Himachal Futuristic Communications Ltd

BSE: 500183 | NSE: HFCL | ISIN: INE548A01028 
Market Cap: [Rs.Cr.] 2,633.73 | Face Value: [Rs.] 1
Industry: Telecommunications - Equipment

Management Discussions
MANAGEMENT DISCUSSIONS AND ANALYSIS

Economic overview

As per IMF's World Economic Outlook, July, 2014, the global Gross Domestic Product(GDP) in the year 2013 grew by 3.2%, marginally lower than 3.5% recorded in 2012. Thelower growth was due to a sluggish economic growth at 2.7% during the first half of theyear. The economic growth during the second half was stronger at 3.7%. With improvingmacroeconomic environment, the global economy is expected to grow much stronger at 3.4%and 4.0% in the year2014 and 2015 respectively (Exhibit 1).

The Indian economic growth during the year continued to remain weak. As per provisionalestimates of CSO, the Indian GDP growth stood at 4.7% in 2013-14. This would be a secondconsecutive year of sub - 5% growth. The inflation during the year largely remained farahead of RBI's comfort zone (Exhibit 2) due to which RBI maintained repo rate at elevatedlevels. Index of Industrial Production (IIP) the measure of industrial output showed nearno growth with Y-o-Y change of -0.1% for the year 2013-14. During the year, there wassignificant volatility in currency. From the start of the year INR against USD depreciatedby 27.5% touching the low of 69.225. However, with the fall in the Current Account Deficitand measures taken by RBI, it recovered by 13% by the end ofthe year.

This high cost of borrowing and a dull investment scenario has been the key factor forthe slow economic growth in India. However with the recovery of global economy and stepstaken by the Indian government to clear the roadblocks in various sectors; Indian economyis expected to have a better growth ahead. IMF has projected that Indian GDP would grow at5.4% in the year 2014, which would further move up to 6.4% in 2015.

Indian telecom industry overview

The Indian telecom industry post liberalization, in 1991, has transformedsignificantly. The teledensity in India in 1991 was 0.8% where the global teledensity was10%. However, over the last two decades, the telecom industry in India has witnessed a seaof change. The wireless subscriber base grew at a staggering CAGR of47.1%, from mere 13.0million in 2002-03 to 904.5 million at the end of 2013-14 (Exhibit 3). With thisphenomenal growth, the telecom sector in India is currently the second largest wirelessnetwork in the world after China. The teledensity has moved up from 4.0% in 2002-03 to75.2% in 2013-14. The teledensity in the urban areas is at 145.8% whereas the rural areashave reached 44.0%. The installation of National Optical Fibre Network (NOFN) by theGovernment of India, will further increase teledensity and broadband subscribers in ruralIndia. Of the total telecom subscriber base, the share of urban subscribers is 59.5%whereas the rural subscriber base stands at 40.5%.

While the wireless subscriber base has been consistently increasing, other than theyear 2012-13 when the telecom operators had significantly reduced the inactive subscribersto save cost as the incremental allotment of radiowaves was no more linked to subscriberaddition. The wireline subscriber base has been continuously falling. The wireline base,which stood at 40.8 million in 2006-07, has come down to 28.6 million in 2013-14. However,the wireline subscribers are expected to grow now onwards with various operatorsinstalling Fibre to the Home (FTTH) Network in many large cities.

The continuous fall in average tariff per outgoing minute from Rs.3.24 per minute in2003 to around 50 paise for the last 2-3 years has been one of the key factors for theboom in subscriber base along with availability of affordable handsets in India. Further,the Department of Telecommunication has estimated that the teledensity in rural India isexpected to further move up to 60% by 2017, leading to continuous growth opportunities forthe telecom industry.

FDI in telecom sector

Currently, the FDI policy in India for the telecom sector is liberal and investorfriendly, which has led to continuous investment in the telecom sector in India. FDI up to100% is allowed in almost all telecom services and manufacturing of telecom equipment. FDIup to 49% is allowed through automatic route and beyond 49% is allowed through ForeignInvestment Promotion Board (FIPB). The FDI equity inflows in telecom sector was USD 478million in 2006-07, which increased to USD 2,558 million in 2008-09, but thereafter hasbeen rather drab (Exhibit 4). After hitting a low of USD 304 million in 2012-13, the FDIin telecom increased to USD 1,307 million in the year 2013-14 and with the advent of 4Gand increased network of 3G and broadband, FDI in telecom sector in India is expected torevive further from here on.

Exhibit 4: Foreign Direct Investment in India (Equity inflow)

(USD million)

Year Total Telecom Sector Share of Telecom in Total (%)
2006-07 15,726 478 3.0%
2007-08 24,579 1,261 5.1%
2008-09 27,309 2,558 9.4%
2009-10 25,888 2,554 9.9%
2010-11 19,427 1,665 8.6%
2011-12 36,504 1,997 5.5%
2012-13 22,423 304 1.4%
2013-14 24,299 1,307 5.4%

Source: DIPP, Ministry of Commerce

Data, the next phase of growth

While the voice subscriber base growth in India is stabilizing, the hunger for data isfast catching pace. The internet user base in India took more than a decade to move from10 million to 100 million but took only three years to double (Exhibit 5) from there to200 million and at the end of 2013 the total internet users in India stood at 213 million,a growth of 42% over 150 million users in 2012. The mobile internet user base of 130million, as of 2013, witnessed a growth of 92% over 2012, is the key factor in fuellingthe growth of internet users in India.

The internet penetration scenario in India is currently similar to the teledensityscenario in 2003-04. With increased availability of affordable internet enabled mobilephones, the growth in internet user base is expected to remain strong.

In the last 3-4 years, the number of users who access the Internet through 3Gconnection has grown significantly. As per media releases, 3G data usage in India hasjumped to 21 petabytes in 2013 from 8 petabytes in 2012, up by 163%. According to Cisco'sVisual Networking Index, by 2017, India's mobile data traffic is expected to reach 900petabytes per month and the growth will be primarily driven by video. As per Deloitte, inthe next two to three years, video will drive 50% to 60% of all the mobile dataconsumption in India. This trend shows the rising demand of high speed internet mobility.The growth of internet users has also led to a substantial growth of other digitalindustries such as e-commerce and digital advertising.

Driven by huge surge in data traffic, the global telecom industry is witnessing atransformational shift. With demand for high speed internet, a number of mobile serviceproviders are introducing 4G services across the globe. Where 3G provides download speedof around 8 mbps, 4G is 5 times faster. Also, there is rising trend of rolling out"Fibre to the Home", providing enormous bandwidth up to 100 mbps.

India is also soon to witness the power of high speed internet with the roll outof4G inIndia. Currently, 4G in India has been launched only in few pockets but soon there wouldbe a pan India rollout. At present, the service providers are in the process of setting upthe backend infrastructure network in India. The macro and small cell base stations have amajor impact of speed of data flow. In India, though a majority of cell sites are alreadyfitted with a microwave based backhaul links, it is important for operators to invest inhigh-quality Optical Fibre Links to ensure that spectrum is used efficiently and thatoperators can obtain the best capacity and data throughput. Hence, the demand of OpticalFibre Cables, telecom equipments as well as infrastructure services are expected to behuge over the coming years. Investment worth Rs.70,000 Crore is envisaged from one singlecompany planning to rollout pan India 4G network in 2015 leading to heightened demand forthe telecom equipment manufacturers as well as infrastructure service providers.

A significant boost to the telecom sector in general and the optical fibremanufacturers in particular is coming from the government with its approval of building ofNational Optical Fibre Network (NOFN). This network would provide high speed connectivityto 250,000 Gram Panchayats of the country. The National Telecom Policy (NTP) has alsotargeted 100% teledensity and 600 million broadband connections by 2020, which includesconnecting 250,000 Gram Panchayats by optical fibre network. This will translate intodemand for an additional 400,000 base stations and 50,000 towers with average tenancy of2.3 at an investment of Rs.50,000 Crore. In effect, the NTP is visualizing doubling thecurrent telecom capacity and increasing its reach to 95+% of India while providingbroadband level of internet capability.

According to a study conducted by World Bank in 2009 using data of 120 developed anddeveloping countries indicates that a 10 percentage point increase in broadbandpenetration leads to a 1.30 percentage point increase in GDP per capita. Hence the deeppenetration of internet in India will open new avenues of growth for the economy as awhole.

Telecom equipment manufacturing industry overview

With the rapid growth in teledensity there has been a vast growth in the networkinfrastructure in India. Currently, India spends around Rs.50,000 Crore every year ontelecom infrastructure and equipment of which close to 90% is imported. The lack of growthof the telecom equipment industry has been due to the lack of support from the Government.While the Indian Government has offered various incentives such as extended tax holidays,full tax exemptions for exports from STPIs, etc. to facilitate the growth of IT servicesindustry in India, there are no such incentives rolled out for telecom manufacturingcompanies in India.

However, the Government has recently increased its focus on the development of domestictelecom equipment manufacturing industry incentivizing the companies to promote telecomequipment manufacturing within the country. To check the imbalance, the Government hastaken following steps:

i) The National Telecom Policy-2012 (NTP-2012) inter-alia, has following objectives onpromoting Telecom Equipment Manufacturing:

• Promote the ecosystem for design, Research and Development, IPR creation,testing, standardization and manufacturing i.e. complete value chain for domesticproduction of telecommunication equipment to meet Indian telecom sector demand to theextent of 60% and 80% with a minimum value addition of 45% and 65% by the year 2017 and2020, respectively.

• Provide preference to domestically manufactured telecommunication products, inprocurement of those telecommunication products, which have security implications for thecountry and in Government procurement for its own use.

ii) Government has laid down the policy for providing preference to domesticallymanufactured electronic products in procurement. Department of Telecommunications hasnotified telecom products to be procured by all the Ministries or Departments (except theMinistry of Defence) of Government and the agencies under their administrative control andfor all Government funded telecom projects.

Outlook

With continuous reforms in the telecom sector in India, we expect the sector wouldgradually move out of the lull investment scenario which would act as a great boost to theIndian economic growth. With the advent of 4G and increasing network for 3G, there wouldbe higher investment for telecom backhaul infrastructure and cell sites leading to arobust demand for telecom equipment as well as infrastructure services over the comingyears.

With robust Government in place and its policies towards enhancing the share ofdomestic equipment in the total equipment sourced by telecom operators, the future of the

Company seems very bright. We have developed various operational and marketingstrategies to strengthen our sustainability and have enabled ourselves to move steadily ona higher growth path. With continuous endeavour backed by a bright business environment,we remain highly confident in making HFCL emerge as an even stronger Company over thecoming years.

Operational review

To meet the growing demand of high fibre count OFC cables, the Company has introducednew manufacturing lines of ribbon cables and has nearly tripled the OFC manufacturingcapacity during the last one year from 21,000 km to 89,000 km for 48 fibres. The Companyhas also upgraded its telecom equipment manufacturing infrastructure at Solan factory andis well placed to undertake manufacturing of 4G backhaul IP microwave radios and opticaltransport and access equipment.

The Company is currently deploying nationwide optical fibre network to support 4G &FTTH broadband traffic. The Company is also implementing turnkey projects for establishinghigh capacity, high resilience, optical transmission network, capable of transportingterabytes of traffic.

Further, the modernization of Indian defence telecom network, by creating pan Indiahigh capacity transport network, has given the Company a business opportunity to createturnkey OFC network over long routes and the Company plans to address related opportunityas system integrator for optical transport and microwave radio network.

During the year, we have successfully bid and won certain contracts to supply ourproducts as well as services and have a robust order book as of March, 2014. Further, wehave already bid for many projects and are optimistic to significantly enhance our orderbook over the coming years.

Financial review Revenue from Operations

The net sales during the year under review stood at Rs.2,019 Crore, significantlyhigher than Rs.605 Crore recorded in 2012-13. The significant boost in net sales was fromboth products as well as services division. The net revenue from the Turnkey Contracts andServices division for the financial year 2013-14 was Rs.1,671 Crore up from Rs.493 Crorein the previous year. The net sales from Telecom Products division for the financial year2013-14 stood at Rs.347 Crore, up from Rs.112 Crore in the previous year.

Operating expenses

The total operating expenses for the financial year 2013-14 stood at Rs.1,818 Crore upfrom Rs.507 Crore in the previous year.

EBITDA

The EBITDA during the year under review stood at Rs.200 Crore as against Rs.99 Crore in2012-13.

Profit after tax

The profit after tax for the year under review came in at Rs.147 Crore, a significantjump from Rs.55 Crore recorded for the year 2012-13. The Net Profit Margin for the yearunderreviewwas 7.31% down from 9.05% in 2012 13. The earnings per share for the financialyear 2013-14 stood at Rs.1.15.

Net worth

With better profitability, the net worth of the Company has significantly increasedduring the year under review to Rs.839 Crore from Rs.711 Crore in the previous year. Thebook value per share for the financial year 2013-14 stood at Rs.6.77 as against Rs.5.74 in2012-13.

Gross debt

The total gross debt at the end of the financial year 2013-14 has been reduced toRs.270 Crore from Rs.274 Crore in the previous year 2012-13.

Gross block

The total gross fixed asset for the financial year 2013-14 stood at Rs.493 Crore, upfrom Rs.438 Crore in the previous year. The increase in gross block includes the capitalexpenditure incurred for expansion of cable manufacturing facility at Goa.

Capital structure

During the financial year 2013-14 the paid up capital of the Company stood at Rs.204.44Crore.

Risk management

With rapidly evolving technology and increasing globalization, risk management becomeseven more critical for enterprises. As a leading telecom services and products Company,HFCL's business risks are similar to most of its peers. Senior Management identifies keymaterial risks, defines the corresponding mitigation measures, monitors various risks asthey become relevant and assesses Company's response on an ongoing basis.

Economic Risk: The economic slowdown and adverse movement of key macroeconomicindicators can impact Company's business operations.

Mitigation: The overall economic slowdown would have some bearing on Company'soperations including deferment of roll out plans by customers. The Company, however, has awide bouquet of products and services offering coupled with a strong balance sheet to facesuch slow down.

Competition Risk: Company has to compete with various organized and un-organizedpeers, particularly when the business is being awarded through Tenders.

Mitigation: The Company is a single window end-to-end solution provider that keepsit ahead of its peers. With its integrated capabilities, proven track record along withlong standing relationships, the Company shall always remain a preferred supplier.

Risk of Delay is Completion of Order: There is a risk that delay in completion oforders may invoke penalties.

Mitigation: The Company has well-defined operational policies driven by wellexperienced pool of executives who have capabilities to complete the orders in time.

Foreign Exchange Risk: The Company imports various raw materials and volatility inexchange rates may impact Company's business adversely.

Mitigation: HFCL protects its business interest with a well-defined currencyhedging initiatives under professional consultants.

Technology Risk: Foreign companies may license their technology to othermanufacturers or may set up their own establishment in India.

Mitigation: The Company gives priority to enhance its technology strengths by wayof in-house R&D and technical tie-ups. It has set high standard of HR Policies toattract the best of technology talent in this direction.

Government Policy Risk: Telecom is a policy driven sector and any adverse policymay have an impact on the

Company.

Mitigation: Government Policies actually wrote the success story for Telecom inlast decade. Further, with a strong new Government in place, the Company believes that,Government policies shall not make any adverse impact.

Internal control system

HFCLhas a proper and adequate system of internal controls to ensure that all assets aresafeguarded and protected against loss from unauthorized use or disposition and thosetransactions are authorized, recorded and reported correctly. HFCL has adequate internalaudit system, covering on a continuous basis, the entire gamut of operations and servicesspanning all locations, business and functions.

Human resource development

HFCL has a team of experienced and competitive professionals. In the ever changingtelecom scenario, the Company recognizes the need for training and retaining the talentpool of the Company. Employees have undergone technical trainings to further enhance theirskills. Performance reviews of employees are conducted on regular basis to motivate andreward the performers. The total on roll employee strength of the Company as on 31stMarch,2014was 2411.

Corporate social responsibility (CSR)

Cognizant of its corporate social responsibilities, HFCL has always worked towards abetter society. HFCL Social Service Society has been in existence for the last 18 yearsand has been doing its best to help the needy people of the society by donating sums forwelfare programmes through various NGOs and other organizations. HFCL Social

Service Society had been engaged in the following welfare programmes:

• Organizing free health care check-up

• Helping mentally retarded and physically handicapped children

• Sponsoring education of needy and meritorious students

• Providing medical facility to needy and poor from time-to-time

• Providing financial help to needy and poor on regular basis

Further, consequent to the provisions of the Companies Act, 2013, the Company hasalready constituted a Corporate Social Responsibility Committee.

   
Futures & Options Quote
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Key Information

Key Executives:

Mahendra Pratap Shukla , Chairman (Non-Executive)

Mahendra Nahata , Managing Director

Arvind Kharabanda , Director (Finance)

Y L Agarwal , Director


Company Head Office / Quarters:

8 Electronics Complex,
Chambaghat,
Solan,
Himachal Pradesh-173213
Phone : Himachal Pradesh-91-1792-230643/44 / Himachal Pradesh-
Fax : Himachal Pradesh-91-1792-231902 / Himachal Pradesh-
E-mail : investor@hfcl.com
Web : http://www.hfcl.com

Registrars:

MCS Ltd
F-65 1st Floor,Okhla Industrial Are,Phase-I,New Delhi-110020

 
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