In the past five years, shares of HCL Infosystems Ltd have underperformed the broader market by as much as 67%. While the S&P CNX 500 index has risen by 48% in the past five years, HCL Infosystems’ stock has declined 51%. The shares have fallen out of favour because of the weak performance of the company during the period.
The company reported revenue of Rs 11,419 crore in the year ended 30 June. Five years ago, it had reported revenue of Rs 11,368 crore for fiscal 2006. What’s more, its operating profit has dropped 24% during the period. Considering that the Indian economy has grown at a healthy pace for most of this period, and aggregate profits of Indian companies have been growing in double digits each year, a decline in profit over a five-year period reflects a sad state of affairs.
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The company’s low-margin phone distribution business, which accounted for around 80% of consolidated revenue five years ago, has been a drag on growth. The computer systems and related products and services division has done much better, with revenue growing by 55% in the past five years. However, since the division accounted for only 20% of sales, its impact on overall growth has been limited.
It was exactly five years ago, in August 2006, when HCL Infosystems lost its status as the sole distributor of Nokia phones in the country. Nokia had then reworked its distribution strategy, becoming a joint distributor along with HCL Infosystems. One would have imagined that with the base adjusting in the first year of joint distribution, things would have stabilized for HCL thereafter. But not only have things not stabilized with respect to the phone distribution business, what’s worse is that outlook remains bleak. Nokia has been losing share rapidly to other manufacturers, and this will continue to impact HCL’s phone distribution business. In the year ended 30 June, revenue and profit of this division fell by 8.5% and 10.7%, respectively.
The computer systems and related products and services division, which includes the systems integration work HCL Infosystems does for the government and public sector firms, did relatively well in the first half of the year. But even this business has declined in the second half, owing to inaction on the government’s part. In fact, in the March quarter, revenue of this division fell by more than 25% from a year ago, and it even reported a loss at the operating profit level.
According to analysts, HCL Infosystems had made large upfront investments in this segment hoping to get business from the government. The delay in execution of these projects seems to be now hurting the company. In sum, both of the company’s main businesses are under pressure, and investors have little reason to be optimistic, even though valuations have corrected substantially.
Graphic by Sandeep Bhatnagar/Mint
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