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GTL: Rupee impairs profits

Nov 23, 2004

Introduction to results
Global Tele-systems Limited (GTL) had recently reported results for the quarter and half ending September 2004. While the company has reported decent topline growth for both the periods, bottomline for 2QFY05 has dipped on account of a sharp reduction in other income. Margins have also come under pressure.

Financial performance (consolidated): A snapshot
(Rs m) 1QFY05 2QFY05 Change 1HFY04 1HFY05 Change
Sales 1,705 1,811 6.2% 3,029 3,516 16.1%
Other income 228 (28)   (42) 200  
Expenditure 1,200 1,293 7.8% 2,048 2,494 21.8%
Operating profit (EBDIT) 505 518 2.5% 982 1,021 4.1%
Operating profit margin (%) 29.6% 28.6%   32.4% 29.1%  
Interest - -   - -  
Interest 24 45 85.2% (38) 68  
Depreciation 223 220 -1.0% 550 443 -19.4%
Profit before tax 486 224 -54.0% 427 710 66.1%
Extraordinary items - -   - -  
Tax 26 33 24.3% 19 59 212.2%
Profit after tax/(loss) 460 191 -58.5% 409 651 59.3%
Net profit margin (%) 27.0% 10.5%   13.5% 18.5%  
No. of shares 71.3 71.3   71.3 71.3  
Diluted earnings per share* (Rs) 25.8 10.7   11.5 18.3  
P/E ratio (x)         5.8  
(* annualised)            

About the company
GTL has been one of the poor performers in the Indian software industry in the past few years, and this has put it in a tough position vis-à-vis its competitors. However, the company has moved on from being a hardware player to one executing turnkey projects for voice and data networks. The company’s offerings include network engineering (48% of revenues) and IT services (52%). The latter includes services such as enterprise solutions and customer management services.

What has driven performance in 2QFY05?
IT services aid topline growth:  Growth in GTL’s 2QFY05 topline is a result of growth in the IT services division (52% of revenues). Notably, this segment has grown sequentially by 4.2% in 2QFY05, from a sequential decline of 0.6% in 1QFY05. However, the network engineering business (48% of revenues) has come under pressure in this quarter and revenues from the same have grown sequentially by 8.5% (16.1% QoQ in 1QFY05). This segment has been a consistent performer for GTL over the past few quarters and a slowed growth in the same is a cause of concern.

Employee costs affect margins:  Higher personnel costs have impacted GTL’s operating margins in 2QFY05. These costs, which were 19% of revenues in 1QFY05, have increased to 21% in this quarter. Cost of sales has, however, declined as a percentage of sales in 2QFY05, thus paring the decline in operating margins for the company.

Exchange losses impact profits:  A sharp decline in other income has led to the decline in 2QFY05 profits for GTL. This has been due to Rs 28 m of exchange losses in the quarter, from Rs 228 m of exchange gains in 1QFY05. Depreciation of the rupee vis-à-vis the US dollar has been the result of these exchange losses and has been the case with almost all Indian software companies in 2QFY05.

Performance in recent times
  3QFY04 4QFY04 1QFY05 2QFY05
Sales growth (QoQ, %) 2.9 11.6 6.5 6.2
OPM (%) 30.3 28.1 29.6 28.6
Profits (QoQ, %) 61.1 (36.8) 128.5 (58.5)
Revenue growth - Segments        
Network Engineering (QoQ, %) 28.7 19.4 16.1 8.5
IT Services (QoQ, %) (9.2) 6.4 (0.6) 4.2

What to expect?
At the current price of Rs 106, GTL’s stock is trading at a price to earnings multiple of 5.8 times annualised 1HFY05 earnings. The stock has traditionally traded at much lower multiples as compared to its peers and there are reasons for the same, the foremost being the consistent poor performance of the company in the past couple of years. We have reiterated a number of times that management in one of the most important criteria for success of a technology business and as such, the management’s inability to clearly visualize growth prospects is a big concern for GTL. Investors should thus practice utmost caution. There are better stocks to be picked from the sector.

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