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GTL: Vertical integration - Views on News from Equitymaster
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  • Mar 20, 2003

    GTL: Vertical integration

    In February GTL announced its decision to acquire Redington Group for a consideration of US$ 95 m (Rs 4.5 bn). Of the total consideration, US$ 50 m (Rs 2.4 bn) was paid in cash, while the remaining US$ 45 m (Rs 2.1 bn) is to be paid by issuing shares of GTL. Redington group will get 14.3 m shares of GTL valued at Rs 150 each. Considering the market price of Rs 65, this is a steep premium.

    Infact, considering the fact that Redington Group expects revenues of about US$ 660 m (Rs 30 bn) for the fiscal FY03, GTL has managed to get a very good deal. While the price that GTL has paid seems to be quite low, the more important point to focus on is that whether the merger makes senses for GTL. The company has three revenue streams: network engineering services (28% of revenues in 9mFY03), customer management solutions that include the call centre business (17%) and enterprise solutions (55%).

    By acquiring Redington, GTL is trying to integrate vertically backwards for its enterprise solutions business. The company as of now provides service like network management and systems integration for a corporates’ IT needs. This means that GTL will provide connectivity and manage the networks services like bandwidth. Thus, GTL is now taking one step back and will now also be able to help its client buy equipment and software.

    This is due to the fact that Redington is a leading supplier of IT hardware and software from multination vendors. Thus, GTL will be able to procure, erect and commission basic IT infrastructure for its clients. Further up the value chain, the company can also offer services like customer management (through its call centres) and help desks.

    GTL: The story so far
    (Rs m) 9mFY02 9mFY03 Change
    Net Sales 4,084 4,515 10.5%
    Other Income 419 109 -73.9%
    Expenditure 3,012 3,233 7.3%
    Operating Profit (EBDIT) 1,073 1,282 19.5%
    Operating Profit Margin (%) 26.3% 28.4%  
    Interest - -  
    Depreciation 670 735 9.6%
    Profit before Tax 822 657 -20.1%
    Extraordinary items 74 -18  
    Tax 85 37 -56.3%
    Profit after Tax/(Loss) 810 601 -25.8%
    Net profit margin (%) 19.8% 13.3%  
    No. of Shares 70.7 70.7  
    Diluted Earnings per share* 15.3 11.3  
    P/E Ratio   5.7  
    (* annualised)      

    Post the dilution, the shares outstanding for GTL will increase from 70.8 m to 85.1 m. At the current market price of Rs 65, GTL trades at a P/E ratio of 6x its 9mFY03 annualised earnings. At the current market price, the market capitalization of GTL (based on 85.1 m shares) works out to be Rs 5.5 bn. The combined sales for GTL and Redington Group (India operations only) are expected Rs 8.2 bn (Rs 5.7 bn from GTL and Rs 2.5 bn from Redington Group). Thus, the stock is currently trading at a market capitalization to sales ratio of 0.6x post acquisition scenario.

    Considering the valuations and future growth prospects, the stock looks attractive. We expected future growth for GTL to come from its networking engineering and customer management business lines. But the acquisition will further strengthen the growth prospects of the enterprise solutions business. However, this business line is expected to face stiff competition going forward. Though the valuations look attractive, investment in GTL is an extremely risky proposition. The company has often in past changed its business focus and also the management is not perceived to be ‘investor friendly’ on the bourses.



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