Comms Stocks Getting Hot

The Indian telecom industry had

borne the brunt of government lethargy and inaction for many years. With the swearing in

of the BJP-led coalition in March 1998, the industry had hoped for some respite. But soon

things fell apart with the collapse of the government and the industry will now have to

wait for the next government to complete the unfinished agenda.

Despite the setting up of TRAI in

1997 and the Group on Telecom (GoT) in 1998, things continued to go the wrong way. The

sector continued to be plagued by unnerving announcements and decisions by the government.

The opening of the telecom sector

to private operators was expected to benefit the telecom equipment companies. However, the

slow pace of progress in private projects negatively affected the fortunes of the telecom

equipment companies.

Cellular companies were unable to

pay the licence fee and only 9 companies managed to pay the 20 percent of their licence

fee by 15 February 1999. The extension of the deadline too width="400" height="212" alt="https://img-cdn.thepublive.com/filters:format(webp)/vnd/media/post_attachments/2a9d38da022ce07436cb6d2a1676392ab1f58523abfcf7a8e4d3eb8390e8156b.gif (15046 bytes)" align="right" hspace="4"

vspace="4"> failed to invoke response from the companies. In fact, some of them even filed

a case against DoT seeking stay on the licence fee alleging delays in government

procedures resulting in huge losses for the companies. However, the high court ruled in

favour of DoT.

TRAI recommended sweeping changes

in the tariff structure for telephone calls. While the STD rates were to be reduced by 52

percent, the ISD rates were to be cut by 57 percent. Local calls were proposed to go up by

as much as 62 percent due to the removal of multi-slab system. Similarly, the monthly

rates for cellular phones was proposed to rise from Rs 156 to Rs 600, whereas charges for

per minute call were proposed to come down from Rs 16 to Rs 6. The main purpose of these

changes was to remove cross subsidization and bring the tariffs in line with international

standards. But the government froze the proposals due to pressure from various quarters.

TRAI, however, went ahead with the new tariffs in the current year.

Sigh of Relief…

The telecom cable industry, on

the other hand, finally received huge orders from DoT during the end of 1998. DoT, the

largest consumer of Jelly Filled Telecom Cables (JFTC), placed orders for about 481 lakh

cable kilometers (lckm). The cable industry, which was working at a capacity of about 50

percent in the past year, was finally relieved. The cable industry was expecting orders

from private operators as well. However the delay in commissioning of projects affected

their plans.

Stock Market

Despite the uncertainties of the

telecom sector, huge expectations drove the market price of all the telecom companies.

Baring MTNL, VSNL, and Sterlite Industries, all the other companies posted substantial

gain in the year under review. The share price of most of the companies came down in the

first nine months of the year and recovered in the last quarter of the current year. At

the end of 1998-99, most of the companies were trading at close to their 52-week high.

Himachal Futuristic Communications Ltd (HFCL) was the major gainer with approximately 462

percent growth followed by Pentafour Communication and Birla Ericsson. The total market

capitalization of the telecom companies, however, fell by 20 percent due to 35 percent

fall in the share price of MTNL and 9 percent fall in the share price of VSNL. These

companies form about 80 percent of the total market capitalization of telecom companies.

Videsh Sanchar Nigam Ltd

Videsh Sanchar Nigam Ltd (VSNL)

was formed in 1986 as a wholly owned PSU to take over the activities of basic

international services from Overseas Communication Services. VSNL has a global network of

satellites, under seas and terrestrial links. VSNL has eight international gateways and

plans to set up two more in the current year. It provides the switching and transmission

infrastructure to connect the domestic and international traffic. VSNL has a monopoly

until the year 2004 and will face competition from private operators thereon. The

company’s strength is its huge infrastructure, which is very difficult to replicate

in a short time. As a strategy to combat the threat of competition, VSNL is aiming to

become a force in the wholesale telecom market with an ambitious $1.4 billion (Rs 5

billion) capital expenditure programme in the five year period from 1998-2002. The company

plans to make a substantial investment in transmission, switching and value-added

services. While VSNL’s main business remains telephony comprising almost 95 percent

of its total revenues, its other services such as leased channels, Internet, and

broadcasting related services, are growing much faster than its telephony services.

The recent changes in the tariffs

are expected to benefit the company. The VSNL plans to go for GDR issues are still on back

burner due to its inconsistent performance on the stock market. The share price of VSNL

rose from Rs 700 to Rs 900 in June 1998 and came down to Rs 660 at the end of the year.

VSNL closed the year March 1999

with revenues of Rs 6,826.80 crore compared to Rs 6,125.11 crore in the previous year. The

net profit jumped by 39 percent to close at Rs 1,341.30 crore. VSNL’s operating

margins moved from 19 percent to 24 percent in the same period. VSNL is expected to close

the current year with a turnover of about Rs 8500 crore and a net profit of Rs 1500 crore.

Mahanagar Telephone Nigam Ltd

Mahanagar Telephone Nigam Ltd

(MTNL) was formed in 1986 to provide basic telephony services in Delhi and Mumbai. The

formation of MTNL was the first step in the opening up of the telecom industry to private

operators in the 1980s. Telephone lines in Delhi and Mumbai today constitute for almost 20

percent of India’s telephone subscriber base and nearly 30 percent of the total

telecom revenues. MTNL has rapidly increased its DELs, especially in the past two-three

years, to meet the growing demand. Consequently, it is able to provide telephone

connections on demand compared to a waiting period of about two-three years a few years

ago. The company currently has more than 38 lakh DELs in both the cities with an asset

size of Rs 7,800 crore. MTNL faces competition from the private operators in Mumbai, where

Huges Ispat has already commenced operations, and Delhi. Apart from the telephone

services, the company has plans to provide value-added services to its customers. The

company has already started providing Internet services. It also plans to enter the

cellular services in the current year. MTNL was the second major loser among telecom

companies with a fall of 35 percent in 12 months. Its share price came down from Rs 269 to

Rs 176 in the year under review.

Being a monopoly player in the

most lucrative sectors, MTNL has been able to grow at a considerable pace. The

company’s turnover for the period ended March 1999 jumped from Rs 4,656 crore to Rs

5,247 crore whereas the net profit jumped 15 percent to Rs 1,317.28 crore. The operating

margins came down from 49 percent to 47.5 percent, which remains high. However, the entry

of private operators will lead to higher marketing and operation costs for MTNL. However,

the company will have an edge over its competitors, considering its huge depreciated

assets and foray into value-added services.

Global Telesystems

Global Telesystems was formed in

1987 to provide distribution, marketing, servicing, and manufacturing of telecom products.

The company was initially engaged in marketing and distribution of telephone and EPABX and

later went into telecom equipment such as fax machines and wireless mobile equipment. Over

the years, Global has become an integrated telecom company providing services in telecom

infrastructure, networking and software/systems integration. With falling margins in

marketing and distribution of products, Global has fast changed its business model by

moving into higher margin value-added services while retaining its pre-eminent position in

the telecom products market. Today, the company has 1000 retailers, 5000 distributors and

26 offices in the country. With the opening up of telephony services to private operators,

Global’s telecom infrastructure division is geared up to meet the huge demand.

Moreover, its foray in telecom software will also help in its rapid growth. The software

division offers solutions in the area of extended ERP, the Internet and telecom related

software. Global Telesystems was one of the major gainers leaping 225 percent during the

year. The company’s share price was at Rs 84 at the start of the year but moved up to

Rs 273 due to its foray into Internet and telecom software services.

Global Telesystems reported

excellent performance in the year ended March 1999. The company’s revenue increased

from Rs 475.12 crore to Rs 535.01 crore whereas the net profit jumped 57.15 percent to

reach Rs 63.22 crore. This was mainly due to the improvement in the overall performance,

especially in the software division. The company’s operating margins improved from

17.55 percent in 1997-98 to 23.06 percent in 1998-99. Global is expected to post higher

growth in the current year due to outlay increase by the private operators and the growth

in its software division. The company should report a turnover of more than Rs 750 crore

and a net profit of Rs 90 crore in the year ending March 2000.

Finolex Cables

Finolex Cables, formed in 1967,

is one of the oldest cables manufacturing company. The company is engaged in the

manufacture of JFTC and Light Duty Electrical Cables (LDEC). Finolex has a capacity to

manufacture 65 lckm of Jelly Filled Telecom Cable (JFTC) and 6 lckm of LDEC. While JFTC is

used by the telecom industry, LDEC caters to general-purpose wiring used for a variety of

applications. Unlike Sterlite Industries, which manufactures optical fibre cables, Finolex

has a JV with Lucent Technologies to manufacture Optical Fibre Cable. The fate of the

cable industry is largely dependent on DoT, which places orders on tender basis. The

private operators have recently started operations and are expected to place new orders as

their plans are put in place. The capacity utilization of cable industries has been

generally low due to DoT’s poor funds position in 1998-99. The capacity utilization

of Finolex’s JFTC plant, which was just 50 percent in 1997-98, jumped to 64 percent

in 1998-99 due to orders placed last year. The company is expected to operate at a higher

capacity utilization in the current year on expected fresh orders from DoT. Undeterred by

the low capacity utilization, Finolex is setting up a new plant at Goa to manufacture 35

lckm of JFTC and LDEC. The company is a major player in the organized LDEC market. The

orders from DoT and the expectations of better results led to a 75 percent spurt in the

share price of Finolex during the year. The company’s share price moved up from Rs

197 to Rs 345 during the year.

Finolex reported a turnover of Rs

446.64 crore, which was up by marginal 2 percent over the corresponding previous year.

While the operating margins snailed up to 19.95 percent, the net profit jumped by 24

percent to Rs 60.13 crore due to the fall in the interest cost and depreciation provision.

With the expected fresh order from the DoT, the company is expected to cross the Rs 500

crore turnover and report a bottomline of Rs 90 crore. The company recently issued 1:1

bonus shares.

Sterlite Industries

Commencing operations with the

manufacture of power and control cables in 1979, the company moved in to JFTC in 1988. The

company backward integrated by setting up a Rs 100 crore copper smelting plant to

manufacture continuous copper rods. The copper smelting plant has a capacity of 1,00,000

tpa and the company plans to increase it to 1,50,000 tpa in the current year. The copper

plant which was affected by gas leak and bomb blast during 1998, is expected to perform

better in the current year. The company also manufactures optic fibre and aluminum coils

and conductors. Sterlite derived its major revenues from copper rods, which stood at 62

percent of the total turnover followed by the JFTC division contributing 26 percent.

However, it remains the top manufacturer of JFTC with a capacity to manufacture 70 lckm.

The company has a cost edge over its competitors due to its backward integration projects

and the huge capacity also provides it economy of scales. Sterlite was the major loser of

1998-99. The scrip lost a massive 43 percent from Rs 313 to Rs 178. The share price had

moved up in the previous year (1997-98) on attempt to takeover Indal, which finally was

unsuccessful.

Sterlite closes the books in June

and reported a 31 percent jump in the total revenues to Rs 1402.11 crore in the year ended

June 1998. The net profit rose from Rs 126.92 crore to Rs 156.67 crore. In the first nine

months of the current year, the company has recorded sales of Rs 1,425.88 crore and net

profit of Rs 108.51 crore. With improved capacity utilization of the copper smelter plant

and the JFTC plant, the company is poised to close the current year at about Rs 2,000

crore with a bottomline of Rs 145 crore.