Department of Post to market its entire range of consumer products (PCs, mobile phones) through the network of post offices across the country.

But the improvement in topline growth and operating margins is likely to stem from the change in the portfolio mix. Thus, it would be interesting to watch the company and wait for it to deliver on the services front. At the current market price of Rs 130, the stock is trading at a P/E multiple of 8x its nine months FY02 annualised earnings. The stock price is likely to witness further decline in valuations due to the depressed financials that are likely to continue in the next quarter also.

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Dec 6, 2021 02:32 PM


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