GTL: Improved performance, but... - Views on News from Equitymaster

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GTL: Improved performance, but...

Feb 11, 2004

GTL Limited announced its consolidated third-quarter results recently, reporting sequential topline and bottomline growth of 3% and 61% respectively. This is an improved performance from the company considering the fact that its topline had been declining sequentially over the past couple of quarters. And the result of these prior poor performances could be seen in the 1% YoY decline in revenues for the nine-month period. Net profit for this period has, however, improved by 17%. However, not much should be read about the profitability growth for both 3QFY04 and 9mFY04. This is because profits for both these periods have been propped up due to write-offs on depreciation provided for impaired assets in 1QFY04 and 2QFY04. Increase in cost of sales has resulted into decline (of 430 basis points) in operating margins for 3QFY04.

Financial performance (consolidated): A snapshot...
(Rs m) 2QFY04 3QFY04 Change 9mFY03 9mFY04 Change
Sales 1,393 1,434 2.9% 4,515 4,463 -1.1%
Other Income 9 18 94.5% 109 13 -88.0%
Expenditure 912 1,000 9.7% 3,233 3,047 -5.7%
Operating Profit (EBDIT) 481 434 -9.8% 1,282 1,416 10.4%
Operating Profit Margin (%) 34.6% 30.3%   28.4% 31.7%  
Interest - -   - -  
Depreciation 285 121 -57.6% 735 670 -8.8%
Profit before Tax 206 331 61.0% 657 759 15.5%
Extraordinary items - -   - -  
Tax 8 13 59.5% 37 31 -15.8%
Profit after Tax/(Loss) 198 318 61.1% 619 727 17.4%
Net profit margin (%) 14.2% 22.2%   13.7% 16.3%  
No. of Shares 70.8 70.8   70.8 70.8  
Diluted Earnings per share* (Rs) 11.2 18.0   11.7 13.7  
P/E Ratio (x)   6.1     8.0  
(* annualised)            

The rise in the topline for 3QFY04 has been well aided by growth in network engineering revenues (40% of total revenues) and those from the BPO division (Customer Management Solutions - 26% of total revenues). While revenues from the former have grown by 29% sequentially, the latter has witnessed a growth of 8% QoQ. However, the enterprise solutions segment (34% contribution) continues to witness pressure and revenues from the same have declined by over 19% sequentially. Apart from its BPO division, the other two streams of revenues for GTL have been under tremendous pressure in the past and, thus, current growth does not provide any sign of sustenance going forward.

While the company has reported a sequential decline of around 10% in its operating profits, net profits have been propped up by a write-off of Rs 113 m on account of earlier depreciation on impaired assets. On the operating margins front, while the company has witnessed a decline in 3QFY04, the same for 9mFY04 have improved by 330 basis points. The fall in margins for the quarter has been due to a rise in cost of sales and services and personnel costs. While the former has increased from 34% of sales in 2QFY04 to 38% in 3QFY04, the increase in the latter has been from 20% to 21%. Selling and administrative costs have, however, declined from 12% to 11%.

Cost break-up...
(Rs m) 2QFY04 3QFY04 Change
Cost of sales & services 468 546 16.7%
% Of sales 33.6% 38.1%  
Personnel cost 281 300 6.8%
% Of sales 20.2% 20.9%  
SG&A expenses 163 154 -5.5%
% Of sales 11.7% 10.7%  
Total expenses 912 1,000 9.7%
% Of sales 65.4% 69.7%  

At the current price of Rs 110, the stock is trading at a P/E multiple of 8x its 9mFY04 annualised earnings. While the company has turned out improved performance for this quarter, a string of poor performances in the past casts doubts regarding sustainability. Also, the company does not seem to be moving in the direction towards meeting its revenue guidance of 7%-10% for FY04. Considering these facts, and that the company was earlier named in the 2001 stock market scam, investors need to practice utmost caution.

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