Tuesday, May 29, 2012

HCL Infosystems stock analysis-AVOID despite low price to book

By conventional ratio analysis metrics, HCL Infosystems(belonging to Ajai Choudhary, not related to HCL Technologies owned by Shiv Nadar) seems cheap with price to book of just 0.52, low price to earning(based on FY11 consolidated EPS) and so on. Also, the company does have a good cash pile with near zero not debt. However, things are cheap for a reason, and in case of HCL Infosystems, the  lesson is to dig deeper however attractive the stock may seem. My reasons for passing on this stock are
  1. Declining performance over the past 5yrs:-Though the stock does give dividends(very high div yield of 16% and payout ratio c.f 50%), its revenue has stagnated for the past 5yrs & profits falling.
  2. Only a well timed QIP+preferential allotment to promoters of 51million shares @ Rs 152, helped the company raise Rs 780crores(of which 50% remains unspent). THAT is the secret of the cash surplus(not operating cash flows which have been negative for the past 3 years at -42,-42,-64 crores respectively for FY11, FY10, FY09 and just slightly positive at Rs 64crores for FY08. Agreed that they may be in a capital intensive business but still this does not make sense. I do not suspect the company of financial jugglerly despite the alarming sign of persistently negative operating cash flows, but it does not inspire confidence in their financial management. 
  3. EPS of Just Rs 2 for 9month period July11-Mar12=>even if they have an excellent quarter to close FY12 at EPS of Rs 3, that gives P/E ratio of around 14x, which is quite high for a negative/zero growth company. The 'ASPIRE' transformational strategy has neither fixed the topline nor the bottom line.though they have received IDC awards for being the top ranked systems vendor, that does not reflect in their market share/profits.
  4. Business profile is also quite unusual for listed IT companies as it is into IT manufacturing(laptops, desktops and tablets) and systems integration for the domestic market(it has negligible export earnings). The domestic focus should have given it first mover advantage but some how that has not happened. And since it imports components for manufacturing, that exposes it to FX risk, and the depreciating rupee exposed it to sizeable losses in FY12. Hence, do not make the mistake of comparing it to domestic BPOs/other foreign BFSI focusses ITES Cos.
While they have  have well qualified staff(CEO is gold medalist from IIT Delhi), as Buffet puts it, when a good management confronts a bad business, it is the reputation of the business that stays intact.

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