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Global tele: Bottomline disappoints yet again - Views on News from Equitymaster

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Global tele: Bottomline disappoints yet again

Oct 28, 2002

GTL, the network engineering and IT services company, has announced disappointing bottomline figures for its September quarter. For 2QFY03, it has reported a seqeuential 35% fall in consolidated net profits. The consolidated topline has grown by a marginal 4%, on a QoQ basis. Not accounting for the other income and extraordinary item figures net profits have still declined by 16%. Fall in other income and jump in extraordinary items have further depressed net profits. Revenues from its network engineering business have grown by 12% in 2QFY03. Overseas focus has led to a considerable growth in Global Tele's revenues from the network engineering business. GTL's call centre operations have registered a 10% growth in the same period. The company's call centre business has customers across verticals like banking, insurance and telecom. Revenues from this business have been growing consistently as more and more multinationals are outsourcing their call centre operations to India due to its low cost proposition. However, on a comparative basis the growth in call centre revenues is rather disappointing as other players like Mphasis have reported 56% QoQ growth in its call centre revenues on a similar base.

(Rs m) 1QFY03 2QFY03 Change 1HFY02 2HFY03 Change
Net Sales 1,460 1,517 3.8% 2,695 2977 10.5%
Other Income 48 10 -78.3% 322 58 -82.1%
Expenditure 1,008 1,082 7.4% 1,986 2090 5.2%
Operating Profit (EBDIT) 453 435 -4.0% 709 888 25.2%
Operating Profit Margin (%) 31.0% 28.7%   26.3% 29.8%  
Interest - -   -  
Depreciation 253 262 3.6% 453 515 13.8%
Profit before Tax 247 183 -26.1% 579 430 -25.6%
Extraordinary items - (18)   - (18)  
Tax 2 6   10 7 -30.0%
Profit after Tax/(Loss) 246 159 -35.2% 569 405 -28.7%
Net profit margin (%) 16.8% 10.5%   21.1% 13.6%  
No. of Shares 70.7 70.7   70.4 70.7  
Diluted Earnings per share* 13.9 9.0   16.2 11.5  
P/E Ratio   8.3     6.5  
(* annualised)            

The performance of entreprise solutions business of GTL has been disappointing. Enterprise solutions business has degrown by 2% in 2QFY03 on a QoQ basis. The company has been losing business in this segment consistently due to the slowdown in spending on networking technologies. Increasingly companies are focusing more on generating better returns on the investments they have already made on information technology.

Operating margins have also taken a hit, falling by 230 basis points. A 26% and 30% QoQ jump in employee and selling and distribution (S&D) costs has led to this fall in operating margins. Net profits of the company have been affected further due to lower other income and higher extraordinary expenses (Rs 18 m). An appreciating rupee has been the main reason for fall in other income.

At the current market price of Rs 75, the stock is trading at a P/E multiple of 8x its annualised 2QFY03 earnings. Going forward the growth drivers of the company will be its network engineering division and its call centre business. Global Tele on account of being an early entrant in to the call centre business is likely to maintain healthy growth rates in this business. On the other hand performance of its network engineering division will depend largely on the fortunes of the telecom sector. The stock is unlikely to witness any major activity in the short term as investors may choose to put their money in other technology stocks that have shown better performance in the current quarter.

Consolidated revenues (Rs m) 1QFY03 % of total 2QFY03 % of total QoQ Change
Network engineering 388 27% 436 29% 12%
Customer management solutions 243 17% 267 18% 10%
Enterprise solutions 829 57% 812 54% -2%
Total 1460   1515   4%

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