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Aksh Optifibre: Bottoms out - Views on News from Equitymaster
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  • Aug 16, 2002

    Aksh Optifibre: Bottoms out

    With meltdown in the telecom service sector, telecom equipment companies, globally, have experienced a challenging 12 months. Business environment has further deteriorated in quarter ended June '02. Similar to domestic industry leader, Sterlite Optical Technologies Ltd. (SOTL), the financials of Aksh Optifibre Ltd. have been battered.

      QoQ   YoY  
    (Rs m) 4QFY02 1QFY03 Change 1QFY02 1QFY03 Change
    Net Sales 526 158 -70.0% 520 158 -69.7%
    Other Income 4 5 4.4% 3 5 55.4%
    Expenditure 466 161 -65.5% 375 161 -57.1%
    Operating Profit (EBDIT) 60 (3)   145 (3)  
    Operating Profit Margin (%) 11.4% -2.0%   28.0% -2.0%  
    Interest 10 11 14.4% 5 11 126.1%
    Depreciation 12 12 2.1% 10 12 24.6%
    Profit before Tax 42 (22)   133 (22)  
    Tax 11 -   33 -  
    Profit after Tax/(Loss) 32 (22)   100 (22)  
    Net profit margin (%) 6.0% -14.1%   19.3% -14.1%  
    No. of Shares 22.0 22.0   22.0 22.0  
    Diluted earnings per share* 5.7 (1.0)   18.2 (1.0)  

    After two quarters of sequential decline in financials, Aksh -- similar to industry trend -- was able to reverse the slide in 4QFY02. The revival in economic growth, especially U.S, post September 11 lows, is likely to have improved optic fibre rates leading to higher margins. Also, with financial year-end, domestic telecom service companies could have increased their offtake to meet network expansion milestones. The first quarter of FY03, globally, has started on a terrible note for telecom equipment companies. As mentioned in our peer group reports, slowdown in the telecom service sector was compounded by accounting scandals in U.S based telecom service companies. Consequently, several firms are bordering at bankruptcy. Also, slowdown in voice, data & video transmission has led to cash crunch among bandwidth providers. Global Crossing filed for bankruptcy. These sector are key demand drivers for telecom equipment suppliers.

    Increase in global optic fibre capacity over the past 24 months coupled with reduced offtake has led to prices turning unremunerative for the industry. In fact, in the past year, both Aksh and Sterlite Optical have increased capacity. At current realisation levels, operating margins are negative, which suggests manufacturers will lose more on keeping plants operational. Sterlite Optical reported negative 12% operating margins. Besides, we reckon, domestic orders tend to pick-up in the second half of the fiscal after the monsoon season. The company commissioned new capacity in FY02. Consequently, interest expense is likely to have been passed through the income statement. Also, with poor realisations, the company could have borrowed funds to meet working capital requirements.

    At Rs 32, the stock is trading at all time lows. We reckon, stability in the international telecom services industry could return by start of 2003. Several players had expressed interest to build a pan-India network, but with fear of overcapacity and rapid changes in the telecom industry, players seem to have adopted a more cautious stand. Encouragingly, Warren Buffet -- world renowned investor -- recently purchased bonds in telecom company, Level 3 Communications, which could indicate value in the sector.



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