The
last one-year has been topsy-turvy for the Indian telecom
sector. However, the year also saw a sea change in the
valuations of the listed telecom companies. Despite the
controversies, share prices of a number of telecom companies
have risen in expectation of improved financial performance.
Among the telecom companies, the Indian cables companies have
largely benefited by the recent orders placed by DoT. Apart from
the major players like Sterlite Industries and Finolex Cables,
other cable telecom companies such as Birla Ericsson, RPG Cables
and Vindhya Telelinks have also posted impressive performance.
On the other hand,
Ahmedabad-based Gujarat Telephone Cables Ltd (GTCL), the largest
manufacturer of JFTC in the country has failed to produce the
performance reported by its competitors. The company, which is
planning to restructure its operations, currently trades at Rs
17 with a 52-week high of Rs 27 and low of Rs 7.
Background: A
Diversified Presence
GTCL was formed in February 1983 as a private limited company
and went public in 1986. It has been promoted by RH Patel, DD
Patel, NR Patel, and SR Patel. The company entered into
collaboration with Rosendahi Maschinen GmbH, Austria and Alcatel,
France to manufacture Jelly Filled Telephone Cables (JFTC). It
came out with a public issue of 28.50 lakh shares at par to
finance the company’s project to manufacture JFTC in 1989. The
issue was oversubscribed by 26 times. The project was to set up
a 6.25 lakh cable kilometre (lckm) of JFTC at Chharodi, near
Ahmedabad. However, the company struggled to operate at
sufficient capacity due to the delay in receiving orders from
the DoT. DoT is the largest player in the telecom sector and had
virtual monopoly in the telephony sector. Despite the low
capacity utilization, the company went on an expansion spree and
constantly increased the capacity to the current level of 140
lckm. The various expansions were financed through rights issue,
issue of fully convertible debentures and loans.
GTCL’s financial
performance in the past four years has been uninspiring. The
company’s turnover in March 1996 stood at Rs 159.32 crore
which has increased to Rs 203.47 crore in June 1999. The company’s
net profit fell from Rs 18.12 crore in March 1996 to Rs 12 lakh
in June 1999.
The DoT places orders on
the basis of a number of criteria, which includes allotting
certain percentage of orders to all the companies that have
applied for the tender. To take advantage of this, the company
formed GTCL Mobile with a capacity to manufacture 22 lckm of
JFTC. The company came out with a public issue of Rs 9.90 crore
in August 1996 to part finance the Rs 36.50 crore project. It
currently trades at Rs 14 with a 52-week high of Rs 23 and
52-week low of Rs 3. The other listed group company of GTCL is
Gujarat Optical Communications Ltd (GOCL), which manufactures
optical fibre cables. GOCL has a capacity to manufacture 4000
cables kilometers per annum of optical fibre cables at Iyawa,
Ahmedabad. GOCL reported a turnover of Rs 58.67 crore in March
1999 as against Rs 55.73 crore in the corresponding previous
year. The company reported a loss of Rs 5.32 crore as against a
loss of Rs 42 lakh last year. GTCL Mobile currently trades at Rs
8 with a 52-week high of Rs 11 and 52-week low of Rs 2.
Operations:
Low Volumes
The company primarily caters to the demand of DoT and MTNL.
While the company has constantly increased its capacity of JFTC
over the past few years, its capacity utilization has been
dismal. The company sold 30.41 lckm of cables in the period
ended June 1999 compared to 28.42 lckm of JFTC in the previous
year 15 months ended June 1998. The company’s capacity
utilization stood at 22 percent as against 16 percent in the
previous year. GTCL reported turnover of Rs 203.47 crore in June
1999 as against Rs 211.70 crore in the 15 months ended March
1998. This translates into an annualized growth rate of 20
percent over the previous year. The company faced liquidity
crunch and was unable to deliver the cables to DoT during 1999.
Future:
Restructuring
DoT is on a massive expansion spree. With the entry of private
operators in the basic telephony market, DoT has become
aggressive in installing new lines through out the country. In
the year 1998-99, against a target of 36 lakh lines, DoT
installed 37.92 lakh lines. DoT has projected 45.5 lakh lines in
1999-2000. To meet the target, DoT had placed orders for 485
lckm of JFTC last year and it is expected place similar orders
in the current year. While the telecom cable companies
are expected to benefit from fresh orders from DoT and the
private operators, GTCL’s share in the fresh orders remains to
be seen. Although GTCL has huge installed capacity and almost
double of the listed telecom cable companies such as Sterlite
Industries and Finolex Cables, the company has not been able to
operate at more than 25 percent capacity utilization. One of the
reasons for the low capacity utilization is the liquidity crunch
faced by the company. The company had to pay liquidating damages
to DoT for not been able to deliver the cables. The company also
has huge outstanding loans, which resulted in rising interest
cost. The company’s plans to convert some of its loans into
equity and bring in additional equity to meet the demand of the
JFTC industry.
Financial
Performance: Uninspiring
GTCL reported a turnover of Rs 203.48 crore, up 20 percent over
the previous year. It reported operating margins of 21 percent
as against 20 percent in the previous year. However massive
interest outgo put pressure on the company’s gross profit
margins. The company has huge outstanding loans to the extent of
Rs 225.57 crore as on June 1999. The company faced an interest
outgo of Rs 38.2 crore in June 1999. As a result, the gross
profit margins stood at 3 percent in June 1999. GTCL reported a
net profit of Rs 12 lakh as against Rs 1.99 crore in the 15
months ended June 1998. The company now proposes to convert part
of the loans into equity capital by allotting approximately 77
lakh equity shares to the lenders. Moreover, the company also
plans to allot equity to the promoters on preferential
allotment. Consequently, the equity capital is expected to
increase from Rs 31.07 crore to more than Rs 40 crore.
Financial Performance |
(Rs |
||||
For the Year |
March-1997 | June-1998# | June-1999 | June-2000* | |
Sales | 160.38 | 211.7 | 203.48 | 211.86 | |
Other Income | 1.91 | 5.39 | 10.50 | 3.915 | |
Operating Profit | 28.52 | 42.40 | 44.40 | 46.60 | |
OPM (%) | 16.59 | 17.48 | 16.66 | 20.15 | |
Net Profit | 1.77 | -1.99 | 0.12 | 3.52 | |
Equity | 31.07 | 31.07 | 31.07 | 31.07 | |
# For 15 Months |
|||||
* Projected |
The company has reported a
turnover of Rs 48.15 crore and a net loss of Rs 51 lakh in the
first quarter ended September 1999. While the company plans to
restructure its business through conversion of loans and issue
of fresh equity, this is not expected to have a major impact on
its performance in the short term.
Investment
Potential: Under Performer
GTCL is currently traded at Rs 17 discounting its projected June
2000 EPS by 15 times. Although the telecom industry is slated to
witness a change in the coming months, GTCL will take some time
to take advantage of the boom. GTCL’s peers such as Sterlite
Industries and Finolex Cables have reported impressive
performance on improved offtake of JFTC. However, considering
the current financial position, we believe that it will take
some time for the company to make its mark among the Indian
cable companies. We do not expect the share price to gain
momentum until the company attains reasonable stability in its
performance. Switch.