HCL Tech - from software development to Speculation:
Yesterday, the HCL Technology disclosed the massive FOREX losses of $ 65M to $75M(Money contraol news dated 13/7). The company also disclosed that they have overall exposure of $ 2.6 billions or about Rs 11,180 crores.
Otherwise a beautiful and debt free company, how the company indulged into forward FOREX contracts of massive Rs 11,180 crores? The company's sales turnover is Rs 3768 crores, and presuming that the sales tunrs over every 2 months, the average debtors outstanding should not exceed Rs 611 crores. So average FOREX related debt o/s is just Rs 600 crores. How on earth they entered into FOREX contracts for Rs 11,180 crores, nearly 18 times or 1800%?
Are they really FOREX contracts or sub prime related liabilities like CDO or CDS (credit default swaps). It appears that it is mostly so. Look at the other income of Rs 439.42 crores in 2007 (Rs 68 lakhs 2006). Sudden jump in such income suggests that they wrote CDS contracts (to receive the income) which have since gone into default. This is my presumption based on circumstancial eveidence. If that is the case, the entire $ 2.6 billions or Rs 11,180 crores could have no value at all. Which bank sold them these contracts - ICICI Bank?
We have to be careful when we come across the people with lot of cash. I come across many boarders here saying that they are sitting on pile of cash and almost everyday they question whether they should get back into the market.
All InfoTexh companies have lots of cash. How many of them have fallen prey to banks like ICICI Bank, to enter into CDO/CDS related contracts.There is no way such contracts could have been FOREX character only, because once they take the name of CDS or CDO, their shareprices will simply collapse.
HCL management owes explanation to the investors on what basis its so called FOREX exposure amnounted to Rs. 11000 crores, when its revenue does not exceed Rs 3700 crores for full 12 months. The profit of Rs 700 crores (excluding Rs 400 crores of other income), means that should there be a total loss of Rs 11000 crores, it would wipe out its entire equity and generate negative book value. The per share exposure comes to Rs 151 whereas its book value is Rs 51.
It is a fine and superb company. In normal course I would have invested in steep correction (it is still expensive), but we do not know what is inside those FOREX losses.
Indian rupee has hardly fluctuated more than 4% - there could not have been so much of FOREX losses - it must be something else. This is one example, how cash rich Infotech sector is vulnerable. They all trade at very high PE ratio, and if they have deployed funds in above manner, the entire sector needs close watch. If this sector falls, its effect on SENSEX/NIFTY could be substantial. Following table may not be accurately reproduced, but read with care.
HCL Technologies BSE: 532281 NSE: HCLTECH ISIN: INE860A01027
Industry : Computers - Software
Profit & Loss account
-------------------------- in Rs. Cr. ----------------------------
Year Jun '03 Jun '04 Jun '05 Jun '06 Jun '07
Income
Net Sales 871.73 1,127.98 1,447.01 3,032.92 3,768.62
Other Income 88.46 126.21 61.54 0.68 439.42
Total Income 960.19 1,254.19 1,508.55 3,033.60 4,208.04
Net Profit 309.30 325.72 329.27 638.38 1,101.82
Shares/Cr 28.84 29.60 3,192.15 3,234.42 6,636.83
EPS (Rs) 10.72 11.00 10.31 19.74 16.60
BookValue(Rs) 80.23 77.38 89.59 79.64 51.61
Conti. Liab: 29.98 205.15 511.56 331.01 418.65
Kalidas, Hong Kong
13/7/2008
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