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HCL Infosystems: Computer systems lead growth - Views on News from Equitymaster

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HCL Infosystems: Computer systems lead growth

Sep 4, 2007

Performance summary
  • Topline grows 3% YoY in FY07, driven by computer products and Internet services.

  • Operating margins expand marginally due to reduction in costs.

  • Higher interest costs offset increased other income – net profit growth outperforms topline growth.

  • Declares final dividend of Rs 2 per share - including the interim dividend, total payout for FY07 stands at Rs 8 per share.

Consolidated financial snapshot
(Rs m) 3QFY07 4QFY07 Change FY06 FY07 Change
Sales 29,104 30,645 5.3% 113,683 116,853 2.8%
Expenditure 28,029 29,489 5.2% 109,909 112,819 2.6%
Operating profit (EBDIT) 1,075 1,156 7.5% 3,774 4,034 6.9%
Operating profit margin (%) 3.7% 3.8%   3.3% 3.5%  
Other income 60 160 164.9% 194 505 160.3%
Interest 32 38 17.3% (9) 104  
Depreciation 37 42 14.8% 124 148 19.4%
Profit before tax 1,067 1,236 15.9% 3,853 4,287 11.3%
Tax 187 387 107.2% 1,049 1,127 7.4%
Profit after tax/(loss) 880 849 -3.5% 2,804 3,160 12.7%
Net profit margin (%) 3.0% 2.8%   2.5% 2.7%  
No. of shares (m)         170.2  
Diluted earnings per share (Rs)         18.6  
P/E ratio (x)         11.2  

India’s largest PC maker
HCL Infosystems, India’s largest personal computer (PC) maker, is primarily engaged in the information technology related hardware business. Its other interests (apart from PCs) in hardware include trading and assembling of equipments like printers, scanners, photocopiers, cellular phones and EPABX systems. It is one of the largest distributors of Nokia GSM cell phones in the country. During the period between FY02 and FY07, the company has grown its sales and net profits at compounded annual rates of 55% and 83% respectively.

What has driven performance in FY07?
Computer growth drives topline: In FY07, HCL Infosystems’ computer business revenues recorded a growth of 14% YoY. Its share in total revenues also increased from 20% in FY06 to 22% in FY07. The telecommunications and office automation remained flat and in absolute terms the revenues have decline marginally. It was mainly because the business from Nokia remained flat although the company launched new products like HCL Palamino and next generation IP-PBX systems. The company also received a multi-year systems integration contract worth Rs 5 bn from BSNL.

Segmental break-up…*
  FY06 Share FY07 Share Change
Computer Systems & Other Related Products 22,947 20.2% 26,145 22.3% 13.9%
Telecommunication & Office Automation 90,498 79.5% 90,495 77.3% 0.0%
Internet & Related Services 371 0.3% 399 0.3% 7.5%
Total 113,816   117,039   2.8%
* Includes inter-segment revenue

Computer segment drives margin expansion: HCL’s operating margins expanded by 20 basis points mainly due to reduction in costs. The EBIT margins of computer segment increased from 1.1% in FY06 to 1.5% in FY07 and recorded a growth of 39% YoY while the margins of telecommunications and office automation segment increased from 2.1% in FY06 to 2.3% in FY07 which recorded a growth of 9% YoY. The EBIT margins of Internet services segment remained flat at 1%.

Higher other income boosts bottomline: HCL Infosystems recorded a 13% YoY growth in bottomline and the PAT margins expanded from 12.5% in FY06 to 12.7% in FY07, which was mainly due to higher other income. Other income recorded a growth of 160% YoY though the full impact of which was offset by rise in interest costs. The effective tax rates at the PBT level declined by 1% to 26% in FY07.

What to expect?
At the current price of 208, the stock is trading at 11.2 times its trailing twelve months earnings. While the growth in revenues and PAT are nowhere near to what it achieved in FY06 over FY05, the improvement in margins is the only consolation, which it can take in this year. While the company plans to leverage its position in the systems integration space, it still remains to be seen how effectively it will be able to manage such large size contract. We will soon update out research report on HCL Infosystems.

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