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Other income boosts Himachal net

NetScribes/Ganesh Ramamoorthy

Despite a 382 per cent jump in net profit and a 127 per cent rise in sales, analysts are not too impressed with the December quarter results of telecom service provider Himachal Futuristic Communications Ltd (HFCL).

Although HFCL posted higher-than-expected results for the quarter, analysts say the company could find it difficult to sustain this growth with global giants like Lucent, Alcatel getting more aggressive in the telecom sector.

HFCL, which operates in the telecom, software, broadband and Internet segments, reported a net profit of Rs 1.30 billion on net sales of Rs 3.95 billion for the quarter against a net profit of Rs 270 million and net sales of Rs 1.74 billion a year back.

Analysts attribute the growth in net profit this quarter mainly to a surge in non-operating income to Rs 691 million from Rs 36.73 million a year back, following the sale of its entire 10 per cent stake in Fascel Ltd, a cellular operator in Gujarat, which resulted in a long-term capital gain of Rs 349.9 million.

Without considering the extraordinary income, net profits have jumped 252.7 per cent over the same quarter last year. Other income, which accounts for as much as 45 per cent of profit before tax, has also risen due to higher interest and other earnings on investment of surplus funds.

HFCL's revenues have been rising ever since it transformed itself from an equipment manufacturer into a solutions provider. "The results are good. The margins have improved, which shows higher execution of orders. But the growth in profit is mainly due to high non-operating income," said an analyst at Pranav Securities.

During the quarter, HFCL's operating profit margins grew to 24.63 per cent from 21.13 per cent in the year-ago period, while net profit margins rose to 28.11 per cent from 15.27 per cent. Without considering the Rs 349.9 million extraordinary income, operating profit margins increased by nearly 10 per cent.

However, given the slower growth this quarter compared to the quarter ended September 30, 2000, analysts wonder if HFCL will be able to maintain its margins in the next quarter. Total income increased 16 per cent over the preceding quarter, while net profit increased 38 per cent on the back of the extraordinary income, lower interest cost (down 23.5 per cent), and lower depreciation charges (down 32.3 per cent).

As HFCL mainly deals with the Department of Telecommunications, analysts say the quality of cash flow is a big issue, given its business model and turnover composition. As on March 31, 2000, HFCL had Rs 2.71 billion as outstanding debt, measuring to 175 days' sales. The company is sitting on cash mobilised by equity issues and divestments, as can be seen from the Rs 990 million it earned in the 9-month period ended December 31, 2000. Analysts also warn against getting carried away by good-looking numbers for this fiscal or even for the near term in view of pending orders worth around Rs 25 billion.

Analysts say the healthy order book level of Rs 18-billion should help minimise these concerns to an extent. HFCL has a host of state-run and private telecom companies as its clients and is expected to gain significantly from the ongoing expansion of telecom infrastructure in the country.

On Monday, the HFCL scrip remained subdued on the bourses as operators resorted to profit-booking following the results. The scrip fell 2.63 per cent from its previous close to end the day at Rs 1,235.60 on the Bombay Stock Exchange. On Tuesday, the scrip was up 1.37 per cent to Rs 1252.50.

At its current market price, the scrip is trading at a forward earnings multiple of 29 times its annualised EPS of Rs 43.49 for FY2001.

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