HCL Infosystems has posted a 19% dip in topline and a 35% drop, YoY, in bottomline for 1QFY02. The drop in topline could be due to fierce competition in the PC industry. As MNC brands like Compaq and Dell are available at competitive rates, the Indian players like HCL Infosystems are finding the going increasingly tough. In fact, Dell has also introduced its famous direct ordering feature in India. Using this perspective clients can search for information and order for PCs with configuration of their choice on Dells website. Not only, does this initiative cut cost for Dell, it gives a more personalised service to the customers.
At one end while companies like HCL have been losing in the volumes game, at the same time realisations (Rs per PC) are also falling, hurting the margins of the company. The operating margins have decline by 120 basis points in 1QFY02.
The company earned 92% of its revenues from sale of products and product related services and the remaining came from software services. The operating margins (including deprecation) for the hardware business was 5% and that for the software business was 12%. If the depreciation is totally added back to the software business the operating margins work out to be about 28%. This is still low compared to the software industry average.
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At the current market price of Rs 60, the stock is trading on a P/E multiple of 4x 1QFY02 annualised earnings. The valuations are not likely to see much of a change considering that the tough times ahead for the company have been already factored in.
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