Solid numbers

BS Compass

HCL Infosystems has posted solid results for the quarter ended June 2003, with earnings before exceptionals and taxes jumping 137 per cent on the back of a 26.5 per cent increase in the core computer systems business.

The stock has responded well to the results, having increased its value by almost 33 per cent in the last two trading sessions.

Effective January 1, 2003, there has been some restructuring in the company's businesses - the software services business was demerged and transferred to HCL Technologies, while the office automation and phone business (HCL Info is the distributor in India for Nokia) was transferred to a 100 per cent subsidiary, HCL Infinet.

It, therefore, makes sense to look at the company's consolidated results for the full year, since this would include the high growth phone business for the whole 12-month period.

Consolidated revenues jumped 98 per cent to Rs 2705 crore, and much of this growth came from the office automation and phone business.

The core computer systems business grew 24 per cent to Rs 1097 crore, and although the annual revenues for the office automation and phone business are not available, the fact that the segment had grown 466 per cent in the first nine months of the fiscal points to the fact that growth was driven by this segment.

This is because a big chunk of phone sales that used to happen in the grey market have now shifted to the legal system. But margins in the phone business range between 4-6 per cent compared to 10-20 per cent for the computer business.

Nevertheless, higher volumes in both of the company's main segments and the benefit of a rising rupee (HCL Info is a net importer) led to an improvement in overall profitability.

The current momentum in volumes is expected to continue in both of the company's main segments, but it goes without saying that it would be a tall order for the company to repeat last year's performance going forward.

Flat products equipment

Ever wondered where the equipment for the setting up a cold rolling mill or a galvanising line comes from? If steel prices are firming up and steel companies are expanding, there will also have to be a company supplying the equipment. Flat Products is such a company, providing equipment and engineering services for steel mills.

The expansion projects announced by steel companies globally have been reflected in the performance of Flat Products.

In FY03, while FPL's topline and bottomline jumped 34 per cent, operating margins also witnessed a significant rise of 400 basis points.

For the first-half of FY04 till date, the company has further improved its order book to Rs 655 crore compared to Rs 600 crore at the end-March (FY03).

While FPL's business is concentrated on the export market with around 71 per cent of order-book comprising of export orders, the domestic steel industry is also witnessing expansions.

For instance, FPL has undertaken Bhushan Steel's expansion of its cold-rolling mill and galvanising line worth Rs 88 crore.

In addition to a bulging order book, the company is also competitive by around 20-25 per cent compared to its competitors in the global market.

However, a couple of concerns become apparent when considering that the business caters to capital intensive businesses with a long gestation period and an even longer working life of the plant.

The order backlog will be cyclical in nature. Further, capacity expansions are few since the industry globally is in excess supply. Hence, growth in order book may be restricted.

Also, the business is working capital intensive and as a result, there will also be a surge in working capital financing and interest outgo.

In FY03, net working capital-to-sales were at 43 per cent compared to 49 per cent in FY02. Going forward, analysts expect a significant conversion of the order backlog into revenues.

Therefore, order inflow during the second-half will have to be better than the first in order to ensure sustainable revenue growth in the next fiscal.

Infrastructure index

The meagre growth of 3.7 per cent in the August infrastructure index has drawn much adverse attention, but what seems to have got unnoticed is that it's a vast improvement on July's 2.6 per cent.

The numbers for the individual industries : refinery products were up 7.3 per cent in August, compared to 7.5 per cent in July; cement was up 5.7 per cent in August compared to 3.4 per cent in July; steel 9.4 per cent as against 7.7 per cent in July; and coal production rose by 3.6 per cent compared to 2.7 per cent in July.

The sectors which did badly were thermal electricity and crude oil, both industries in which supply factors play a larger role than demand.

Note that the index is up 4.1 per cent this year between April to August, compared to 4.3 per cent last year, and a meagre 2.4 per cent in 2001.

With contributions from Mobis Philipose and Sameer Ranade