ICRA Credit Perspective

HCL INFOSYSTEMS LIMITED

Analyst Contacts Rating

ICRA has retained the A1+ (pronounced as A one plus) rating for Rs.
Vikas Aggarwal 3.25 billion Commercial Paper (CP)/Short term Debt (STD) Programme
vikas@icraindia.com of HCL Infosystems Limited (HCL).
+91-124-4545301
Shubham Jain (Refer Annexure for Rating History)
shubhamj@icraindia.com
+91-124-4545306 Key Financial Indicators
Relationship Contact 30/06/09 30/06/08 30/06/07 30/06/06
Operating Income 122.77 124.71 116.99 113.84
Vivek Mathur Operating Profit before 4.15 4.80 4.27 3.86
vivek@icraindia.com Depreciation, Interest
+91-124-4545310 and Tax
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

December 2009
Operating Profit before % 3.38% 3.85% 3.65% 3.39%
Depreciation, Interest
and Tax/ Operating
Income
Profit after Tax/ % 1.95% 2.41% 2.70% 2.46%
Operating Income
Return on Capital % 30.21% 39.89% 49.47% 57.52%
Employed
Return on Net Worth % 22.47% 32.10% 40.73% 44.99%
Net Cash % 58% 45% 74% 164%
Accruals/Debt
Operating Profit before Times 7.51 8.41 14.16 18.75
Depreciation, Interest
and Tax/ Interest
Total Debt/ Net Worth Times 0.20 0.35 0.28 0.12
Net Working Capital/ % 6% 5% 4% 2%
Operating Income
Total Debt/ OPBDITA Times 0.55 0.74 0.54 0.22
Note: Amount in Rs. billion

Website
www.icra.in

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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 Concerns
Low operating margins because of highly competitive nature of industry.
Impact of Nokia’s entry into distribution of its mobile phones on HCL’s turnover and profits over the
medium term.
Decline in PC volumes due to slowdown in the economy, subdued consumer sentiment, lack of easy
access to consumer finance.

Rating Rationale
The reaffirmation of the rating takes into account HCL’s established position in the ICT and networking
business, and the company’s strong liquidity position as reflected by its low gearing, substantial liquid
investments and un-utilised bank limits. ICRA expects HCL’s operating margins to remain under pressure,
given intensely competitive nature of the industry; however, its debt protection indicators are likely to
remain comfortable because of its limited capex requirements, healthy cash accruals and low debt
repayment obligations. Moreover, ICRA draws comfort from the funds raised through its recently concluded
Qualified Institutional Placement (QIP) and preferential warrants issue, which will help the company to meet
the funding requirements arising from the growth in relatively higher working capital intensive Systems
Integration (SI) business.

Company Profile
HCL Infosystems, India's leading information enabling and Integration Company offer its customers
technology solutions across multiple platforms. It has partnerships with some leading global player like
Intel, AMD, Toshiba, Ericsson, Microsoft, Nokia, Apple and Kodak among others. The company has
manufacturing 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 HCL
Infinet Limited (HCLI) with itself. ICRA has done the analysis of HCL’s operating and financial performance
on a consolidated basis and here onwards the term HCL has been used to refer to the company along with
all its subsidiaries.

Business and Competitive Position

Nokia business is the largest contributor to HCL’s revenues and profits: HCL posted revenues of Rs.
122.77 billion in FY20091. Nokia2 and other office automation product distribution was the largest
contributor to HCL’s sales (about 72% in FY2009), followed by the computers (around 27.8%) and the rest
was 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 business
accounting for about 39%.

Nokia’s entry into distribution of its mobile handsets has resulted in marginal decline in revenues
of Telecommunication & Office automation segment: Till March 2006, HCLI was the sole distributor of
Nokia 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 distribution
network of its products in India while the rest 50% will be handled by HCLI. As on date, HCL has completed
the transfer of 50% of the mobile phone distribution network to Nokia; the same has resulted in flat growth
in revenues in this business segment despite an increase in overall GSM handset sales. In order to
compensate for the loss of Nokia turnover, HCL has tied up with Apple for the distribution of IPODs, with
Kodak for digital cameras, and is also seeking to enter into arrangements with other manufacturers to
distribute their products.

1
Financial year from July to June
2
As on June 09, Nokia had an overall market share of 64% in domestic mobile industry (source: voice&data).
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ICRA Credit Perspective HCL Infosystems Limited

Economic slowdown has adversely impacted the IT spending: After witnessing high growth over the
last few years, the personal computer (PC) market witnessed de-growth in FY2009 due to the economic
slowdown, whereby the total desktop volumes declined by around 16.7% 3 and laptops by 5%3. The
slowdown can be attributed to subdued consumer sentiment and unavailability of finance. The same has
also impacted HCL’s volumes and revenues in FY2009.

FY2008 FY2009 Y-o-Y Q4-FY2009 Q1-FY2010 Q-o-Q

growth (April-June (July- growth
2009) September
2009)
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 June

Source: IDC data

Some revival in PC demand was witnessed in the last quarter (July-September 2009), which witnessed a
growth 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 for
over 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 its
computer business revenue from the commercial segment. HCL has maintained its leadership position in
this 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 its
direct sales model and wide solution support network.

Decline in market share increasing in a retail PC market: With introduction of lower price models
facilitated by declining input costs and duties and increased penetration in B and C class cities, HCL was
able 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 strategies
adopted by the competitors and increasing share of grey market. Going forward HCL has a strategy to
focus specially on the rural market where the penetration levels are still very low in order to regain its
market share in the retail segment.

Market share in laptop market remains stagnant; HCL discontinued the distribution of Toshiba
laptops: 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 influencing
purchase decisions. HCL forayed into laptop manufacturing in April 2006. Since then HCL has been able to
capture a market share of around 7%. The company is trying to increase its market share through product
innovation and improvement in product design. The company has also launched laptops that are more
suitable for the hot Indian climate. To avoid any conflict with its own products, the company also
discontinued the distribution of Toshiba laptops in FY2009, which has a market share of around 2.6% in the
domestic laptop market.

Increased focus on high-margin System Integration (SI) business: HCL has increased its focus on the
growing System Integration (SI) market. SI includes the activities of solution deployment that involves
software development, software maintenance and support, turnkey project implementation and systems
consultancy. In a short span of time HCL has won several orders and the company reported SI sales of
about Rs. 9 billion in FY09. Though the margins in SI business are as high as 20-25%, the working capital
intensity is higher on account of milestone based payment terms. This is reflected in increase in working
capital intensity of HCL, as measured by Net Working Capital (NWC)/Operating Income (OI) from 2% in FY
2006 to 4% in FY2007 and further to 6% in FY2009.

3
Source: IDC market research

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ICRA Credit Perspective HCL Infosystems Limited

Financial Position
Decline in HCL’s revenues and profits due to economic slowdown: HCL reported a decline of 1.5% in
its revenues from Rs. 124.71 billion in FY2008 to 122.77 billion in FY2009 due to the economic slowdown
resulting in lower demand for its products. The operating margins also declined from 3.85% to 3.38% in the
same period, on account of increase in cost of PC components with dollar appreciation. The company also
had 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 the
company 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 reported
a net profit of Rs. 0.59 billion on a turnover of Rs. 30.01 billion as compared to Rs. 0.66 billion on a
turnover of Rs. 30.46 billion in the corresponding period last year.

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

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

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

November 2009

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ICRA Credit Perspective HCL Infosystems Limited

Annexure

Rating History
Amount Maturity Date Rating Outstanding
Outstanding
(Rs. billion) November 2009 November 2008
Commercial 3.25 A1+ A1+
Paper/Short-term
debt Programme

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ICRA Credit Perspective HCL Infosystems Limited

ICRA Limited
An Associate of Moody's Investors Service

CORPORATE OFFICE
Building No. 8, 2nd Floor, Tower A; DLF Cyber City, Phase II; Gurgaon 122 002
Tel: +91 124 4545300; Fax: +91 124 4545350
Email: info@icraindia.com, Website: www.icra.in

REGISTERED OFFICE
1105, Kailash Building, 11th Floor; 26 Kasturba Gandhi Marg; New Delhi 110001
Tel: +91 11 23357940-50; Fax: +91 11 23357014

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