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Vol. 16/10-11 Aug 31, 2010.

Analyst: Atul Kanwar atulkanwar@bajajcapital.com Reviewed by: Alok Agarwala aloka@bajajcapital.com

BUY

HCL Infosystems Ltd.

Incorporated in April 1986, HCL Infosystems Ltd. (HCLI) is promoted by a group of technocrats. HCLI is Indias premier hardware services and ICT (Information Communications Technology) systems Integration company offering products & services that include computing, storage, networking and security. HCLI is a one-stop shop for all the ICT requirements of an organization. It has specialized expertise across verticals including telecom, BFSI, e-governance, power etc. The company has India's largest distribution and retail network to market a range of digital lifestyle products in partnership with leading global ICT brands. HCLI has India's largest vertically integrated computer manufacturing facility with over three decades of electronic manufacturing experience & HCLI desktops is the largest selling brand in the enterprise space. HCLI sells its products in 4 major segments: PC-Notebooks, Nokia handsets (exclusive 3rdparty distributor in India), consumer electronics, and office SI (Systems Integration) services. HCLI manufacturing plants are located in Pondicherry (2), Chennai & Uttarakhand.

Investment Details
CMP (Rs.) Target (Rs.) Upside Potential (%) Horizon (Months) 112.8 140.0 24.2 12 M

Profile
Industry Market Cap (Rs cr.) Face Value (Rs.) 52-week high/low (Rs.) Book Value (Rs.) Price / Book Value PE Ratio (TTM) Dividend (%) Average Daily Volume (1 Y) Computer Hardware 2459.6 2.0 188.8/102.0 86.0 1.3 10.1 375 283907

KEY INVESTMENT ARGUMENTS Healthy PC-Notebook sales expected in FY11

PC-Notebook sales that account for 20% of the companys revenues are expected to grow by 18% in FY11 against an industry growth of 9%, as estimated by IDC (International Data Corporation). PC-Notebook revenue growth will be supported by a 100bps gain in companys market share to 11%, on aggressive marketing of the new ME (Mobile Excitement) brand and a widening product range. PCNotebook sales will also increase due to greater demand from government and education sectors. India is the third fastest growing PC-Notebook market in the ASEAN region with a CAGR of ~22 %.

Consumer electronics business set to boom

In consumer electronics, HCLI has varying rights for the distribution of several popular products from well known manufacturers. Over the next 3 years, this segment is expected to grow 40% per annum on an expansion of the companys distribution network to 1000 towns from 201 at present, as well as the introduction of new products and the rising disposable income of consumers (Source: Kim Eng Research).

Shareholding
Promoters FII DII Others

Consumer Electronics Product List Manufacturer Apple 9% 8% 50% Kodak Microsoft San Disk Cisco Kingston iPod Digital Camera Office, Windows Flash Drives, Memory Cards Wireless Routers Memory Cards Speakers Product

33%

Source: BSE. Figures as on June 30, 2010.

Altec Lansing Source: Company Data

Stock idea HCL Infosystems Ltd.

HCL Infosystems V/s NSE 150 100 50 0

27/08/2009 27/09/2009 27/10/2009 27/11/2009 27/12/2009 27/01/2010 27/02/2010 27/03/2010 27/04/2010 27/05/2010 27/06/2010 27/07/2010 27/08/2010

Market share for Nokia expected to recover

Nokia has been losing market share in India (down to 51% at present from 54% in 2009) to low-priced producers like Micromax and Karbonn, among others. Market share for Nokia is expected to recover in FY11 on the launch of new 3G-enabled handsets and new models with smartphone features, which will be hard for competitors to match. These include C2 phones (dual SIM cards), as well as C5 & C6 phones (social networking). 3G services are expected to be launched in October 2010, which is expected to increase the market for mobile phones by 10%. HCLI contract with Nokia ends in August 2011.

HCL Infosystems

NSE

Systems Integration (SI) business to increase substantially

SI business accounts for 9% of HCLI revenue. The current order book is Rs.2200cr. Demand for SI is supported by government spending of Rs. 23,000cr. under the current development plan on e-governance projects (involving income tax, land records, passport services etc.) and the rollout of 3G services in the telecom sector. SI contribution to revenue is expected to increase to 15% by FY12.

HCLI has entered the gaming industry

Recently, HCLI became the first Indian company to enter the handheld gaming console. Launched under the ME brand, they will compete with market leaders like Sony's PlayStation Portable and Nintendo DS. HCLI ME is custom-made for children between the age group of 4-15 years. The console gaming industry is expected to grow at a CAGR of 19%, making it a Rs. 1,160cr. market by 2014 as against Rs. 490cr. in 2009. To garner a bigger pie of the segment, HCLI is pricing its products competitively. HCLI ME handheld gaming devices have been priced at Rs. 799 to Rs. 4,990 each. The Sony PSP and Nintendo DS base models cost Rs.5,000 each.

SI Order Book (Rs. Cr.)_ 3,500 2,800 2,200 1,500 1,200 1,400

FY07 FY08 FY09 FY10 FY11E FY12E

HCLI to supplyATM machines

HCLI has tied-up with Korean major Nautilus Hyosung to launch customized ATM (Automated Teller Machine) solutions for Indian banks with a special emphasis on service offering for rural areas. With just 40,000-plus ATMs in India serving a population of over 1.2-billion, there is going to be a huge demand for ATMs in India. The company will import ATMs as SKD (Semi Knocked Down) kits, then move to CKD (Completely Knocked Down) kits, and eventually as a part of indigenization start manufacturing the whole unit in India. The initial assembly will be done at HCLI plants in Pondicherry and Uttarakhand.

Source: Company

HCLI acquires 60% stake in NTS Group

HCLI has made an acquisition of 60% stake in NTS Group based in Dubai for $6.5mn valuing the company at US$ 10.8mn. NTS group provides IT hardware, services and consulting to enterprises in the Middle East region. NTSs clients include government bodies like Dubai municipality, police, ministry of health, ministry of education and also private enterprises like Etisalat, Emaar etc. NTS has revenues of ~US$ 24mn. HCLI will make an upfront payment of US$ 4mn with the balance payable over the next 2 years. NTS has a net debt of ~US$ 2mn. The acquisition is EPS accretive adding ~1-1.5% to HCLI profits. HCLI will use this acquisition to expand its SI footprint in the Middle East and African market.

Domestic IT Market (Rs. Billion) 1400 1200 1000 800 600 400 200 0
2009 2010E 2011E 2012E 2013E
91 77 279 111 317 322 126 342 147 382 173 376 204 105 442 117 521

128

Change in business mix to boost revenues

The change in the company's business mix - its shift towards system integration which is a better margin business - will boost revenues significantly.

428

480

Costs expected to fall

FY11 costs for the company are expected to fall marginally due to a greater emphasis on sales of its own PC-Notebooks. Of HCLIs total cost, 80% is for purchasing products for onward sale. Another 16% is for parts used in making PCNotebooks and the remaining cost is for spare parts, etc.

Hardware Source: IDC (2009)

Software

Services

Others

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Stock idea HCL Infosystems Ltd.

Manpower

Only company handling programs like TPDS

HCLI led consortium with Accor Services and Virgo Softech as partners, has been awarded a contract by the govt. of M.P. for implementing India's food-coupon based TPDS (Targeted Public Distribution Systems) in the state. The project would involve setting up a model of food & civil supplies distribution in the state based on the UIDAI (Unique Identification Authority of India) guidelines for over 1cr. expected transactions per month at Rs. 10.98 (per transaction per family) spread over 78 months. Only ~80 lakhs APL (Above Poverty Line) families will be paying a one-time subsidized registration fee of Rs. 250. This aims at revolutionizing the PDS which is fraught with issues of inefficiency and non-transparency. The project is to cover 50 districts and over 20,000+ fair price shops. The company had earlier deployed India's first smart card based PDS system in Chandigarh. It is the only company in the country with experience and expertise in the field to take on citizen centric programs like Aadhar and PDS and expects to bag similar projects in the near term.

3,879

4,323

5,082

5,753

5,921

FY05

FY06

FY07

FY08

FY09

Source: Company

Involved with the 2010-11 Census of India

HCLI bagged a Rs. 40-crore order to digitise the data generated from the Census of India 2010-11. The project includes maintenance, scanning and storage at a central repository. The project also involves processing all captured data.

Total PC-Notebook Market (Millions) 13 11 8 7 8 9

Rapid inventory turnover

HCLI has rapid inventory turnover of 24 days, which reduces the risk of obsolete inventory. In the past, there has been minimal loss due to inventory write-offs.

Promoters acquire shares at Rs. 153

Apart from internal accruals, the company has, over the past one year, raised money by issuing warrants to its promoters which were recently converted at Rs 153.

KEY CONCERNS
FY08 FY09 FY10E FY11E FY12E FY13E

Source: IDC (Aug 2009)

Attrition
Attrition is one of the major risks which organizations are facing today. With the increasing demand and limited availability of specialised workforce for the ICT domain - identifying, recruiting and retaining this talent is vital.

Exchange rate fluctuation risk

As HCLI imports various products paying in US dollar and other foreign currencies and sells them in the Indian market in rupees, the weakening of the rupee against major currencies especially the US dollar, would impact its earnings negatively.

CONCLUSION
PC-Notebook Market Share
HP Lenovo HCL Zenith Dell Wipro Acer Others

43%

18% 10% 10% 3% 5% 9%

2% Source: IDC (Aug 2009)

HCLI PC-Notebook sales are expected to grow at 18% compared to an Industry average of 9%. Consumer electronics business is expected to grow at 40% per annum for the next 3 years. SI business has an order book of Rs. 2200cr.Nokia sales are expected to recover because of the 3G services launch. NTS group acquisition is EPS accretive adding ~1%1.5% to companys profits. There would be additional revenues from new streams like gaming, ATMs, TPDS & Indias 2010-11 census. Healthy cash accruals and low debt repayment obligations will help the company to perform better in coming quarters. HCLI, a Rs 2459.6 cr. company by market capitalization, is currently trading at a share price of Rs 112.75. The company has an attractive dividend yield of 6.7% based on the current price and a dividend of 375% given in FY10. The current EPS is Rs 11.1 which translates into a P/E of 10.1. In terms of price to book value, it is available at 1.3. The market cap to sales ratio is 0.2.Given the growth prospects of the company, the stock is an attractive buy. We recommend a BUY on the stock with an investment horizon of 12 months and target price of Rs. 140.

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Stock idea HCL Infosystems Ltd.

HCL Infosystems: Structure

System Integration, Roll Out & Infrastructure Management

Telecom E - Governance
Media & Entertainment

Power

Railways

Health

Security

Airport / Ports

Defence

Education

BFSI

Power

Complete ICT Solutions from HCL Indias Largest Direct Sales Computer Systems: PCs, Laptops, Workstations, Racks, Peripherals, Organization Kiosk, Software, Servers, Storage, Backup Solutions, Networking Equipments, Security Solutions, Enterprise VPN (Virtual Private Network), ASP Services (Application Service Provider), ATM Solutions: Computing & Storage, Networking, Security, Telecom, Imaging, Printing & Copying, Voice & Data Comm., Video Conferencing, Digital Signage, Enterprise Services, Managing Networks, POS (Retail) Indias Largest Distribution & Retail Network (3000 franchisee, 92,000 retail outlets)

Imaging Products: Digital Copiers, Multimedia Projectors, Plasma / LCD Display, Panels Audio Visual System Integration, Laser Printers (Mono / Colour) Products: Computing, Imaging & Printing, Mobile Handsets, iPods, Digital Camera, Accessories,Wi reless Headsets, Memory Products, Solar Chargers

Telecom Products: IP Phones, TDM (Time Division Multiplexing), IP PBX (Private Branch Exchange), Video Conferencing, Call Centre Solutions, TV Broadcasting, GPS (Global Positioning System) Solutions Indias Largest Service Support Network: Multi- Locational Project Services, Network Security & Management Services, FM Services, Multi Vendor & System Integration Support, IT/BPO Outsourcing Services, Copy & Printing Services, Spot Maintenance Services, Document Management Services, Branch Rollout Solutions & Data Centre Hosting Services

ICT Training & Education

Manufacturing ISO-14001,9001; ISO-13485-2003; TS 16949-2002; TUV-Accredited
Source: Company

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Stock idea HCL Infosystems Ltd.

FINANCIAL STATEMENTS:
Income Statement: Consolidated Particulars
Net Sales Other Income Total Income Total Expenditure PBIDT PBIDT Margin % Interest PBDT Depreciation PBT Tax APAT APATM (%) . Rs. Cr.

Q4FY10
3204.9 16.0 3219.9 3104.6 115.4 3.6 12.0 103.4 7.2 96.2 29.0 67.2 2.1

Q3FY10
2814.5 6.7 2837.6 2733.5 104.0 3.7 9.1 94.9 5.6 89.3 29.3 60.1 2.1

Q4FY09
3106.3 3.5 3121.3 3020.5 100.8 3.2 10.1 90.7 5.9 84.8 24.4 60.4 1.9

QoQ (%)
13.9 139.2 13.5 13.6 10.9

YoY (%)
3.2 354.5 3.2 2.8 14.5

31.3 8.9 28.9 7.7 -1.0 11.9

18.8 14.0 21.3 13.5 18.9 11.3

Financials: Consolidated 201006

Share Capital Networth Capital Employed Total Income Total Expenditure Revenues PBIDT Other Income Interest Depreciation PBIT APAT Operating Cash Flows Free Cash Flows Dividend % CEPS (Rs.) EPS (Rs.)* Debt-Equity Ratio Interest Coverage Ratio RoNW % PBIDT Margin % PBIT Margin % APAT Margin % Total Asset Turnover Ratio Fixed Asset Turnover Ratio Market Cap/Sales PE Multiple P/BV Ratio 0.2 10.1 1.3 3.4 3.2 2.0 11.1 375.0 12114.4 11703.3 12049.8 411.2 34.8 39.2 25.5 385.7 242.4 43.6

Rs. Cr.

200906
34.2 1121.9 1348.8 12308.1 11880.3 12378.5 427.8 37.1 55.2 21.3 406.5 239.5 264.4 200.0 325.0 14.2 12.9 0.3 7.4 22.5 3.5 3.3 1.9 3.8 76.8

200806
34.2 1013.3 1367.8 12384.4 11878.6 12402.6 505.8 49.9 57.0 18.6 487.1 298.9 151.3 193.1 400.0 17.3 16.2 0.3 8.5 32.1 4.1 3.9 2.4 4.2 88.9

200706
33.8 856.8 1092.7 12004.0 11530.3 11855.4 473.7 60.9 30.2 14.8 458.8 311.6 26.5 3.3 400.0 18.3 17.4 0.2 15.2 40.7 4.0 3.9 2.6 4.7 115.8

200606
33.8 694.7 779.4 11541.6 11123.3 11455.0 418.3 48.0 20.6 12.4 405.9 275.9 278.6 110.3 400.0 16.2 15.5 0.1 19.7 45.0 3.7 3.5 2.4 6.1 147.6

200506
33.4 551.5 633.4 7846.5 7519.6 7787.2 326.8 51.4 15.6 15.2 311.6 221.0 126.8 189.0 310.0 13.7 12.8 0.2 20.0 46.9 4.2 4.0 2.8

5 yr CAGR %

9.1 9.3 9.1 4.7

4.4 1.9

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Stock idea HCL Infosystems Ltd.

Disclaimer: This document has been prepared by Bajaj Capital Centre for Investment Research (BCCIR), a unit of Bajaj Capital Limited (BCL). BCL and its subsidiaries and associated companies form an integrated unit imparting investment banking, investment advisory and brokerage services in stocks, mutual funds, debt, real estate, personal finance etc. Our research analysts and sales persons provide important input into our investment banking and advisory activities. This document does not constitute an offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. The information contained herein is from publicly available data or other sources believed to be reliable. We do not represent that information contained herein is accurate or complete and it should not be relied upon as such. This document is prepared for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision. The user assumes the entire risk of any use made of this information. Each recipient of this document should make such investigations as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this document (including the merits and risks involved). The investment discussed or views expressed may not be suitable for all investors. Affiliates of BCL may have issued other reports that are inconsistent with and reach to a different conclusion from the information presented in this report. This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject BCL and affiliates to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in all jurisdictions or to certain category of investors. Persons in whose possession this document may come are required to inform themselves of and to observe such restriction. BCL & affiliates may have used the information set forth herein before publication and may have positions in, may from time to time purchase or sell or may be materially interested in any of the securities mentioned or related securities. BCL and affiliates may from time to time solicit from, or perform investment banking, or other services for, any company mentioned herein. Without limiting any of the foregoing, in no event shall BCL, any of its affiliates or any third party involved in, or related to, computing or compiling the information have any liability for any damages of any kind. Any comments or statements made herein are those of the analyst and do not necessarily reflect those of BCL and affiliates. This Document is subject to changes without prior notice and is intended only for the person or entity to which it is addressed and may contain confidential and/or privileged material and is not for any type of circulation. Any review, retransmission, or any other use is prohibited. Though disseminated to all the customers simultaneously, not all customers may receive this report at the same time. BCL will not treat recipients as customers by virtue of their receiving this report. Disclosure of interest: 1. BCL and its affiliates have not received compensation from the company covered herein in the past twelve months for Issue Management, Capital Structure, Mergers & Acquisitions, Buyback of shares and other corporate advisory services. 2. Affiliates of BCL are currently not having any mandate from the subject company. 3. BCL and its affiliates do not hold paid up capital of the company. 4. The Equity Analyst and his/her relatives/dependents hold no shares of the company covered as on the date of publication of research on the subject company. Copyright in this document vests exclusively with BCL.

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