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GTL (Global Tele): The bad run continues

Oct 27, 2001

For 2QFY02, GTL 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 (excl. extra-ordinary items for FY01). The company’s margins have deteriorated due to the increase in costs for sales and services that have jumped by a significant 71%. However, the company has managed to control its employee costs. The number has shown a steep drop of 37% sequentially.

Though, in the quarter ended September ’01, the company’s business improved compared to 1QFY02. The third and fourth quarter are going to be tough for the company as the tech sector is facing uncertainty post September 11 events. However, the impact could be lower considering the company earns only 6% of its revenues from the US. On a consolidate basis the company’s revenues have grown by 30% sequentially and the net profits have declined by 12%. The drop in margins is even more severe on a consolidated basis.

(Rs m) 1QFY02 2QFY02 Change
Sales 1,181 1,407 19.2%
Other Income 157 162 3.0%
Expenditure 867 1,073 23.7%
Operating Profit (EBDIT) 314 334 6.5%
Operating Profit Margin (%) 26.6% 23.8%  
Interest - -  
Depreciation 209 238 13.9%
Profit before Tax 262 258 -1.5%
Tax (9) 18 -298.7%
Profit after Tax/(Loss) 271 240 -11.5%
Net profit margin (%) 22.9% 17.0%  
Diluted number of shares 70.4 70.4  
Diluted Earnings per share* 15.4 13.6  
P/E (at current price)   5.9  

While on a sequential basis all the three revenues stream 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%.

Service offering (Rs m) 1QFY02 % contribution 2QFY02 % contribution change
Software and application services 579 49.0% 612 43.5% 5.8%
Enterprise network services 427 36.1% 578 41.0% 35.4%
Engineering services 176 14.9% 218 15.5% 23.8%
Total 1,181   1,407   19.2%

SAS has shown declining trends in domestic as well as international revenues due to slowdown in the licensing business (20% of revenues in FY01). The licensing business is a very risky one to be in. Considering the fact that the company does not have much expertise in software development in case of software becoming obsolete there is not much that GTL can do. 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 signs of slowdown. However, the company wants to gradually get out of this business due to the low margins involved.

Capacity utilization in CRM (Call Centre) is two quarters behind schedule. The company will face stiff competition from software companies that are taking an interest in the area. MsourceE is a subsidiary of Mphasis in the call centre business that has been showing strong growth. The advantage other software companies have over GTL is that these companies have established relationships with the prospective clients.

GTL continues to increase its presence internationally. The company’s margins would continue to be under pressure due to higher personnel and administration costs, particularly in the USA, over the next few quarters.

At the current market price of Rs 80 the stock is trading at a P/E multiple of 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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