HCL Infosystems has announced its consolidated results for the first quarter of FY05, reporting strong YoY growth in both the topline and the bottomline. Strong growth across all segments has helped rev up the company’s performance in 1QFY05. However, rising raw material costs, intensifying competition and the consequent pricing pressure seems to have taken toll on its margins. On a standalone, while revenues have grown YoY by 24%, profits are almost flat.
Financial performance (Consolidated): A snapshot…
Operating profit (EBDIT)
Operating profit margin (%)
Profit before tax
Profit after tax/(loss)
Net profit margin (%)
No. of shares
Diluted earnings per share* (Rs)
P/E ratio (x)
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. 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?
All-round growth perks topline: Growth in revenues from the office automation & telecommunication (OAT) business (75% of 1QFY05 consolidated revenues) continues to be the growth driver for HCL Infosystems. In this quarter, revenues from this segment grew YoY by 127%, and this seems mainly a result of robust growth in the company’s cellular handset (Nokia) distribution business. The rapid expansion by major cellular players across the length and breadth of the country has helped HCL Infosystems add new customers to its fold, thus leading to a strong growth of this business. Reducing prices of handsets has also aided this fast growth in the OAT segment.
Revenues from the second largest business stream of the company, computer systems & other related products, also clocked in a strong YoY growth of 24%. This segment now contributes to 24% of the company’s revenues and has benefited from large orders from some PSU banks and major technology companies. Apart from a slew of new products launches in the quarter, HCL Infosystems launched a PC financing facility, wherein a PC can be bought for as low as Rs 499 per month. In a low PC penetration country, where affordability is a key factor in PC purchases, these measures are likely to stand in good stead for the company in its future growth. The third segment, Internet and related services (1% of revenues), grew YoY by 20%.
High input costs dent margins: Despite a fall in excise duty (as percentage of sales) from 3.2% in 1QFY04 to 0.9% in 1QFY05, a strong rise in cost of sales have dented the company’s margins in this quarter. These costs have increased to 94% of sales in 1QFY05, from 78% in the corresponding quarter last fiscal. Also, while the press release does not explicitly state this fact, we believe that the company has faced pressure on realisations, as competition (both from unorganised and MNC players) seems to be intensifying in this sector. Lower duties for both computers and mobile handsets, and the need to pass these on to consumers, might also have reduced realisations for the company in 1QFY05.
Lower operating margins affects net profits: Factors like decline in operating margins and higher tax outgo have affected the net profit growth in the quarter. Net profit growth has trailed growth in topline in the past few quarters as well, and this is indicative of the competitive pressures on the company.
What to expect?
At the current price of Rs 644, the stock is trading at a P/E multiple of 12.3 times annualised 1QFY05 earnings. The board of the company has recommended a quarterly interim dividend of Rs 7 per share (70%).
With its direct customer service contacts at 260-plus locations around the country, HCL Infosystems has managed to outperform the industry growth and emerge market leader in the desktop PC segment (13.3% share). The company has also benefited from a rapid growth in demand for GSM handsets. We believe that, going forward, as income levels rise and consequently the demand for desktop PCs and cellular handsets, strong growth is likely to continue for the company. Potentially larger investments in hardware from Indian corporates also promise strong times ahead.
However, much will depend on how the company is able to modify its product offerings in times of rapidly changing technology and ward-off intensifying competition from the unorganised sector (private PC assemblers) and MNCs like IBM, Dell and HP. Considering these factors, and that valuations are at the higher end of the spectrum, we would advice investors to practice caution.
LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.
SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.
Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India. Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: firstname.lastname@example.org. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407