Patience please

Manish Joshi & Sachchidanand Shukla

Hughes Tele.com’s performance during the quarter to September 2001 may not have cheered the bourses, driven as these are by the bottomline. Hughes’s Rs 82.7 crore net loss (Rs 29.6 crore), should be seen in the light of several factors. In fact, the loss should be compared at the before tax level, as the company has provided for a huge amount of Rs 46 crore (Rs Nil) as deferred tax under AS - 22 for the first time. It should also be noted that Hughes has posted a turnaround at the operating level with a profit of Rs 1.8 crore (loss of Rs 2.7 crore). OPM stood at 2.9 per cent.

Basic telecom is a highly capital intensive industry with long gestation period. Obviously, Hughes has suffered from high capital cost because of its late entry, after MTNL and DoT. As a result, net profit is unlikely to come by at least in the near future. The basic telecom is more a play on volumes rather than price given the nature of product and the market.

However, Hughes has an advantage over MTNL and DoT in the long run as it is laying optic fibre cable (OFC) everywhere, as against the copper cable by others. Copper cables become dysfunctional frequently in monsoon owing to water-logging. OFC does not suffer from this problem and it also offers higher bandwidth for Internet applications such as video on demand.

The most noteworthy aspect of Hughes’ performance during the second quarter is the 88 per cent surge in revenue from operations to Rs 61.5 crore. This is nothing but reflection of the fact that the company has been rapidly increasing its subscriber base. During the quarter, Hughes has added 15,000 customer lines taking its total subscriber base to one lakh customers.

Despite robust topline, the bottomline continues to reel under the pressure of high interest and depreciation outgo. The rapid deployment of broadband optic fiber network (OFN) might have been financed by debt as interest cost rose by nearly 66 per cent to Rs 19.4 crore. Depreciation has also increased by 50 per cent to Rs 24.7 crore as OFN is being gradually rolled out in new areas.

Outlook for the current fiscal 2001-02 should improve considerably if Hughes succeeds in adding another one lakh customers to make two lakh lines strong network. However, investors should not expect phenomenal gains at the bottomline level at least in the immediate future.

Shree Rama Multi-tech
Shree Rama Muti-tech (SRM) is one of the leading players in the “multitech” packaging business and boasts of an impressive FMCG clientele such as HLL, Dabur and Nirma etc. It is the second largest player in the laminated tubes business in India after Essel packaging.

During early 2000, SRM’s IPO issue was oversubscribed by over 46 times and was celebrated as the hottest non-IT stock. However, as SRM is a play on the FMCG sector, it was hit hard by the slowdown in the economy and in FMCG business. Margins too were under pressure as key input costs went up. FMCG companies had pegged their hopes on a pick up in rural demand with a good monsoon, however, these have not translated into reality. These factors ought to reflect in Q4 showing of the company.

Further, as the key to the business lies in keeping costs low by enhancing scale of operations, both Essel and SRM have been building capacities. SRM has increased capacities of multi-layer tubes and speciality packaging and plastic products.

Recently it announced plans to build capacities in China. Secondly, demand for packaging material is fad driven. Demand for hygenic superior finish and easy to carry packaging material with longer shelf life, rises at a much faster rate thus, investments into R&D and innovations must rise at an equal pace.

During 2000, tubes accounted for roughly 35 per cent (32 per cent) of the total revenues, while the share of stickers and labels increased to 34.6 per cent (29 per cent).

Small paper cups segment where SRM is a market leader, too, witnessed sizeable growth made posible by soft drink companies as well as small vendors in the unorganised sector. However, despite the long term potential and hold in the market, unless FMCG business picks up the company may continue to struggle.