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HFCL: Singed in slowdown

Jun 25, 2002

Telecom equipment manufacturers experienced a rough year in FY02. Globally, demand for telecom equipment slipped, as telecom service providers pulled back network expansion due to cash crunch and excess capacity built during the tech boom. Domestically, service providers are likely to have delayed purchases to take advantage of reduced prices. However, Himachal Futuristic Communications Ltd. (HFCL) has underperformed, as compared to key industry peers.

(Rs m)4QFY014QFY02ChangeFY01FY02Change
Sales 2,903 2,779 -4.3% 12,800 8,893 -30.5%
Other Income (354) 63 -117.8% 985 177 -82.0%
Expenditure 3,687 2,371 -35.7% 11,303 7,497 -33.7%
Operating Profit (EBDIT) (784) 407 -152.0% 1,497 1,396 -6.8%
Operating Profit Margin (%)-27.0%14.7%11.7%15.7%
Interest 239 195 -18.5% 350 641 83.0%
Depreciation & amortisation 57 79 37.7% 193 256 32.6%
Profit before Tax (1,435) 197 -113.7% 1,939 677 -65.1%
Extraordinary items (202) (157)-22.3% (202) (157)-22.3%
Tax (47) 33 -170.6% 458 104 -77.2%
Profit after Tax/(Loss) (1,589) 7 -100.4% 1,279 416 -67.5%
Net profit margin (%)-54.7%0.2%10.0%4.7%
No. of Shares 78.8 78.8 78.8 78.8
Earnings per share* (80.6) 0.3 16.2 5.3
P/E Ratio 13.1

Although operating costs have reduced considerably leading to better margins, operating profits for the full year have been adversely impacted by the drop in sales. Fall in raw material expenses, the largest constituent of operating costs, has led to reduction in operating expense. However, YoY decline in costs, for both periods, have been amplified, as the company incurred heavy business write offs in FY01. The company provided for an aggregate Rs 1.6 bn towards bad debts, provisions for further bad debts and loan & advances written off. These expenses are primarily towards HFCL Nine Broadcasting Ltd., Microwave Communication Ltd. and HFCL Bezeq Telecom Ltd.

With staff cost and sub-contract expenses rising by 30% in FY02, the expense head as a percentage of sales has almost doubled over the concerned period. As expected, margins and return on capital (ROCE) for telecom turnkey projects is higher compared to the telecom equipment business. Operating margins earned for the full year are in line with industry trends.

Interest expense for the full year has increased considerably in FY02, as compared to a decline in the previous fiscal. Reduced sales & bad investments could have put pressure on the cash flows of the company. To tide over the current mismatch in cash flows the company is likely to have increased borrowings. Extra-ordinary items refer to diminution in value of investments.

At Rs 69 the scrip is trading on a multiple of 13.1x FY02 earnings. However, this is at a premium to industry peers, which are quoting at 7x-8x FY02 earnings. HFCL recently emerged as the winning bidder for Government owned, Hindustan Teleprinters Ltd. (HTL). HFCL acquired 74% stake in HTL for Rs 550 m. Reportedly, HFCL is planning to increase its product portfolio to include set-top boxes and cable modems while HTL will manufacture CDMA equipment. Telco majors across the global are facing excess capacity, lower realisations per talk-time and face threat from new technologies. Consequently, the environment for telecom equipment providers is not likely to turnaround in the near term.

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