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HFCL: Benefits from diversification

Sep 3, 2002

Himachal Futuristic Communications Ltd. (HFCL) has reported an impressive turnaround in topline performance. After experiencing a 30% slide in FY02 turnover, the company has made a sharp comeback. Having said that, considering the slowdown in the telecom sector and poor performance of telecom equipment players, such topline performance was unexpected.

(Rs m) 1QFY02 1QFY03 Change
Sales 1,603 2,045 27.6%
Other Income 40 32 -19.8%
Expenditure 1,274 1,634 28.3%
Operating Profit (EBDIT) 329 410 24.7%
Operating Profit Margin (%) 20.5% 20.1%  
Interest 107 257 140.1%
Depreciation 57 62 9.0%
Profit before Tax 205 124 -39.7%
Tax - 21  
Profit after Tax/(Loss) 205 103 -49.7%
Net profit margin (%) 12.8% 5.0%  
No. of Shares 78.8 78.8  
Earnings per share* 10.4 5.2  
P/E Ratio   10.8  

As compared to other key telecom equipment manufacturers that are present primarily in optic fibre cables (OFC), HFCL manufactures a portfolio of telecom equipment. Among the products of the company are optical equipment, microwave communication equipment, CDMA systems, optic fibre cables, set-top boxes and cable modems. Also, the company derives an estimated 35% of revenues from turn-key projects. In our FY02 report, we had mentioned that HFCL is planning to enter manufacturing of set-top boxes, cable modems and CDMA equipment. Basic service providers -- awarded a favourable judgment on wireless in local loop (WLL) -- have entered the limited mobility market based on CDMA technology, which could have driven HFCL revenues. Also, we reckon, cable modems are likely to have witnessed brisk sales, as cable internet gains popularity.

Growth in operating profits is largely driven by revenues while operating margins (OPM) have declined. However, compared to the previous quarter, operating margins have recovered. The demand for CDMA equipment is likely to have led to a jump in raw material costs. Interest expense of the company has been volatile over the past 6 quarters. After reducing in 4QFY02, interest expense has increased considerably in 1QFY03. Reduced sales & bad investments over the past 18 months could have put pressure on cash flows leading to increased borrowings. Higher interest costs have eaten into pre-tax profits.

At Rs 57 the scrip is trading on a multiple of 10.8x 1QFY03 annualised earnings. HFCL emerged as the winning bidder for Government owned, Hindustan Teleprinters Ltd. (HTL). HFCL acquired 74% stake in HTL for Rs 550 m. The cable bill, which supports conditional access system, is being reconsidered by parliament. Conditional access system will allow encryption of television channels by broadcasters facilitating the move towards pay channels. Consequently, cable T.V users will require set top boxes for viewing preferred channels, which could trigger demand for the company's product. That said, the company has been associated with several irregularities and investors need to remain wary.

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