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BUY HCL Infosystems – Citi

December 4, 2007

HCL Infosystems Welcome PartyAfter a long time we have a BUY call on a front line IT stock. Citi has inititated coverage on HCL Infosystems [HCLI] with a BUY rating. HCL Infosystems is a HCL group company mainly focused on hardware and systems integration business. HCLI is a play on government and domestic industry tech spending.

HCL’s primary product offering is personal computers – both desktop and laptops – to the consumer and commercial markets. The consumer market consists of retail buyers including SOHO (Small Office/Home Offices) and small-scale enterprises, while the commercial market consists of government, education sector and corporate sectors across various industry verticals. It plans to target newer verticals such as retail, healthcare, media and entertainment, railways, and ports/airports. Management expects to see faster growth in system integration with a longterm target of 50% of revenues coming from its system integration business.

HCLI’s office automation business primarily comprises of distribution of Nokia GSM handsets in India. It is also one of two other players that provide L-3 servicing of Nokia handsets across several cities in India. The company also has rights for distribution of other lifestyle products, such as iPod (and accessories), DISHTV (DTH product of Essel group), Kodak digital-still cameras, etc.

Sum of Tthe Parts Valuation:
Margins will grow at a 25% CAGR, on our estimates. Hardware business is valued at Rs184 (12x EV/EBIT); the Nokia business Rs107 (probability weighted 5.5x EV/EBIT); and cash Rs14. Citi sets a target price of Rs 305 on the stock.

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