HCL Infosystems: Disappointing profit growth - Views on News from Equitymaster

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HCL Infosystems: Disappointing profit growth

Aug 17, 2000

HCL Infosystems has reported a disappointing financial performance for FY00. The company's profits increased by 25% to Rs 731 m while sales have grown by 19% to Rs 11 bn. The company derives more than 80% of its revenues from computer hardware business where the margins are under pressure.

(Rs m)FY99FY00Change
Sales 9,460 11,249 18.9%
Other Income 40 113 180.5%
Expenditure 8,644 10,399 20.3%
Operating Profit (EBDIT) 815.9 850.0 4.2%
Operating Profit Margin (%)8.6%7.6% 
Interest 96 52 -46.0%
Depreciation 115 127 10.0%
Profit before Tax64578421.5%
Tax 60 54 -10.7%
Profit after Tax/(Loss) 585 731 24.8%
Net profit margin (%)6.2%6.5% 
No. of Shares (eoy) (m) 31.9 31.9  
Diluted number of shares 31.9 31.9  
Diluted Earnings per share* 18.34 22.90  
*(annualised)   

During the FY00, HCL's operating margins declined to 7.6% (from 8.6% in FY99) due to increasing competition in the personal computers (PC) market from assembled manufacturers and other branded producers. Its focus in the software services market is likely to improve the margins in the current year if the company manages to increase the revenues from this segment. In the software service segment the company is constantly building skills in e-commerce development tools and applications like CRM (customer relationship management), SCM (supply chain management) and knowledge management.

The domestic home PC market accounts for around 54% of total PC sales in India. The market is expected to grow at the rate of 65% as the Internet culture is spreading fast in India. HCL is the undisputed market leader with a share of around 12% in volume terms in the domestic branded PC market. To meet the increasing demand of PCs the company is planning to increase its production capacity to 250,000 from the current 150,000.

HCL has a wholly owned subsidiary called HCL Infinet which offers free Internet access with every PC sold by its parent company. This strategy is expected to provide customer base of over a lakh in the first year itself as the parent company has set a sales target over 150,000 PCs for the year 2001.

At the current market price of Rs 294, HCL Infosystems is trading at a P/E ratio of 13 times its FY00 earnings. Historically the company's P/E was in the range of 40-50 times. Its lower valuations are due to its focus into low margin hardware business and the low value added services provided in the software services business. This has resulted into bottomline growing at the slower rate compared to other software majors. The future valuations of the company will depend on its ability to show a relatively higher growth in profits, by increasing contribution from software services and providing value added services.

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