HCL Infosys : Steady performance - Views on News from Equitymaster

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HCL Infosys : Steady performance

Aug 21, 2001

HCL Infosystems has posted at topline growth of 3% for FY01. The net profits for the year declined by 20% compared to FY00. This was due to a 45% drop in other income and extra ordinary losses of Rs 106 m. The operating margins too have declined by 40 basis points. The company advanced a loan of Rs 138 m to ‘OWN HCL TRUST’ for operating an employee stock option scheme, and the Trust had utilized this amount for acquiring the company’s shares. As at 30th June 2001, due to significant decline in the stock prices (the stock was quoting Rs 850 in Feb 2000), the ability of the Trust to repay the loan has been impaired to the extent of difference between market price and purchase price. This amount of Rs 106 m has been written of in FY01, excluding which the decline in net profits would have been just 5.6%.

(Rs m) FY00 FY01 Change
Sales 11,249 11,623 3.3%
Other Income 113 61 -45.5%
Expenditure 10,399 10,784 3.7%
Operating Profit (EBDIT) 850 839 -1.3%
Operating Profit Margin (%) 7.6% 7.2%  
Interest 52 19  
Depreciation 127 122 -3.4%
Profit before Tax 784 759 -3.2%
Tax 54 69 29.0%
Provision and contingencies loss/(income) - 106  
Profit after Tax/(Loss) 731 584 -20.1%
Net profit margin (%) 6.5% 5.0%  
Diluted number of shares 32 32  
Diluted Earnings per share 23 18 -20.1%
P/E (x)   3.2  

The growth in the hardware business was a marginal 2%, while the services business grew by 36%. The growth in the hardware business could be low due to the fact that realisations have come down by 5.7% in the PC industry. The race to dominate the PC market has led to a price war amongst the players. Currently, the unoragnised sector hold 53% of the market share, MNC's have 27% and the Indian brands have just 20% of the market share. The change in market share compared to FY00 has been in favour of the MNC brands. The Indian brands have managed to gain market share marginally. However, the company's growth in the services segment too was below the industry growth rate of 55%. The lower growth rate could be due to services being concentrated in the Indian markets (the growth IT services sales in the country for FY01 was 30%).

(Rs m) FY00 % of revenues FY01 % of revenues Change
Sales Revenue 9,616 82.1% 9,794 77.4% 2%
Service Revenue 2,092 17.9% 2,852 22.6% 36%
Total revenues* 11,709   12,645   8%
* Consolidated revenues (HCL Infosys and Subsidiaries)

The companies margins have declined inspite of rise in contribution from its services business. This indicates that the margins in the services business too are under pressure. While the cost of sales and staff costs have increased, HCL Infosystems has managed to reduce its administrative costs by 8%.

(Rs m) FY00 % of revenues FY01 % of revenues Change
Cost of sales 8,538 75.9% 8,671 74.6% 1.6%
Staff costs 800 7.1% 945 8.1% 18.2%
Admin costs & Repair costs 1,094 9.7% 1,007 8.7% -7.9%
Voluntary retirement scheme 46 0.4% - 0.0% -

At the current market price of Rs 54, the stock is trading at P/E multiple of 3 times its FY01 earnings. The hardware companies command lower P/E multiples due to the fact their growth rates are lower than their software counterparts. As the result has nothing new to offer, the company's valuations might not see much of change and remain range bound.


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