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Global Tele: Improving margins

Apr 18, 2001

Global Tele-Systems has clocked a growth of 23% in consolidated revenues (Global Tele plus Global Electronic Commerce Services) YoY. Of the total growth Global Tele grew by 20% and the Global Electronic Commerce (GECS) grew by a whopping 121%. This is due to the small base of GECS, whose size was Rs 359 m in FY00. The combined entity has shown a growth of 30% compared to the revenues of Global Tele for FY00. While the electronic commerce business has grown at very fast pace the companies other businesses have shown growth rates below industry averages. From the 4QFY01 results of software companies it is quite clear that the demand for e-commerce software solutions has shown a slowdown. The demand for e-business infrastructure that is Global Tele’s core business might see a pressure on the demand side as in an uncertain economic environment companies might look at cost cutting.

(Rs m) FY00 FY01 Change
Sales 6,252 8,148 30.3%
Other Income 50 538 971.1%
Expenditure 4,182 5,308 26.9%
Operating Profit (EBDIT) 2,070 2,840 37.2%
Operating Profit Margin (%) 33.1% 34.9%  
Interest 258 0  
Depreciation 739 789 6.8%
Profit before Tax 1,123 2,590 130.6%
Tax 30 165 451.4%
Extraordinary Items 1,192 1,952 63.7%
Profit after Tax/(Loss) 2,285 4,376 91.5%
Net profit margin (%) 36.5% 53.7%  
Profit after Tax/(Loss)# 1,093 2,424 121.8%
Net profit margin (%)# 17.5% 29.8%  
Diluted number of shares 70 44  
Diluted Earnings per share* 16 55 256.5%
P/E (x)   3  

The highlights of the performance are two fold. Firstly the consolidated entity has improved operating margins by about 300 basis points. Of this the major improvement has come from the business of Electronic commerce where the companies operating margins have shot up by 18.4% to reach a figure of 28.9%. The company has affected this by controlling the other expenditure that has fallen from 34% of revenues in FY00 to 17% in FY01.

For the consolidated entity the company’s staff costs are at 10% of revenues for FY01. Global Tele is one of the first IT services companies. Due to the nascent state of the industry and also the low skill set requirements the company’s employee costs are low.

(Rs m) 3QFY01 4QFY01  
Sales 2,080 2,307 11.0%
Other Income 142 84 -40.7%
Expenditure 1,440 1,514 5.1%
Operating Profit (EBDIT) 639 794 24.2%
Operating Profit Margin (%) 30.7% 34.4%  
Interest 0 0  
Depreciation 136 154 13.6%
Profit before Tax 646 724 12.1%
Tax 75 (30) -139.5%
Extraordinary Items 0 376  
Profit after Tax/(Loss) 570 1,129 98.0%
Net profit margin (%) 27.4% 48.9%  
Profit after Tax/(Loss)# 571 754 32.0%
Net profit margin (%)# 27.4% 32.7%  
Diluted number of shares 43.41 43.41  
Diluted Earnings per share* 13.1 69.4 428.2%
P/E (x)      

The net profit figure has shown a growth of 132% for the consolidated entity. This is because in FY00 GECS had incurred a loss of Rs 49 m. If we exclude the loss figure the net profit growth for the consolidated entity was 121.8%. The reasons for the vast growth are the improvement in operating margins, drop in depreciation figure for the consolidated entity compared to FY00 by 11% and no finance charges in FY00.

For the 4QFY01 the company has shown a sequential (QoQ) growth of 10% in revenues and 32% in net profits (excluding extraordinary income). There has been a significant improvement in operating margins compared to 3QFY01. On a YoY basis the company has clocked a growth of 15.9% in revenues and 52% improvement in net profits.

At a current price of Rs 156 the stock is trading a P/E multiple of 1.5 times its FY01 earnings.

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