Shares of HCL Infosystems Ltd rose by nearly 5% after the company announced that it will hive off three of its relatively small businesses into separate subsidiaries. These three businesses are hardware solutions, learning solutions and services.
In July 2012, the company had transferred its computer products manufacturing and channel business to a wholly-owned subsidiary called HCL Computing Products Ltd. In 2011, it had transferred its digital entertainment business, i.e. distribution of non-telecom products such as Apple iPods, memory cards and cameras, to another wholly-owned subsidiary called Digilife Distribution and Marketing Services Ltd.
Apart from being the holding company of all these subsidiaries, HCL Infosystems will continue to house the mainstay telecom distribution business, which contributes the majority of its revenue and profit.
The company has said that the restructuring exercise is to provide focused management orientation to each of these growth areas. Be that as it may, having separate entities will also help HCL Infosystems in disposing off non-core businesses and/or get in strategic investors for a particular business.
In August 2012, there were reports that Lenovo Group Ltd was in talks to acquire the company. HCL Infosystems had said that it wasn’t aware of any such development. But even if Lenovo was interested, it’s unlikely it will be interested in all the different businesses HCL Infosystems is currently engaged in. It may be content buying just HCL Computing Products.
HCL Infosystems has prior experience with this. In November 2011, it had sold its Internet access services business run under subsidiary HCL Infinet Ltd to Tikona Digital Networks Ltd.
This is not to say this business couldn’t have been sold if it was operating as a division of HCL Infosystems. But having unrelated businesses run as subsidiaries makes the process easier.
Additionally, it makes sense for HCL Infosystems to exit non-core businesses or at least induct strategic investors into some of its businesses. Its shares have dropped by over 80% in the past five years, with profits shrinking in its major businesses.
In the year ended June 2012, the company’s computer systems and related businesses, including hardware solutions and learning, reported a loss. This was partly owing to forex swings, but even adjusted for that, profit of the segment fell by 60% and amounted to only 1.4% of revenue. The telecom distribution, digital entertainment and office automation business reported a 9% drop in profit excluding forex losses. Profit of the segment amounted to 2.3% of revenue.
The 5% rise in HCL Infosystems’ shares on Tuesday suggests that investors are hoping for some asset/stake sale to alleviate some of its problems.