• APRIL 18, 2002

HCL Infosystems: Margins under pressure

In 3QFY02, HCL Infosystems has managed to arrest the decline in topline that was seen for first half of FY02. The company has posted a 4.5% growth in topline on a YoY basis. However, falling operating margins have caused the company’s net profits to decline by 45%.

HCL earns around 55% of its revenues from PC sales. FY02 has been a bad year, considering the fact that MAIT expects PC sales to decline 12% decline in volumes during the fiscal. The PC manufacturers have been doubly hit due to realisations (Rs per PC) declining sharply as a consequence of a price war triggered by intense competition. The average realisation per PC declined to Rs 27,520 a drop of 20% as compared to the corresponding period last year in 1HFY02.

According to IDC, HCL Infosystems was the largest seller of desktop PCs in India for the year 2001. HCL Infosystems had an 8.6% market share. During the fiscal the calendar year the company saw a 27% growth in volumes.

(Rs m)3QFY013QFY02Change9mFY019mFY02Change
Sales 3,362 3,514 4.5% 9,114 8,588 -5.8%
Other Income 26 33 28.0% 51 83 63.3%
Expenditure 3,147 3,370 7.1% 8,450 8,132 -3.8%
Operating Profit (EBDIT)215144-33.3%664455-31.4%
Operating Profit Margin (%)6.4%4.1% 7.3%5.3% 
Interest 7 23 214.2% 22 30 40.3%
Depreciation 32 30 -5.0% 90 89 -0.9%
Profit before Tax 202 123 -38.9% 603 419 -30.6%
Tax 20 20 2.0%54 45 -17.0%
Profit after Tax/(Loss) 182 103 -43.4% 549 374 -31.9%
Net profit margin (%)5.4%2.9% 6.0%4.4% 
Diluted number of shares 31.9 31.9 31.931.9 
Diluted Earnings per share* 22.8 12.9   22.9 15.6  
P/E (x)   12.3    10.2  

At the current market price of Rs 158, the stock is trading at a P/E multiple of 10x its 9mFY02 annualised earnings. The stock price is likely to witness some selling pressure due to the decline in the bottomline. The company has been concentrating on improving the share of revenues from the services business. In FY01, the contribution from services was around 17%. Increased contribution could help the company improve its topline growth and inch its operating margin higher in the future. However, for FY02, the company will close the year with a decline a topline and operating margins.

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