HCL Infosystems business to get boost from Nokia product launches

The stock of New-Delhi based HCL Infosystems has fallen over 50% during the past one year in comparison with a 20% drop in the benchmark indices. The poor performance on bourses reflects the disappointing financial performance of the company in the past two quarters.

While the system-integration (SI) business continues to be a laggard, new product launches under the Nokia distribution system and mobility solutions are expected to drive the company's growth.

HCL Infosystems holds a diversified business portfolio which includes computer systems and other related products and services, telecommunication and office automation and internet and related services. While telecom and office automation (T&OA) business contributes nearly 70% to the company's overall business, the computer systems business contributes the rest.

During the fiscal ended June 2011, the company's net sales fell 5% to Rs 11,420 crore. Its net profit declined by 30% to Rs 169 crore. The disappointing results can be attributed to a 13% drop in the telecom distribution business. The computer systems division posted a somewhat stable performance during the year. However, the SI business continued to be a laggard. With an outstanding order book of Rs 1,100 crore, and assuming no further delays, these orders are expected to take 2-3 years to get consolidated.

The new product launches by Nokia - dual sim phones at various prices and newer service offerings -is expected to boost SI's performance . The company has renewed its distribution agreement with Nokia and extended the same up till December 2014. Also, the company will now be entitled to take over certain additional activities resulting in reduced margin pressure. The uptick in the telecom distribution business has led to a significant increase in the sales volumes, which increased over 35% during the May-August 2011 over the previous four months.

The company also aims to expand its footprint in the rural areas. The company is taking continuous measures to consolidate its operational functions and improve efficiency.

At the current market price of Rs 63.4, the stock trades at eight times its earnings for the trailing 12 months, which is similar to that of the other IT companies of similar size. An uncertain macro environment and sluggish SI business continue to be a concern. However, the management expects to witness renewed business traction in the next two quarters.