HCL-Info Icra

8/8/2019 HCL-Info Icra

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ICRA Rating Services Page 1

HCLINFOSYSTEMSLIMITED

Analyst Contacts

Vikas Aggarwal

[email protected]

+91-124-4545301

Shubham Jain

[email protected]

+91-124-4545306

Relationship Contact

Vivek Mathur

[email protected]

+91-124-4545310

Websitewww.icra.in

Rating

ICRA has retained the A1+ (pronounced as A one plus) rating for Rs.3.25 billion Commercial Paper (CP)/Short term Debt (STD) Programmeof HCL Infosystems Limited (HCL).

(ReferAnnexure for Rating History)

Key Financial Indicators

30/06/09 30/06/08 30/06/07 30/06/06

Operating Income 122.77 124.71 116.99 113.84

Operating Profit beforeDepreciation, Interestand Tax

4.15 4.80 4.27 3.86

Profit after Tax 2.40 3.00 3.16 2.80

Tangible Net Worth 11.22 10.14 8.57 6.95

Total Debt 2.27 3.55 2.36 0.84

Operating Profit beforeDepreciation, Interestand Tax/ OperatingIncome

% 3.38% 3.85% 3.65% 3.39%

Profit after Tax/Operating Income

% 1.95% 2.41% 2.70% 2.46%

Return on CapitalEmployed

% 30.21% 39.89% 49.47% 57.52%

Return on Net Worth % 22.47% 32.10% 40.73% 44.99%

Net CashAccruals/Debt

% 58% 45% 74% 164%

Operating Profit beforeDepreciation, Interestand Tax/ Interest

Times 7.51 8.41 14.16 18.75

Total Debt/ Net Worth Times 0.20 0.35 0.28 0.12Net Working Capital/Operating Income

% 6% 5% 4% 2%

Total Debt/ OPBDITA Times 0.55 0.74 0.54 0.22Note: Amount in Rs. billion

ICRACreditP

erspective

December2009
mailto:[email protected]:[email protected]://www.icra.in/http://www.icra.in/mailto:[email protected]


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ICRA Credit Perspective HCL Infosystems Limited


Credit Strengths

Leading player in the domestic computer and networking business. Increasing presence in the high margin System Integration (SI) business. Strong financial flexibility because of low gearing and significant liquid investments. Setting up production facility in Uttranchal wherein it would have income tax and excise benefits.

Credit ConcernsLow operating margins because of highly competitive nature of industry.Impact of Nokias entry into distribution of its mobile phones on HCLs turnover and profits over themedium term.Decline in PC volumes due to slowdown in the economy, subdued consumer sentiment, lack of easyaccess to consumer finance.

Rating Rationale

The reaffirmation of the rating takes into account HCLs established position in the ICT and networkingbusiness, and the companys strong liquidity position as reflected by its low gearing, substantial liquidinvestments and un-utilised bank limits. ICRA expects HCLs operating margins to remain under pressure,given intensely competitive nature of the industry; however, its debt protection indicators are likely toremain comfortable because of its limited capex requirements, healthy cash accruals and low debtrepayment obligations. Moreover, ICRA draws comfort from the funds raised through its recently concludedQualified Institutional Placement (QIP) and preferential warrants issue, which will help the company to meetthe funding requirements arising from the growth in relatively higher working capital intensive SystemsIntegration (SI) business.

Company Profile

HCL Infosystems, India's leading information enabling and Integration Company offer its customerstechnology solutions across multiple platforms. It has partnerships with some leading global player likeIntel, AMD, Toshiba, Ericsson, Microsoft, Nokia, Apple and Kodak among others. The company hasmanufacturing facilities at Pondicherry for assembly of computers and microprocessor-based systems(installed capacity of 1230000 units per annum). Besides, it also has facilities for manufacturing peripherals(like computer keyboards, terminals, monitors and hubs) at Puducherry and Chennai.

In April 2007, HCL merged the Product Distribution and Support business of its 100% subsidiary HCLInfinet Limited (HCLI) with itself. ICRA has done the analysis of HCLs operating and financial performanceon a consolidated basis and here onwards the term HCL has been used to refer to the company along withall its subsidiaries.

Business and Competitive Position

Nokia business is the largest contributor to HCLs revenues and profits: HCL posted revenues of Rs.122.77 billion in FY2009

1. Nokia

2and other office automation product distribution was the largest

contributor to HCLs sales (about 72% in FY2009), followed by the computers (around 27.8%) and the restwas accounted by Internet and related services (0.2%). As a percentage of PBIT however, the share of

Nokia distribution (including other office automation products) was at 61% with hardware businessaccounting for about 39%.

Nokias entry into distribution of its mobile handsets has resulted in marginal decline in revenuesof Telecommunication & Office automation segment: Till March 2006, HCLI was the sole distributor ofNokia mobile phones in India (which accounted for around 90% of its turnover). However in March 2006,Nokia has entered into a new agreement with HCLI under which Nokia will have 50% of distributionnetwork of its products in India while the rest 50% will be handled by HCLI. As on date, HCL has completedthe transfer of 50% of the mobile phone distribution network to Nokia; the same has resulted in flat growthin revenues in this business segment despite an increase in overall GSM handset sales. In order tocompensate for the loss of Nokia turnover, HCL has tied up with Apple for the distribution of IPODs, withKodak for digital cameras, and is also seeking to enter into arrangements with other manufacturers todistribute their products.

1Financial year from July to June2As on June 09, Nokia had an overall market share of 64% in domestic mobile industry (source: voice&data).


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Economic slowdown has adversely impacted the IT spending: After witnessing high growth over thelast few years, the personal computer (PC) market witnessed de-growth in FY2009 due to the economicslowdown, whereby the total desktop volumes declined by around 16.7%

3and laptops by 5%

3. The

slowdown can be attributed to subdued consumer sentiment and unavailability of finance. The same hasalso impacted HCLs volumes and revenues in FY2009.

FY2008 FY2009 Y-o-Y

growth

Q4-FY2009

(April-June2009)

Q1-FY2010

(July-September2009)

Q-o-Q

growth

Desktops

Retail 2,039,131 1,799,762 -11.74% 458,970 587,482 28%

Enterprise 4,142,726 3,350,705 -19.12% 806,548 870,720 8%

Total (Desktops) 6,181,857 5,150,467 -16.68% 1,265,518 1,458,202 15%

Laptops 2,227,230 2,115,835 -5.00% 499,879 731,707 46%

Total PCs 8,409,087 7,266,302 -13.59% 1,765,397 2,189,909 24%

*Financial year from July to JuneSource: IDC data

Some revival in PC demand was witnessed in the last quarter (July-September 2009), which witnessed agrowth of 24% (on a sequential quarter-on-quarter basis) indicating recovery in the hardware market.Moreover, considering the current low PC penetration in India with an installed base of thirty million PCs forover a billion people, the long term prospects for the PC industry remains favourable.

HCL remains a dominant player in commercial PC industry: HCL derives more than 70% of itscomputer business revenue from the commercial segment. HCL has maintained its leadership position inthis segment with a market share of 14.9% because of its long-standing relationship with government,banking, utilities and education sectors. Its leading market share in this segment is also supported by itsdirect sales model and wide solution support network.

Decline in market share increasing in a retail PC market: With introduction of lower price modelsfacilitated by declining input costs and duties and increased penetration in B and C class cities, HCL wasable to increase its market share in the retail PC market from a low 5% in FY2003 to 8.70% in FY2008.However, its market share again came down to 5.22% in FY2009 due to the aggressive pricing strategiesadopted by the competitors and increasing share of grey market. Going forward HCL has a strategy tofocus specially on the rural market where the penetration levels are still very low in order to regain itsmarket share in the retail segment.

Market share in laptop market remains stagnant; HCL discontinued the distribution of Toshibalaptops:The laptop market in India reported a healthy growth rate of around 70% till the last financial year,with the prices of laptops and desktops converging and the convenience factor increasingly influencingpurchase decisions. HCL forayed into laptop manufacturing in April 2006. Since then HCL has been able tocapture a market share of around 7%. The company is trying to increase its market share through productinnovation and improvement in product design. The company has also launched laptops that are moresuitable for the hot Indian climate. To avoid any conflict with its own products, the company alsodiscontinued the distribution of Toshiba laptops in FY2009, which has a market share of around 2.6% in thedomestic laptop market.

Increased focus on high-margin System Integration (SI) business: HCL has increased its focus on thegrowing System Integration (SI) market. SI includes the activities of solution deployment that involvessoftware development, software maintenance and support, turnkey project implementation and systemsconsultancy. In a short span of time HCL has won several orders and the company reported SI sales ofabout Rs. 9 billion in FY09. Though the margins in SI business are as high as 20-25%, the working capitalintensity is higher on account of milestone based payment terms. This is reflected in increase in workingcapital intensity of HCL, as measured by Net Working Capital (NWC)/Operating Income (OI) from 2% in FY2006 to 4% in FY2007 and further to 6% in FY2009.

3Source: IDC market research


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Financial Position

Decline in HCLs revenues and profits due to economic slowdown: HCL reported a decline of 1.5% inits revenues from Rs. 124.71 billion in FY2008 to 122.77 billion in FY2009 due to the economic slowdownresulting in lower demand for its products. The operating margins also declined from 3.85% to 3.38% in thesame period, on account of increase in cost of PC components with dollar appreciation. The company alsohad to write-off bad debts to the extent of Rs. 90 million which also impacted its operating margins. The

lower turnover coupled with decline in margins resulted in decrease in operating and net profits of thecompany in FY2009 as compared to the previous financial year.

In the quarter ended September 2009, de-growth in its revenues and profits have continued. HCL reporteda net profit of Rs. 0.59 billion on a turnover of Rs. 30.01 billion as compared to Rs. 0.66 billion on aturnover of Rs. 30.46 billion in the corresponding period last year.

Lower debt levels resulted in lower gearing, other debt Coverage indicators and liquidity positionremain comfortable: With the scheduled repayments and part utilization of liquid investments during thefinancial year, HCLs debt decreased from Rs. 3.55 billion in FY2008 to Rs. 2.27 billion in FY2009 andconsequently gearing declined from 0.35 times as on 30th June 2008 as compared to 0.20 times as on30th June 2009. Moreover, adjusting for cash and liquid investments (Rs. 4.70 billion as on 30th June2009), HCL net gearing was negative. Further because of healthy cash accruals from operations, the debtprotection indicators remain comfortable as indicated by NCA/Total Debt at 58% and interest coverageratio at 7.51 times in FY2009.

Recent QIP and Warrants issue further boosts liquidity; funds will be largely utilised for SI businessand inorganic growth through acquisitions: In October 2009, HCL raised Rs. 4.73 billion by allotmentof 30.5 million equity shares at a price of Rs. 154.69. The company also issued 21.1 million warrants to itspromoters on preferential basis at a price of Rs. 152.90, which will result in the total proceeds of Rs. 3.22billion. As of now, the company has received Rs. 2.69 billion against the warrant issue and the balance isexpected to come by the end of the next financial year. The company proposes to use the funds raised togrow its presence in SI business which is highly working capital intensive and fund inorganic growth by wayof acquisitions to strengthen its position in SI and securities segment. Post the QIP and Warrants issue, theliquidity position of the company has improved further and it stood at around Rs. 11 billion as on 31stOctober 2009.

Going forward, while pressure on margins are likely to remain in the computer hardware business and thefunding requirements are expected to further increase to fund the working capital requirement of the SIbusiness; the debt servicing indicators of the company are expected to remain comfortable because oflimited capex requirements, significant cash and liquid investments, healthy cash accruals and low debtrepayment obligations.

November 2009


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Annexure

Rating History

Amount

Outstanding

Maturity Date Rating Outstanding

(Rs. billion) November 2009 November 2008

CommercialPaper/Short-termdebt Programme

3.25 A1+ A1+


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ICRA LimitedAn Associate of Moody's Investors Service

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Contents may be used freely with due acknowledgement to ICRA.

ICRA ratings should not be treated as recommendation to buy, sell or hold the rated debt instruments. ICRA ratings aresubject to a process of surveillance, which may lead to revision in ratings. Please visit our website(www.icra.in/www.icraratings.com) or contact any ICRA office for the latest information on ICRA ratings outstanding. Allinformation contained herein has been obtained by ICRA from sources believed by it to be accurate and reliable. Althoughreasonable care has been taken to ensure that the information herein is true, such information is provided 'as is' withoutany warranty of any kind, and ICRA in particular, makes no representation or warranty, express or implied, as to theaccuracy, timeliness or completeness of any such information. All information contained herein must be construed solelyas statements of opinion, and ICRA shall not be liable for any losses incurred by users from any use of this publication orits contents.

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