The Hindu Business Line : HCL Infosystems: Buy

Investments with a one-year horizon can be considered in the shares of HCL Infosystems, considering its well-positioned business in the domestic IT infrastructure market and very reasonable valuations. At Rs 137, the stock trades at 7 times its expected 2007-08 earnings, with a 5.8 per cent dividend yield also providing a cushion against downside.

Strong positioning in the domestic desktop and laptop markets, scope for higher margins on system integration deals and recent e-governance initiatives hold promise for the company.

Compared to MNCs in these segments, HCL Info’s pricing is fairly aggressive and may position it to capture further market share, considering that PC penetration is very low in India. The company manufactures and markets its own brand of desktops and laptops. Over the last four years, HCL Info has captured an estimated market share of 15.5 per cent in the desktop and 7.4 per cent in laptops. HCL Info’s tie-up with Microsoft to provide low-cost laptops also holds promise; the laptop market has expanded two-fold in 2007-08, according to a recent IDC survey. Because of the hardware-intensive nature of the business, the operating profit margins have been in the 5 per cent range, but hold scope for improvement.

The company seems to have increased its focus on high-margin system integration projects, with recent deal wins such as that with BSNL and Defence through BSNL, valued at over Rs 500 crore each. HCL Info also has strong client relationships with PSU banks, e-governance agencies and power companies. It also has deal wins with the Punjab government, and the Railways and airports also figure among clients.

Among its other business forays, volume growth from Nokia GSM sales (even after 50 per cent of the distribution has been returned to Nokia) and prospects for high growth from Apple products such as iPhone may be watched for success as also its foray into training for networking professionals.

Key risks to this recommendation arise from competition from players such as CMC, Wipro Infotech and Datacraft, and rupee depreciation against the dollar, which may trim margins due to import-intensive operations.

K.Venkatasubramanian