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GTL: Transition phase - Views on News from Equitymaster
 
 
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  • Oct 27, 2001

    GTL: Transition phase

    The past and introduction
    Incorporated on December 23 1987, as a private limited company, Global Tele-Systems now GTL, had very modest beginnings. The company at that time was focused on hardware and services for telecommunications hardware. GTL went public in 1991 under the name Global Tele-Systems Limited. From just selling hardware the company graduated to implementation of network and started turnkey execution of projects for voice and data networks. The company’s claim to clairvoyance is setting up of ‘Global Electronic Commerce Services Ltd.’ (GECS) in May 10, 1993 to provide EDI (electronic data interchange) services way ahead of others. Cut to 2001, today Global Tele is of the size of Rs 8 bn (US$ 180 m) and is one of the very few players who plan to focus on the IT enabled services market. These markets are expected to be major revenue grosser for the IT industry in the future. The company’s set of offerings, that keeps changing very rapidly, as of now includes enterprise network services (ENS), software and application services (SAS) and engineering services (ES).

    IT enabled services player
    ENS contributed to about 43% of the GTL’s revenues in 2QFY02. The services offerings are to meet the Internet related IT infrastructure needs of an organisation. The portfolio includes data centres, managed services, corporate messaging, managed bandwidth services. It has been undoubtedly established that Internet is a fantastic distribution channel and no organisation can hope to survive without using it. However, at the end of the day the organisations would love to concentrate on their core business rather than worrying about the safety of their data (more so post Sep 11) and keeping their networks up and running. The most logical thing to do is to outsource their needs to organisations like GTL.

    Sr No Business area % contribution to
    revenues in FY01
      Network engineering (NE)  
    1 Technical services 5.6%
    2 Telecom Networks and Infrastructure (carrier class)* 9.0%
      Total 14.6%
      Software and application services (SAS)  
    3 CRM 3.6%
    4 E-processing 4.7%
    5 Payment gateway 0.0%
    6 Software rights and derivatives 19.6%
    7 E-commerce and consulting 7.8%
    8 Systems integration 15.1%
    9 Software development 7.8%
      Total 58.6%
      Enterprise network services (ENS)  
    7 Data centre 2.1%
    8 Virtual private networks 2.9%
    9 Managed networks 2.8%
    10 Messaging services 2.0%
    11 Telecom Networks and Infrastructure (enterprise business)* 17.0%
        26.7%
    A Please note as per FY01 balance sheet Sr no 3,4,5,10 grouped under business application services
    B Services as per Sr no 7,8,9 previously rendered under Internet business infrastructure unit (GECS)
    * Quantum estimates

    SAS services is more of an ASP (application service provider) kind of a business where GTL rents out software applications like eCRM (contact centre or call centre solutions), e-procure, e-enterprise and payment gateways on which corporates will carry out their business transactions. GTL also earns from IPR rights it has for certain products. The company has brought out and modified certain products. It earns revenues from the sales of these products. GTL is also involved with software development in a small scale. The contribution of this segment (SAS) to revenues was 44% in 2QFY02

    One segment that has seen an early start within IT enabled services sector is of call centres or customer interface services. GTL has cashed in on this opportunity. With an average realisation of US$ 13 (Rs 624) per hour the company has an operational call centre with 1,000 seats in place. Since the centre works on 8 hour shifts the effective capacity becomes 3,000 seats provided all the three shifts are working. The company currently is running one shift and has business for about 400 to 450 seats. This roughly translates to revenues of Rs 820 m (US$ 17 m) alone in a year. Under an ideal 85% utilisation with two shifts running the company can hope to gross Rs 3 bn (US$ 64 m) from this business alone. The remaining 15% of the capacity would be required for training.

    GTL’s Network engineering group (NE) provides infrastructure related services and the technical services for carrier class networks to cellular and basic service operators. The division provides turnkey engineering solutions ranging from designing, installation and operations and maintenance of networks. The contribution to GTL’s revenues was 15% in 2QFY02.

    While GTLin its FY01 annual report has given revenues from each sub segment of the three broad groups (ENS, SAS and NE) these are not provided for in 1QFY02 and 2QFY02. A look at the FY01 numbers shows that GTL’s major sources of revenues are software rights and derivatives (20% of FY01 revenues), systems integration (15%) and telecom networks and infrastructure (26%). According to FY01 balance sheet, the company earned 50% of its revenues from software and the remaining 50% from IT enabled services.

    For the 2QFY02, the company has posted a sequential growth of 19% in topline and a dip of 11% in net profits due to declining margins. However, on a YoY basis the company has posted a 33% drop in revenues and a 67% decline in bottomline. While on a sequential basis all the three revenues streams of the company have shown growth, on a YoY basis ENS has shown a marginal decline in revenues of 1%. The SAS business is the hardest hit with a steep fall of 59%. The NE group, however, has shown very strong growth of about 96%.

    Read our analysis of GTL's 2QFY02 results.

    Concerns
    The company’s major growth area has been its software business. The major revenue grosser for GTL is its licensing businesses. The licensing business is a very risky one to be in, considering the fact that the company does not have much of expertise in software development in case of a software becoming obsolete. There are already cases of VisualSoft and Hughes software suffering due to concentration on products. However, these companies at least make the product themselves. The SI (systems integration) business too has shown sings of slowdown. However, the company wants to gradually get out of this business due to the low margins involved.

    The company is very dynamic, perhaps a bit too dynamic. It keeps on changing its businesses organisation quite often. Thus, it becomes a bit confusing and tiring to read between the numbers of the company. In the 1999 balance sheet the company was organised as engineering services, software and Internet services and consumer telecom. In FY00 the company hived off consumer telecom business. The same year it sold 9 m shares of GECS for a consideration of Rs 1,719 m. In FY01, the company then merged GECS with GTL. Thus, in FY01 it had software services and engineering services added to this business application & Internet and business infrastructure services.

    Service offerings (Rs m) FY99 % Contribution FY00 % Contribution FY01 % contribution
    Consumer Telecom 953 17.8% 340 5.4% - -
    Software and internet services 1,926 36.0% 2,957 55.3% 4,096 50.3%
    Engineering services 2,471 46.2% 2,714 50.7% 2,094 25.7%
    Business application services -   242 3.9% 871 10.7%
    Internet business infrastructure services -   -   632 7.8%
    Technical services -   -   455 5.6%
    Total 5,350   6,252   8,148  
    Revenue growth     16.9%   30.3%  
                 
    Segmental revenue Growth            
    Software and internet services -   53.5%   38.6%  
    Engineering services -   9.8%   -22.9%  
    Business application services -   -   260.6%  

    Another concern is that the company is under investigation by the SEBI for its alleged involvement in the recent stock market scam.

    Undoubtedly the company has been a pioneer to seize business opportunities time and again. However, the management must get its focus. The argument in favour of the management could be that even software companies change their offerings. This is true but the basic nature of the business does not change. However, a shift from EDI services to BPO has totally different dynamics.

    Conclusion
    Global success will largely depend on a cost leadership strategy. This will help it gain business and its size will probably help it sustain through any shake out the IT enabled services industry. The company will most probably position it self as a second rung player in the segment. At the current market price of Rs 80 the stock is trading at a P/E multiple of 5.5 times its 1HFY02 annualised earnings. The investors should wait for the company to show some consistent results and business focus before considering this as an investment option.

     

     

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