The markets weren’t off target when they hammered HCL Infosystems Ltd’s stock by 30% after it announced a new distribution arrangement with Nokia Corp. last year.
The company’s results in the last couple of quarters have been lacklustre, primarily because of a sharp dip in the performance of the phone distribution business.
HCL was the sole distributor for Nokia phones in the country till August 2006, but this changed when Nokia reworked the distribution arrangement, becoming a joint distributor along with HCL . In the 12 months till June 2006, when the previous arrangement was in place, revenues of the telecommunication and office automation segment (primarily made up of revenues from the Nokia phone distribution business) had grown by 56.6% to Rs9,050 crore. With the new arrangement being gradually implemented, the growth of this business has steadily declined. In the six months till December 2006, growth fell to 13%, and in the next six-month period, revenues from this business fell 10.55%. Things could get worse as the share of the distribution business is expected to gradually decrease to 50% by end 2007/early 2008. Considering that until mid-2006 most of the company’s revenue and profit growth was coming from the phone distribution business, the change in the segment’s fortunes is drastic.
The saving grace for HCL Infosystems investors is that the performance of the computers business has picked up. For the year till June, its revenues grew 14%, and segment profit jumped 39%. It remains to be seen if similar growth can be sustained; last year’s growth was helped by a surge in the fourth quarter, when sales jumped by 33% and profit soared by 67%.
Besides, although volumes in the phone distribution business have been declining lately, margins improved slightly from last year’s levels. As HCL’s management had pointed out last year, since Nokia won’t be a competing distributor, margins would not be impacted.
But what’s more important is that HCL’s growth has been impacted. Its revenues grew just 2.8% in the last fiscal year and operating profit rose only 6.5%, compared with growth rates of about 45% in the previous fiscal year. It’s no wonder HCL Infosystems’ price earnings multiple has nearly halved to nine times trailing earnings, from 17 times just prior to the revised Nokia deal.
Shriram Transport Finance
A clear example of how discriminating the current correction in the market has been is provided by the Shriram Transport Finance Co. Ltd scrip, which is down a mere 1.3% in the past one month. At first glance, the outperformance is surprising, when one considers that its business lies in financing heavy commercial vehicles, the market for which has been hit hard by higher interest rates. But then, the company’s June quarter results had already underlined the fact that second-hand truck sales, which make up the bulk of Shriram’s revenue, have not been affected.
Disbursements were up a huge 77% compared with the year-ago period, sharply reversing the slower growth in the March quarter. Net interest margins, too, have gone up—from 7.9% in the March quarter to 8.2%. The rise in volumes as well as in net interest margins led to a growth of 78% in net interest income, and operating profits increased by 83%. This, in turn, enabled the company to make higher provisions. That’s why, although gross non-performing assets (NPA) were marginally higher at 2.07% compared with the March level, the net NPA percentage was lower. The good results have effectively buoyed the stock during the market turmoil.
The company’s new initiatives include utilizing the private moneylender network to grow its loans. About Rs100 crore a month is being disbursed through these agents and there’s an enormous potential for scaling up. The company is also getting into the freight bill discounting business where yields, net of bad loans, are higher than in its CV lending business.
The company also uses securitization of its loans to increase both its resources and its return on assets. The loans are sold to banks keen to increase their priority sector lending portfolio.
Analysts point out that the tie-ups with retail financiers have started paying off, with loan generation higher than in the same period last year.
While the truck financing company’s rate of growth in disbursements will slow down in the coming quarters, the rise in margins and containment of net NPAs are encouraging. The company has built up a strong franchise in the pre-owned truck market, and its niche position as a play on the high-yield retail sector has helped it outperform BSE’s Bankex.
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