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CSFB gives HFCL 'sell' recommendation

NetScribes/Salil Panchal & Rajiv Banerjee

One of the most volatile trading counters on the Indian bourses, Himachal Futuristic Communications Ltd, has been given a 'sell' recommendation by leading foreign institutional broking firm Credit Suisse First Boston. Domestic brokerage firms like Motilal Oswal Securities and KR Choksey, too, have done likewise.

A negative cash flow and overdependency on a single client are the factors which led a section of the market to perceive the scrip as not too good an investment opportunity at this stage.

The scrip has slid sharply at the markets over the past two trading days and this has impacted other telecom counters too.

News of the sell recommendation led to a dip of Rs 48.60 in the HFCL scrip on Tuesday, over its previous close of Rs 1,370. When the market closed on Tuesday, HFCL was trading at Rs 1,321. A total of 5.1 million shares have been traded at the counter.

The scrip has see-sawed at the markets over the past four months. It was ruling at a high of the Rs 1,700 level in mid-September, falling to the Rs 1,000 level in October, and climbing back to the current Rs 1,300 level. The scrip, which closed at Rs 1,542.15 on December 14, dipped 15 per cent to close on Rs 1,316.85 the next day.

Credit Suisse First Boston, in its HFCL report dated December 15, stated that though the company was high on valuations, it was low on competitive strengths. This will prove to be a major stumbling block for the company as competition intensifies.

Analysts said that the expansion of the telecom sector, its deregulation and various multimedia opportunities will benefit HFCL only if it improves its competitive strengths. HFCL mainly needs to improve its client base and reduce dependency on the Department of Telecom (DoT), said analysts.

"For a company dependent on just one client, the valuations of HFCL are too stretched," said an analyst with Motilal Oswal Securities. He added the scrip was poised for a further dip of 10-15 per cent from current levels, as negative market sentiments take their toll.

"HFCL's telecom equipment business is largely dependent on a single customer and a single product segment. Penetrating the private market requires a broader and more credible product profile. Foreign competition is intensifying," stated the CSFB report.

The report further states that while the company has witnessed strong earnings growth in the past two years, net cash flow from operations have been negative due to a more than proportionate increase in working capital requirements in both the financial years of 1999 and 2000. "We expect that the trend in negative operating cash flows will continue in the third quarters of financial years 2001 and 2002. CSFB has not taken into account increase in generic loans and advances at this level".

"The entire capex and the increase in loans and advances has been met through the company's financing activities. Hence, it appears that business growth has been achieved alongside an increase in cash flow requirements. The valuations reflect the huge macro-potential in the sector but do not factor in the business challenges and the unattractive cash flow profile. The market has already discounted the growth potential of the company in the light of the challenges ahead for it,'' the report states.

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