The June quarter results of HCL Infosystems Ltd were lacklustre, with gains in the computer hardware business being offset by a drop in the profitability of the telephone distribution business.
Earnings before interest and tax of the former rose by 28.3% compared with the March quarter, on the back of an 11.5% growth in revenues. Revenues of the telephone distribution business were flat, but the segment’s profit fell by 20.3% sequentially because of a sharp drop in margins.
According to an analyst, the company made a provision for doubtful debts last quarter, which seems to have hit margins in the telephone distribution business.
But leaving quarterly variations aside, it’s important to note that the firm’s revenues have grown at a compounded annual growth rate of 2.5% in the past three years and operating profit has grown by 2.1%. Of course, the change in the firm’s distribution agreement with mobile handset maker Nokia Corp. in the second half of 2006 hit the telephone distribution business till end-2007.
Till August 2006, HCL Infosystems was the sole distributor of Nokia phones, which later changed, and over time the company’s share was estimated to have come down to around 50%. While the telephone distribution business has remained at the same level they were three years ago, the computer hardware and services business has grown at a decent pace of 14%.
Graphics: Paras Jain / Mint
But the markets had anticipated that overall growth would pick up from 2008, since the major impact of the change in the distribution was expected to be felt by end-2007. The slowdown since last year, however, has further delayed growth prospects. Customers postponed buying personal computers and the replacement market for mobile phones slowed with the economy.
Last quarter’s results show that while the telephone distribution business continues to be sluggish, computer sales have picked up. Within the computer services segment, the systems integration (SI) business is also doing well.
According to an analyst with a domestic brokerage who didn’t want to be identified, the SI business is likely to drive growth in the future. The firm has initiated plans to raise capital through a qualified institutional placement and a preferential allotment to promoters. Much of this may be used to expand in computer services.
The markets expect growth to pick up from current levels, going by the 130% jump in the company’s shares in the past six months. This easily beats the return of the broad market in the same period. The shares now trade at around 11 times past earnings, which is not cheap for a company that has an operating margin of just 3%. Of course, if growth picks up substantially, the shares may get rerated further.
But since there has already been a sharp rerating and evidence of overall growth picking up is still awaited, it may be better for investors to be cautious.
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