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GTL: Other income mars performance - Views on News from Equitymaster
 
 
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  • Apr 17, 2003

    GTL: Other income mars performance

    GTL’s performance for 4QFY03 looks disappointing at the first glance. While revenues are up 21% QoQ, the net profit figure is up only 2%. This is due to the company incurring interest expenses in 4QFY03 of Rs 53 m and losses on account of adverse movement in foreign exchange rates. In 3QFY03 and in 4QFY03, the interest income was positive for the company.

    (Rs m) 3QFY03 4QFY03 Change FY02 FY03 Change
    Net Sales 1,568 1,890 20.6% 5,478 6,405 16.9%
    Other Income 22 (69) -422.4% 508 40 -92.1%
    Expenditure 1,143 1,326 16.0% 3,966 4,559 15.0%
    Operating Profit (EBDIT) 425 565 32.9% 1,512 1,846 22.1%
    Operating Profit Margin (%) 27.1% 29.9%   27.6% 28.8%  
    Interest - - - - - -
    Depreciation 220 231 5.0% 946 965 2.0%
    Profit before Tax 227 265 16.7% 1,075 921 -14.3%
    Extraordinary items - (8)   74 (26)  
    Tax 30 55   54 93 71.1%
    Profit after Tax/(Loss) 197 201 2.2% 1,094 802 -26.7%
    Net profit margin (%) 12.6% 10.6%   20.0% 12.5%  
    No. of Shares 70.7 70.7   70.7 70.7  
    Diluted Earnings per share* 11.1 11.4   15.5 11.3  
    P/E Ratio   4.9     4.9  

    Excluding the impact of the other income, the net profit has grown sequentially despite extra-ordinary expenses of Rs 8 m in 4QFY03. During the quarter, the company has managed to improve operating margins by more than 2%, when compared on a sequential basis. Consequently, the operating profits have jumped 33%.

    On a YoY basis, GTL has posted a 36% growth in revenues in 4QFY03. However, due to impact of negative other income, GTL bottomline for 4QFY03 is lower by 29% when compared to 4QFY02. Excluding the impact of other income in both the years, net profits are up 32% YoY. Thus operationally, 4QFY03 has been an excellent one for GTL.

    For the full year, the company has posted a 17% growth in revenues, while net profits have fallen by 27%. This is due to lower other income in FY03. Also, while there was an extra-ordinary income of Rs 74 m in FY02, the company has incurred an extra-ordinary loss of Rs 26 m in FY03. Removing the impact of these items (other income and extra-ordinary heads), net profits for the fiscal FY03 has jumped 48%. The operating profits have grown by 25% on the back of a small 1.2% improvement in operating margins.

    Highlight of the company’s performance in FY03 is the strong growth in revenues. The growth was largely back ended and came in the fourth quarter. Infact for 9mFY03, the company had posted only an 11% growth in revenues.

    Strong fourth quarter
    Segments 3QFY03 4QFY03 Change
    NE 477 30.4% 676 35.8% 41.9%
    ES 817 52.1% 905 47.9% 10.8%
    CMS 274 17.5% 309 16.4% 12.8%
    Others 0 0.0% 0 0.0% 0.0%
    Total 1,568 100.0% 1,890 100.0% 20.6%
    NE – network engineering, ES- enterprise solutions, CMS-customer management solutions

    Almost all the growth in revenues for 4QFY03 is due to increased business from the network engineering (NE) services. With a lot of countries in the Middle East migrating to cellular telephones, there is a demand for the company’s services. The domestic telecom service providers have also shown robust growth with most of the technology being deployed is 2G and 2.5G mobile telephony systems. Going forward, the company expects another round of spending by its clients as they choose to migrate to 3G (third generation) systems.

    The growth from the company’s call centre business classified as customer management solutions (CMS) continues to be rather disappointing. While its peers like Spectramind and MsourcE continued to post a strong growth in revenues, GTL call centre revenues were almost flat sequentially. The ailing enterprise solutions business also posted a marginal sequential growth in revenues for the quarter.

    The full year numbers also present a similar story. Almost all of the growth for the company has come an 82% jump in revenues from the network engineering services. While the growth in revenues from CMS was sober at 56%. This is lower compared to peers like MphasiS that posted a 299% growth in revenues for its call centre business in FY03.

    Segments FY02 FY03 Change
    NE 1,070 19.5% 1,947 30.4% 82.0%
    ES 3,693 67.4% 3,363 52.5% -8.9%
    CMS 703 12.8% 1,094 17.1% 55.6%
    Others 13 0.2% 1 0.0% -93.7%
    Total 5,478 100.0% 6,405 100.0% 16.9%

    For the enterprise solutions business, competition has begun to take a toll. Infact, revenues from the segment declined 9% during the fiscal. To counter this, the company made an acquisition recently. In February, GTL announced its decision to acquire Redington Group for a consideration of US$ 95 m (Rs 4.5 bn). By acquiring Redington, GTL is trying to integrate vertically backwards to cater to enterprise solutions requirements. The company as of now provides service like network management and systems integration for corporates’ IT needs. This means that GTL will provide connectivity and manage the network services like bandwidth. Thus, it 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.

    At the current market price of 56, the stock is trading at a P/E multiple of 5x its FY03 earnings. Considering the valuations and future growth prospects, the stock looks attractive. We expect 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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