Birla ericsson optical: Regaining Lost Ground

The telecom sector finally embarked on the recovery path in the year 1999. Despite the unending tussle between the Telecom Regulatory Authority of India (TRAI) and Department of Telecommunications (DoT) on one hand and DoT and cellular operators on the other, the overall prospects of the sector seem to be improving. The government has taken positive steps to revive the sector, which has for long been under shackles. With the DoT and private operators expected to compete with each other and play a major role in increasing the telephone lines, the telecom cable companies are expected to play a major role in ensuring the growth.

Competing with the major players in the telecom sector such as Sterlite Industries and Finolex Cables is Rewa, Madhya Pradesh-based Birla Ericsson Optical. The company has reported a fantastic performance in the year ended March 1999 and in the first half ended September 1999. Birla Ericsson Optical is currently traded at Rs 67 with a 52_week high of Rs 97 and low of Rs 14.

Background

Slugged by Slowdown



Birla Ericsson was incorporated in 1992 as a public limited company and commenced commercial operations in March 1994. The company was promoted by its current chairman,
Mrs Priyamvada Birla of the MP Birla Group jointly with Ericsson Cables AB, Sweden, Universal Cables Ltd, and Vindhya Telelinks. Universal Cables is a diversified company and figures amongst one of the largest manufacturers in India in the field of power cable. Vindhya Telelinks is one of the largest manufacturers of Jelly Filled Telephone Cables (JFTC) in the private sector in India. Mrs Birla is also the chairman of the Vindhya Telelinks. The other promoter, Ericsson Cables, is a multinational company based in Sweden and is one of the leading manufacturers of power and telecom cables.

The company came out with a public issue of 87,50,000 equity shares of

Rs 10 each for cash at par aggregating Rs 8.75 crore in the year 1993 to finance the project to manufacture 4,000 cable kilometre (ckm) Optical Fibre Cable (OFC). The project was estimated to cost Rs 47.50 crore and was proposed to be financed through equity participation of

Rs 7.50 crore from Ericsson Cables AB and Rs 8.75 crore from the promoters, apart from the public issue. The balance Rs 22.50 crore was proposed to be raised through loans. The company gradually increased the capacity of its OFC plant from 4,000 ckm to 8,000 ckm by 1995. The company also set-up a 6,25,000 ckm JFTC in 1993-94, the capacity of which has been consequently increased to 17,14,000 ckm by the end of March 1999.

Birla Ericsson Optical commenced its operations in 1994 and reported a turnover of Rs 71.08 crore and a net profit of Rs 4.90 crore in the year ended March 1995. The performance thereafter was modest due to the poor performance of the telecom industry. The company’s turnover snailed to Rs 95.76 crore by March 1998 whereas the profit slumped to Rs 1.02 crore. The company, however, recovered in March 1999 with a 32 percent jump in sales to Rs 126.06 crore and 961 percent jump in net profit to

Rs 10.83 crore. 

Operations

JFTC Aides Growth 



Birla Ericsson is engaged in manufacturing OFC and JFTC. While the company commenced operations by manufacturing OFC, it currently achieves major revenues from its JFTC division. In the year ended March 1999, Birla Ericsson achieved a turnover of
Rs 96.87 crore from the JFTC division, which was up by 24 percent over the previous year. Revenues from this division formed 81 percent of the total revenues of Rs 126.06 in March 1999 compared to 66 percent of the total revenues in the previous year. The company sold 12.86 lakh cable kilometre (lckm) of JFTC compared to 10.58 lckm in the previous year. The capacity utilization too improved from 63 percent to 74 percent in March 1999.

The performance of the OFC division was excellent in the year ended March 1999. The company sold 3,299 ckm of OFC compared to 1,237 ckm in the corresponding previous year. The turnover jumped 167 percent to Rs 18.54 crore whereas the capacity utilization stood at 41 percent as against 13 percent in the previous year. OFC contributed 16 percent of the total turnover in March 1999 compared to 8 percent in the previous year. The company’s total turnover for the year ended March 1999 included

interest on deferred debts amounting 



to Rs 7.19 crore. The interest income relates to the sales made on deferred
basis. The sales to the DoT are generally made on deferred basis whereby the

DoT remits the outstanding over a 



period of time and pays interest on the outstanding. Future

Telecom Boom Imminent



The DoT has projected a huge demand for telephone lines in the coming years. The demand for telephone lines estimated to jump from approximately 210 lakh lines currently to 310 lakh by 2001 and 640 lakh by 2006. While the DoT has placed orders for JFTC in the recent past, the opening of the telecom sector to private operators is also expected to give a push to the demand for JFTC. On the other hand, the demand for OFC too is expected to jump as a number of operators are laying stress on building optical fibre network to provide efficient services. The requirement of OFCs is also necessary to sustain the stupendous growth that the IT sector has witnessed in the past two years. According to estimates, the size of OFC tender in 1996 was around 16,000 ckms, which doubled to 32,000 ckms in 1999. Birla Ericsson should thus perform excellently well in the coming year considering its presence in both JFTC and OFC. Moreover, the company is also in the process of expanding the capacity of both the JFTC and OFC division to meet the future demand.

Financials Performance

Indicates Turnaround



The company reported a turnover of Rs 126.06 crore for the year ended March 1999 compared to Rs 95.76 crore in the corresponding previous year. Its net profit, however, jumped phenomenally by 961 percent to Rs 10.83 crore. The major reason for the improvement in the net profit was control over the costs and the decline in the interest outgo. The company’s Operating Profit Margin (OPM) improved from 19 percent in March 1998 to 21 percent in March 1999. For the half year ended September 1999-00 the company recorded a turnover of Rs 64.23 crore posting a growth of 120 percent over the corresponding period previous year. Net profit during the same period stood at Rs 5.07 crore as against Rs 2.50 crore in the same period last year. The company is expected to close March 2000 with a turnover of Rs 153 crore and a net profit of Rs 14.71
crore.

Investment Potential

Long-Term Bet

Birla Ericsson is currently traded at Rs 67 discounting its projected March 2000 Earn Per Share (EPS) by 14 times and March 2001 EPS by just 10 times. The shares of Birla Ericsson were traded at Rs 15 last year and touched a high of Rs 97 in October 1999. The fall to the current level is a result of the poor sentiments of telecom stocks. With the improved performance of the JFTC and the expected jump in the OFC, the performance of the company is slated to improve in the coming years. Moreover, considering the thrust of the government on privatization of the telecom sector, telestock believes that the overall sentiments of the telecom sector will further improve. While the company’s share price has had a roller-coaster ride in the past, we believe that the long-term prospects of the company remain bright.

Buy