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HCL Infosys: Upwardly mobile!

Sep 16, 2004

Introduction to results
HCL Infosystems had recently announced strong results for the quarter and year ending June 2004. The company's performance across all its segments of operations continued to remain strong. Also, decline in costs, helped by lower excise duties, helped the company post improved operating margins in both 4QFY04 and FY04.

Financial performance (Consolidated): A snapshot…
(Rs m) 4QFY03 4QFY04 Change FY03 FY04 Change
Sales 8,826 12,960 46.8% 26,187 43,077 64.5%
Other income 82 8 -90.5% 172 232 35.2%
Expenditure 8,442 12,350 46.3% 24,921 40,982 64.4%
Operating profit (EBDIT) 384 609 58.8% 1,266 2,094 65.4%
Operating profit margin (%) 4.3% 4.7%   4.8% 4.9%
Interest 15 6 -59.7% 66 31 -53.1%
Depreciation 43 52 20.6% 186 180 -2.9%
Profit before tax 408 559 37.1% 1,186 2,115 78.3%
Tax 66 101 53.6% (144) 364  
Extraordinary items - -   (404) -  
Profit after tax/(loss) 342 459 34.0% 926 1,751 89.0%
Net profit margin (%) 3.9% 3.5%   3.5% 4.1%  
No. of shares 32.6 32.6   32.6 32.6  
Diluted earnings per share* (Rs) 41.9 56.2   28.4 53.7  
P/E ratio (x)   10.7     11.2  
(* annualised)            

What is the company's business?
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. The very low levels of PC penetration in the country (around 5 per 1,000 population) present the biggest opportunity for higher growth for HCL Infosys going forward. Its number one position is, however, under serious threat due to low barriers to entry in this business.

What has driven performance in 1QFY05?
  • Sales: Office automation & telecommunication (66% of consolidated revenues) business continues to drive topline growth for HCL Infosys. In FY04, revenues from this business grew by 89% YoY. The company has benefited tremendously from the rapid growth in Nokia handsets of which it is the largest distributor in the country. High growth in GSM mobile telephony and reducing prices of handsets has aided this fast growth in FY04. The computer systems business and Internet and related services business of the company also displayed increased strength and revenues from these grew YoY by 39% and 38% respectively.

  • Operating margins: Margins have improved for both 4QFY04 and FY04 on account of cost control measures adopted by the company and reduction in excise duties on computer systems and related products (from 7.8% in FY03 to 6.9% in FY04). As a matter of fact, the previous government had halved the excise duty on computers to 8% and also abolished the special additional duty of 4%. It also reduced custom duties on mobile handsets from 10% to 5% in the earlier part of 2004. Apart from helping HCL Infosys in maintaining margins, this move is likely to help the company in warding of some pressure posed from the low priced products from the unorganised segment (private assemblers).

  • Net profits: Apart from the strong growth in topline and improvement in operating margins, reduced interest and depreciation outgo has helped HCL Infosys to post robust earnings growth in FY04.

    What to expect?
    At the current price of Rs 600, the stock is trading at a P/E multiple of 11.2x FY04 earnings. The board of the company has recommended a final dividend of Rs 7 per share (70%). This takes total dividend for the year to Rs 21 per share (210%). HCL Infosys has benefited from the rising demand for PC and telecom products in the country and this is vindicated by the fact that the company has become the first in India to cross the one lakh units milestone in the desktop PC segment, where it is a market leader with 13.3% share. The fact that the company was among the first to pass on the benefits of cuts in excise and custom duties on computer products to customers, has helped it grow its business significantly in recent times.

    Growth is likely to continue for HCL Infosys as income levels rise and consequently the demand for desktop PCs. Larger investments from corporates to upgrade their hardware systems also promises strong times ahead. However, this growth will be highly dependent on how the company is able to modify its product offerings in times of rapidly changing technology. Also, the company continues to face tough competition from global players like IBM, Dell and HP and the unorganised segment that has cut into its market share over the past few years. Considering these factors, we would advice investors to practice caution.

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