HCL Infosystems_20100831

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8 Vol. 16/10-11 Aug 31, 2010. BUY HCL Infosystems Ltd. Incorporated in April 1986, HCL Infosystems Ltd. (HCLI) is promoted by a group of technocrats. HCLI is India’s premier hardware services and ICT (Information Communications Technology) systems Integration company offering products & services that include computing, storage, networking and security. HCLI is a one-stop shop for all the ICT requirem ents of an organization. It has specialize d expertise across verticals including telecom, BFSI, e-governance, power etc. The company has India's largest distribution and retail network to market a range of digital lifestyle products in partnership with leading global ICT brands. HCLI has India's largest vertically integrated computer manufacturing facility with over three decades of electronic manufacturing experience & HCLI desktops is the largest selling brand in the enterprise space. HCLI sells its products in 4 major segments: PC-Notebooks, Nokia handsets (exclusive 3rd- party distributor in India), consumer electronics, and office SI (Systems Integration) services.  HCLI manufacturing plants are located in Pondicherry (2), Chennai & Uttarakhand. KEY INVESTMENT ARGUMENTS  Healthy PC-Notebook sales expected in FY11 PC-Notebook sales that account for 20% of the company’s revenue s are expected to grow by 18% in FY11 against an industry growth of 9%, as estimated by IDC (International Data Corporation). PC-Notebook revenue growth will be supported by a 100bps gain in company’s market share to 11%, on aggressive marketing of the new ME (Mobile Excitement) brand and a widening product range. PC- Notebook sales will also increase due to greater demand from government and education sectors. India is the third fastest growing PC-Notebook market in the ASEAN region with a CAGR of ~22 %. Consumer electronics business set to boom In consumer electronics, HCLI has varying rights for the distribution of several popular products from well known manufacturers. Over the next 3 years, this segment is expected to grow 40% per annum on an expansion of the company’s distribution network to 1000 towns from 201 at present, as well as the introduction of new products and the rising disposable income of consumers (Source: Kim Eng Research). Consumer Electronics Product List Manufacturer Product Apple iPod Kodak Digital Camera Microsoft Office, Windows San Disk Flash Drives, Memory Cards Cisco Wireless Routers Kingston Memory Cards Altec Lansing Speakers Source: Company Data Analyst: Atul Kanwar [email protected]  Reviewed by: Alok Agarwala [email protected]  Profile Industry Computer Hardware Market Cap (Rs cr.)  2459.6 Face Value (Rs.) 2.0 52-week high/low (Rs.) 188.8/102.0 Book Value (Rs.) 86.0 Price / Book Value 1.3 PE Ratio (TTM) 10.1 Dividend (%) 375 Average Daily Volume (1 Y) 283907 Investment Details CMP (Rs.) 112.8 Target (Rs.) 140.0 Upside Potential (%) 24.2 Horizon (Months) 12 M Shareholding Source: BSE. Figures as on June 30, 2010. 50% 33% 9% 8% Promoters FII DII Others

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8Vol. 16/10-11 Aug 31, 2010. 

BUY

HCL Infosystems Ltd. 

Incorporated in April 1986, HCL Infosystems Ltd. (HCLI) is promoted by a group of technocrats. HCLI is India’s premier hardware services and ICT (InformationCommunications Technology) systems Integration company offering products &services that include computing, storage, networking and security. HCLI is a one-stopshop for all the ICT requirements of an organization. It has specialized expertise acrossverticals including telecom, BFSI, e-governance, power etc. The company has India's

largest distribution and retail network to market a range of digital lifestyle products inpartnership with leading global ICT brands. HCLI has India's largest vertically integratedcomputer manufacturing facility with over three decades of electronic manufacturingexperience & HCLI desktops is the largest selling brand in the enterprise space. HCLIsells its products in 4 major segments: PC-Notebooks, Nokia handsets (exclusive 3rd-party distributor in India), consumer electronics, and office SI (Systems Integration)services.  HCLI manufacturing plants are located in Pondicherry (2), Chennai &Uttarakhand.

KEY INVESTMENT ARGUMENTS

  Healthy PC-Notebook sales expected in FY11

PC-Notebook sales that account for 20% of the company’s revenues are expected togrow by 18% in FY11 against an industry growth of 9%, as estimated by IDC(International Data Corporation). PC-Notebook revenue growth will be supportedby a 100bps gain in company’s market share to 11%, on aggressive marketing of the new ME (Mobile Excitement) brand and a widening product range. PC-Notebook sales will also increase due to greater demand from government andeducation sectors. India is the third fastest growing PC-Notebook market in theASEAN region with a CAGR of ~22 %.

  Consumer electronics business set to boom

In consumer electronics, HCLI has varying rights for the distribution of several

popular products from well known manufacturers. Over the next 3 years, this

segment is expected to grow 40% per annum on an expansion of the company’s

distribution network to 1000 towns from 201 at present, as well as the introduction

of new products and the rising disposable income of consumers (Source: Kim Eng

Research).

Consumer Electronics Product List

Manufacturer Product

Apple iPod

Kodak Digital Camera

Microsoft Office, Windows

San Disk Flash Drives, Memory Cards

Cisco Wireless RoutersKingston Memory Cards

Altec Lansing Speakers

Source: Company Data

Analyst:

Atul [email protected] 

Reviewed by:Alok Agarwala 

[email protected] 

Profile

Industry ComputerHardware

Market Cap (Rs cr.)  2459.6Face Value (Rs.) 2.0

52-week high/low (Rs.) 188.8/102.0

Book Value (Rs.) 86.0

Price / Book Value  1.3

PE Ratio (TTM)  10.1

Dividend (%)  375

Average Daily Volume (1 Y)  283907

Investment Details

CMP (Rs.) 112.8

Target (Rs.)  140.0

Upside Potential (%) 24.2Horizon (Months) 12 M

Shareholding

Source: BSE. Figures as on June 30, 2010.

50%

33%

9%8%

Promoters FII DII Others

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Stock idea – HCL Infosystems Ltd. 

 Bajaj Capital Centre for Investment Research 2/6

  Market share for Nokia expected to recover

Nokia has been losing market share in India (down to 51% at present from 54% in

2009) to low-priced producers like Micromax and Karbonn, among others. Market

share for Nokia is expected to recover in FY11 on the launch of new 3G-enabled

handsets and new models with smartphone features, which will be hard for

competitors to match. These include C2 phones (dual SIM cards), as well as C5 &

C6 phones (social networking). 3G services are expected to be launched in October2010, which is expected to increase the market for mobile phones by 10%. HCLI

contract with Nokia ends in August 2011.

  Systems Integration (SI) business to increase substantially

SI business accounts for 9% of HCLI revenue. The current order book is Rs.2200cr.

Demand for SI is supported by government spending of Rs. 23,000cr. under the

current development plan on e-governance projects (involving income tax, land

records, passport services etc.) and the rollout of 3G services in the telecom sector.

SI contribution to revenue is expected to increase to 15% by FY12.

  HCLI has entered the gaming industry

Recently, HCLI became the first Indian company to enter the handheld gamingconsole. Launched under the ME brand, they will compete with market leaders like

Sony's PlayStation Portable and Nintendo DS. HCLI ME is custom-made for

children between the age group of 4-15 years. The console gaming industry is

expected to grow at a CAGR of 19%, making it a Rs. 1,160cr. market by 2014 as

against Rs. 490cr. in 2009. To garner a bigger pie of the segment, HCLI is pricing

its products competitively. HCLI ME handheld gaming devices have been priced at

Rs. 799 to Rs. 4,990 each. The Sony PSP and Nintendo DS base models cost

Rs.5,000 each.

  HCLI to supplyATM machines

HCLI has tied-up with Korean major Nautilus Hyosung to launch customized ATM

(Automated Teller Machine) solutions for Indian banks with a special emphasis on

service offering for rural areas. With just 40,000-plus ATMs in India serving a

population of over 1.2-billion, there is going to be a huge demand for ATMs in

India. The company will import ATMs as SKD (Semi Knocked Down) kits, then

move to CKD (Completely Knocked Down) kits, and eventually as a part of 

indigenization start manufacturing the whole unit in India. The initial assembly will

be done at HCLI plants in Pondicherry and Uttarakhand.

  HCLI acquires 60% stake in NTS Group

HCLI has made an acquisition of 60% stake in NTS Group based in Dubai for

$6.5mn  – valuing the company at US$ 10.8mn. NTS group provides IT hardware,

services and consulting to enterprises in the Middle East region. NTS’s clients

include government bodies like Dubai municipality, police, ministry of health,

ministry of education and also private enterprises like Etisalat, Emaar etc. NTS hasrevenues of ~US$ 24mn. HCLI will make an upfront payment of US$ 4mn with the

balance payable over the next 2 years. NTS has a net debt of ~US$ 2mn. The

acquisition is EPS accretive adding ~1-1.5% to HCLI profits. HCLI will use this

acquisition to expand its SI footprint in the Middle East and African market.

  Change in business mix to boost revenues

The change in the company's business mix - its shift towards system integration

which is a better margin business - will boost revenues significantly.

  Costs expected to fall

FY11 costs for the company are expected to fall marginally due to a greater

emphasis on sales of its own PC-Notebooks. Of HCLI’s total cost, 80% is for purchasing products for onward sale. Another 16% is for parts used in making PC-

Notebooks and the remaining cost is for spare parts, etc.

HCL Infosystems V/s NSE

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50

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HCL Infosystems NSE

 SI Order Book (Rs. Cr.)_

 Source: Company 

FY07 FY08 FY09 FY10 FY11E FY12E

1,200 1,400 1,500

2,200

2,800

3,500

Domestic IT Market (Rs. Billion)

Source: IDC (2009)

0

200

400

600

800

1000

1200

1400

2009 2010E 2011E 2012E 2013E

317 342 382 428 480

111 126147

173204279

322376

442

521

7791

105

117

128

Hardware Software Services Others

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Stock idea – HCL Infosystems Ltd. 

 Bajaj Capital Centre for Investment Research 3/6

  Only company handling programs like TPDS  

HCLI led consortium with Accor Services and Virgo Softech as partners, has been

awarded a contract by the govt. of M.P. for implementing India's food-coupon

based TPDS (Targeted Public Distribution Systems) in the state. The project would

involve setting up a model of food & civil supplies distribution in the state based on

the UIDAI (Unique Identification Authority of India) guidelines for over 1cr.

expected transactions per month at Rs. 10.98 (per transaction per family) spreadover 78 months. Only ~80 lakhs APL (Above Poverty Line) families will be paying

a one-time subsidized registration fee of Rs. 250. This aims at revolutionizing the

PDS which is fraught with issues of inefficiency and non-transparency. The project

is to cover 50 districts and over 20,000+ fair price shops. The company had earlier

deployed India's first smart card based PDS system in Chandigarh. It is the only

company in the country with experience and expertise in the field to take on citizen

centric programs like Aadhar and PDS and expects to bag similar projects in the

near term.

  Involved with the 2010-11 Census of India 

HCLI bagged a Rs. 40-crore order to digitise the data generated from the Census of 

India 2010-11. The project includes maintenance, scanning and storage at a centralrepository. The project also involves processing all captured data.

  Rapid inventory turnover

HCLI has rapid inventory turnover of 24 days, which reduces the risk of obsolete

inventory. In the past, there has been minimal loss due to inventory write-offs.

  Promoters acquire shares at Rs. 153 

Apart from internal accruals, the company has, over the past one year, raised money

by issuing warrants to its promoters which were recently converted at Rs 153.

KEY CONCERNS

  Attrition

Attrition is one of the major risks which organizations are facing today. With the

increasing demand and limited availability of specialised workforce for the ICT

domain - identifying, recruiting and retaining this talent is vital.

  Exchange rate fluctuation risk

As HCLI imports various products paying in US dollar and other foreign currenciesand sells them in the Indian market in rupees, the weakening of the rupee againstmajor currencies especially the US dollar, would impact its earnings negatively.

CONCLUSION

HCLI PC-Notebook sales are expected to grow at 18% compared to an Industry averageof 9%. Consumer electronics business is expected to grow at 40% per annum for the next3 years. SI business has an order book of Rs. 2200cr.Nokia sales are expected to recoverbecause of the 3G services launch. NTS group acquisition is EPS accretive adding ~1%-1.5% to company’s profits. There would be additional revenues from new streams likegaming, ATMs, TPDS & India’s 2010-11 census. Healthy cash accruals and low debtrepayment obligations will help the company to perform better in coming quarters.HCLI, a Rs 2459.6 cr. company by market capitalization, is currently trading at a shareprice of Rs 112.75. The company has an attractive dividend yield of 6.7% based on thecurrent price and a dividend of 375% given in FY10. The current EPS is Rs 11.1 whichtranslates into a P/E of 10.1. In terms of price to book value, it is available at 1.3. The

market cap to sales ratio is 0.2.Given the growth prospects of the company, the stock isan attractive buy.

We recommend a “BUY” on the stock with an investment horizon of 12 months andtarget price of Rs. 140.

PC-Notebook Market Share

Source: IDC (Aug 2009)

18%

10%

10%

9%5%3%

2%

43%

HP HCL Dell Acer

Lenovo Zenith Wipro Others

 Total PC-Notebook Market (Millions)

Source: IDC (Aug 2009) 

FY08 FY09 FY10E FY11E FY12E FY13E

87

89

11

13

 Manpower

Source: Company 

FY05 FY06 FY07 FY08 FY09

3,879 4,323 5,082 5,753 5,921

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Stock idea – HCL Infosystems Ltd. 

 Bajaj Capital Centre for Investment Research 4/6

HCL Infosystems: Structure

Source: Company 

Complete ICT Solutions from HCL

Computer Systems: PCs, Laptops, Workstations, Racks, Peripherals,Kiosk, Software, Servers, Storage, Backup Solutions, NetworkingEquipments, Security Solutions, Enterprise VPN (Virtual PrivateNetwork), ASP Services (Application Service Provider), ATM

Imaging Products: Digital Copiers, Multimedia Projectors, Plasma / LCD Display, Panels Audio Visual System Integration, Laser Printers(Mono / Colour)

Telecom Products: IP Phones, TDM (Time Division Multiplexing), IPPBX (Private Branch Exchange), Video Conferencing, Call CentreSolutions, TV Broadcasting, GPS (Global Positioning System)Solutions

India’s Largest Service Support Network: Multi- Locational ProjectServices, Network Security & Management Services, FM Services,Multi Vendor & System Integration Support, IT/BPO OutsourcingServices, Copy & Printing Services, Spot Maintenance Services,Document Management Services, Branch Rollout Solutions & DataCentre Hosting Services

India’s Largest

Distribution &

Retail Network

(3000

franchisee,

92,000 retail

outlets)

Products: Computing,Imaging &Printing,Mobile

Handsets,iPods, DigitalCamera,Accessories,Wireless Headsets,MemoryProducts, SolarChargers

India’s Largest

Direct Sales

Organization

Solutions:Computing &Storage,Networking,Security,Telecom,Imaging,Printing &Copying, Voice& Data Comm.,VideoConferencing,Digital Signage,EnterpriseServices,ManagingNetworks, POS(Retail)

ICT Training & Education

Manufacturing ISO-14001,9001; ISO-13485-2003; TS 16949-2002; TUV-Accredited

System Integration, Roll Out & Infrastructure Management

Telecom E - Governance Power Railways Health Security

Media &

Entertainment

Airport / 

PortsDefence Education BFSI Power

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Stock idea – HCL Infosystems Ltd. 

 Bajaj Capital Centre for Investment Research 5/6

FINANCIAL STATEMENTS:

Income Statement: Consolidated . Rs. Cr. 

Particulars Q4FY10 Q3FY10 Q4FY09

QoQ

(%)

YoY

(%)

Net Sales 3204.9 2814.5 3106.3 13.9 3.2

Other Income 16.0 6.7 3.5 139.2 354.5

Total Income 3219.9 2837.6 3121.3 13.5 3.2

Total Expenditure 3104.6 2733.5 3020.5 13.6 2.8

PBIDT 115.4 104.0 100.8 10.9 14.5

PBIDT Margin % 3.6 3.7 3.2

Interest 12.0 9.1 10.1 31.3 18.8

PBDT 103.4 94.9 90.7 8.9 14.0

Depreciation 7.2 5.6 5.9 28.9 21.3

PBT 96.2 89.3 84.8 7.7 13.5

Tax 29.0 29.3 24.4 -1.0 18.9

APAT 67.2 60.1 60.4 11.9 11.3

APATM (%) 2.1 2.1 1.9

Financials: Consolidated Rs. Cr. 

201006 200906 200806 200706 200606 200506

5 yr CAGR

%

Share Capital 43.6 34.2 34.2 33.8 33.8 33.4

Networth 1121.9 1013.3 856.8 694.7 551.5

Capital Employed 1348.8 1367.8 1092.7 779.4 633.4

Total Income 12114.4 12308.1 12384.4 12004.0 11541.6 7846.5 9.1

Total Expenditure 11703.3 11880.3 11878.6 11530.3 11123.3 7519.6 9.3Revenues 12049.8 12378.5 12402.6 11855.4 11455.0 7787.2 9.1

PBIDT 411.2 427.8 505.8 473.7 418.3 326.8 4.7

Other Income 34.8 37.1 49.9 60.9 48.0 51.4

Interest 39.2 55.2 57.0 30.2 20.6 15.6

Depreciation 25.5 21.3 18.6 14.8 12.4 15.2

PBIT 385.7 406.5 487.1 458.8 405.9 311.6 4.4

APAT 242.4 239.5 298.9 311.6 275.9 221.0 1.9

Operating Cash Flows 264.4 151.3 26.5 278.6 126.8

Free Cash Flows 200.0 193.1 3.3 110.3 189.0

Dividend % 375.0 325.0 400.0 400.0 400.0 310.0

CEPS (Rs.) 14.2 17.3 18.3 16.2 13.7

EPS (Rs.)* 11.1 12.9 16.2 17.4 15.5 12.8

Debt-Equity Ratio 0.3 0.3 0.2 0.1 0.2

Interest Coverage Ratio 7.4 8.5 15.2 19.7 20.0

RoNW % 22.5 32.1 40.7 45.0 46.9

PBIDT Margin % 3.4 3.5 4.1 4.0 3.7 4.2

PBIT Margin % 3.2 3.3 3.9 3.9 3.5 4.0

APAT Margin % 2.0 1.9 2.4 2.6 2.4 2.8

Total Asset Turnover Ratio 3.8 4.2 4.7 6.1

Fixed Asset Turnover Ratio 76.8 88.9 115.8 147.6

Market Cap/Sales 0.2

PE Multiple 10.1

P/BV Ratio 1.3

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Stock idea – HCL Infosystems Ltd. 

 Bajaj Capital Centre for Investment Research 6/6

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