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HCL Infosystems: Strong performance

Oct 22, 2002

HCL Infosystems has posted a steep 11% decline in net profits for 1QFY03, on a YoY basis. However, revenue growth continues to be robust. Revenues for 1QFY03 grew by 74% YoY. Though the numbers look disappointing at the first glance, the company’s performance is strong. The decline in net profits is due to higher interest costs and taxes. At the operational level, inspite of pressure on margins, the company’s operating profit has grown by 14%. To recap briefly, the company for FY02 posted a strong 8.5% growth in revenues. However, due to operating margins declining from 7% in FY01 to 4.7% in FY02, the company’s bottomline fell by 21% for the fiscal.

The declining margins are due to a steep growth in the cost of sales. The figure jumped by 93% YoY, increasing from 75% of sales in 1QFY02 to 84% of sales in 1QFY03. However, the impact on the operating margins was cushioned by slower growth in staff and SG&A (selling, general and administration) expenses.

(Rs m)1QFY021QFY03Change
Sales 2,355 4,097 74.0%
Other Income 22 11 -48.6%
Expenditure 2,204 3,926 78.1%
Operating Profit (EBDIT)15117113.6%
Operating Profit Margin (%)6.4%4.2% 
Interest 1 17 1215.4%
Depreciation 30 30 -0.7%
Profit before Tax 141 136 -4.0%
Tax 16 25 49.4%
Provision and contingencies loss/(income) - -  
Profit after Tax/(Loss) 125 111 -11.0%
Net profit margin (%)5.3%2.7% 
Diluted number of shares 31.9 31.9 
Diluted Earnings per share* 15.6 13.9  
P/E (x)   6.2  

The contribution to revenues from services declined from 8% in 1QFY02 to 4%. The swift growth in the company’s hardware and trading business has been accompanied by a fall in revenues from the services business. The company’s performance on the services front has been very disappointing. Not only have they declined but also the margins from this business have almost halved. Margins from hardware and trading businesses too have declined. This could indicate a larger proportion of trading revenues as compared to revenues from manufacturing activities. HCL Infosystems is one of the largest manufacturers of PCs in the country.

Revenues (Rs m)1QFY021QFY03Change
Products and Related Services 2,169 3,931 81.2%
Software Services 185 165 -11.3%
Total 2,355 4,096 73.9%
% Contribution1QFY021QFY03 
Products and Related Services92.1%96.0%-
Software Services7.9%4.0%-

During the quarter, HCL Infosystems bagged large orders. The list of clients added for its enterprise business include Air India, ACC, MSEB, IIT Kharagpur, ITC, Indian Overseas Bank, State Bank of Bikaner and Jaipur, Gujarat Electricity Board, State Bank of Patiala and LIC Housing Finance Corporation. The company has added clients for its services business too. During the quarter, HCL InfiNet, the company’s ISP subsidiary, launched a range of Internet telephony devices called YAP (Your Alternate Phone).

At the current market price of Rs 87, the stock is trading at a P/E multiple of 6x its 1QFY03 earnings. While the pressure on margins is likely to continue going forward, the company strong volume growth is a vindication of its abilities to growth in such a difficult environment. With information gradually penetrating into almost all walks of life, growth potential for companies like HCL Infosystems are immense. Thus, while topline will continue to grow swiftly, its bottomline is likely to grow at a much slower pace going forward.

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