HCL Infosystems: Focused efforts - Views on News from Equitymaster

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HCL Infosystems: Focused efforts

Apr 25, 2003

HCL Infosystems, the country's largest personal computer maker has posted a steep 112% rise in revenues for 3QFY03, and an exorbitant increase of 230% in its profits. For the nine months ended 31st March 2003, the company has posted a 104% rise in its topline, and 29% increase in profits. However, if a big write-off on account of extraordinary items in 2QFY03 is excluded, the profits rise a whopping 109% in 9mFY03.

(Rs m) 3QFY02 3QFY03 Change 9MFY02 9MFY03 Change
Net Sales 3,514 7,432 111.5% 8,588 17,503 103.8%
Other Income 33 12 -65.2% 83 79 -4.8%
Expenditure 3,370 7,016 108.2% 8,132 16,604 104.2%
Operating Profit (EBDIT) 144 416 188.9% 456 899 97.1%
Operating Profit Margin (%) 4.1% 5.6%   5.3% 5.1%  
Interest 23 16 -31.7% 30 50 66.7%
Depreciation 30 31 3.3% 89 91 2.2%
Profit before Tax 124 381 207.1% 420 837 99.3%
Extraordinary items 0 0   0 -302 0
Tax 20 37 87.0% 45 50 11.1%
Profit after Tax/(Loss) 104 343 230.2% 375 485 29.3%
Net profit margin (%) 3.0% 4.6%   4.4% 2.8%  
No. of Shares 31.9 31.9   31.9 31.9  
Diluted Earnings per share* 13.0 43.0   15.7 20.3  
P/E Ratio 7.67 2.32   6.38 4.93  
(* annualised)            

The product and related services segment contributed to over 97% of the revenues of HCL Infosystems. Contribution from the software services segment is on a continuous decline on account of the demerger of this segment, along with the office automation and telecommunication business. The scheme of demerger is pending in the High Court and once the court approves the scheme, the software services business' revenues will not reflect on the books of HCL Infosystems.

Post the re-engineering HCL Infosystems will have two focused business units. While HCL Infosystems will concentrate on the IT products, solutions and related services business, its 100% subsidiary - HCL Infinet - will focus on the rapidly growing communication and imaging products, solutions and services industry.

Revenue break-up (Rs m)
Segment 9MFY02 Contribution 9MFY03 Contribution Change
Products and Related Services 8070 93.9 17070 97.9 112%
Software Services 520 6.1 430 2.5 -17%

The company bagged prestigious orders from the Ministry of Defence, Chennai's Commercial Tax Department and ONGC for its Infiniti PC and Server range. Also, it bagged orders from ONGC and Bharat Coking Coal Ltd. for Sun Microsystems' product-line. The business from the government contracts accounted for 60% of the company's revenues in the quarter. On the office automation front, the company was able to garner good business from its various product lines. Nokia mobile phones business saw an upsurge in sale in this quarter. Also, the imaging business won very substantial orders from Reliance Industries, GE Caps and the Directorate of Education, Gujarat. On the communications front, HCL Infinet won an Internet telephony order in India from Accenture.

Despite bagging huge orders from the government, the operating margins for the quarter show just a marginal rise on account of an increase in expenditure to the tune of 108%. This rise on the expenditure front is attributed to the increasing cost of sales, including material consumption and excise duty. These costs have increased by around 125% YoY for both the March quarter, as well as the 9 months period ended March 2003. However, an expenditure increase to these levels cannot be termed eccentric owing to the very nature of its business – hardware. Manufacture of hardware products require parts that have to be bought in from different suppliers, and that shows effect on this expenditure segment.

However, the continuing marketing and branding initiatives by the company will help it to consolidate market share in the PC segment. 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 global organizations are looking towards outsourcing their IT needs, they are looking at partners who can take care of all their IT requirements. And this is the space that HCL Infosystems needs to fill.

Also, leveraging on its partnership with Sun Microsystems Inc. will help the cause of HCL. Already, the duo have bagged two big deals – from the Government of Andhra Pradesh for the complete automation of VAT services, and from ONGC for the installation and up gradation of Sun Systems for HR and Finance functions respectively.

At the current market price of Rs 100, HCL Infosystems is quoting at a P/E multiple of 6x its 9MFY03 annualised earnings. Excluding the extra-ordinary write-off, the stock trades at a P/E multiple of 3x its 9MFY03 estimated earnings. Though the absence of revenues from the software business is likely to depress margins, the company’s continuing emphasis on the products segment, its consummate understanding of the IT, telecom, and imaging products and services area, is likely to see it through rough times.


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