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Gujarat Telephone Cables: Tangled Cables

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VoicenData Bureau
New Update

The

last one-year has been topsy-turvy for the Indian telecom

sector. How
ever, 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.

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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 debent
ures 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.

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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.

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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

Crore)

For the Year

ended

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
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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.
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