Himachal Futuristic Communications Ltd.

Transcription

1 Company Note Telecom Cables India Research NVS Wealth Managers Himachal Futuristic Communications Ltd. CMP : Rs. 21 Nifty 10,910 Sensex 36,255 Nifty PE Sensex PE Stock Data Sector Telecom Cables BSECode NSE Code HFCL FV 1.00 MarketCap (INR cr) 2,602 MarketCap(US$ mn) 368 mn) Equity mn) Cap (Rs. in Crs.) 124 Stock Performance (%) 52-weekhigh/low Rs / Shareholding Pattern (%)* As on 30 th September, % Promoters DII 2% 38% 7% FII Non Insti. *The Shareholding is before considering the Proposed Conversion of Share Warrants. 1 st January, 2019 A LONG TERM INVESTMENT STORY Himachal Futuristic Communications Ltd. (HFCL) under the dynamic leadership of Telecom Visionary Shri Mahendra Nahata is an established player with over 3 decades of expertise in Telecom Infrastructure Development, System Integration and manufacturing of High - End Telecom Equipment and Optical Fiber Cables (OFC). HFCL caters to an array of institutional customers including Private and PSU Telecos, Defence, Railways and Civic Utilities. The Indian Telecom industry is poised for a giant leap on the back of high speed broadband and Pan India roll out of 5G services. OFC continues to be the backbone of the increasingly digital world and India s Optic Fiber capacity is poised to display exponential growth in near future. A DENSER FIBER NETWORK IS EXTREMELY CRITICAL AND HOLDS THE KEY FOR CONTENT HEAVY 5G SERVICES BOTH FOR THE FRONTHAUL AND THE BACKHAUL. HFCL has bagged the HIGHEST EVER ORDER BOOK of Rs. 10,200 Crs. plus as of 31 st October, 2018 and the order book exceeds 3 times FY2018 revenue or cumulative revenue of last 3 years. HFCL caters to marquee customers both in public and private sector such as BSNL, Bharat Broadband Network Ltd., Larsen and Toubro Ltd., Alstom, China Rail, Reliance Jio and so on. HFCL s OFC manufacturing facilities are running at full capacities. The Company plans to capitalize on the supply constraints of Optic Fiber across the globe by planning a backward integration project to manufacture 6.4 MfKm of Optic Fiber thereby strengthening its Profit Margins. HFCL is expanding its current consolidated OFC manufacturing capacity by 10 MfKm taking its total OFC manufacturing capacity to 22 MfKm by May 2019 which would propel HFCL into WORLD S TOP 10 OFC MANUFACTURERS. HFCL in order to leverage its telecom product and turnkey capabilities, has ventured into Railways, Smart City and Defence verticals, each offering sizeable opportunities for growth: Indian Railways: One of the largest Rail Networks in the world is sprucing up to meet the demand of an ever growing safer, scalable and speedy surface transport. Infusion of modern technology in Railway Telecom and Signaling offers dual advantages of track optimization and passenger safety. Indian Railways is revamping over 60,000 Kms of its legacy systems and has set aside a budget of around Rs. 85,000 Crs. (USD 12 Billions) over next 6 years to overhaul the existing signaling system of the Rail Network. This translates into an immense business opportunity for HFCL - An established player in the (Eastern and Western) Dedicated Freight Corridor. Defence Industry: The Defence sector has witnessed a powerful influx of progressive reforms such as raising the FDI limits, higher private sector participation, higher budgetary allocation and so on. HFCL defence vertical has carried out deep analysis and has planned to venture into the Sector under 3 major disciplines namely Opto Electronics, Electronic Fuses and Unmanned Aerial Vehicles (UAVs). We believe if HFCL is able to capture even a part of the import dominated sector, it presents a huge opportunity for the Company. Smart City Programme:The government has identified 99 centres for development under this Programme at an outlay of around Rs. 2,04,000 Crs. where connectivity technology shall play a role to build better communities. OFC Connectivity being the most efficient way of networking, shall lead in providing smart solutions and therefore, immense potential lies for telecom infra developers to develop and/or redevelop communication infra and therefore, HFCL stands to gain the most from this opportunity. HFCL is already addressing opportunities in this areas by leveraging the past experience in City Surveillance projects and large telecom projects. HFCL is playing a significant role in rolling out a Pan India 4G and FTTH network infrastructures for Reliance Jio. The Company is the exclusive Telecom Solution Provider for Reliance Jio in J&K, Himachal Pradesh, Haryana, Punjab, UP, Delhi and Rajasthan which ensures continuous and sizeable business opportunities. Shri Mahendra Nahata occupies a position of eminence on Board of Reliance Jio. 1

2 I. HFCL THE TELECOM CONGLOMERATE OFC MANUFACTURING Optic Fiber Cables Duct / Micro Duct Cables Indoor - Outdoor cables Wire / CST armoured cables Aerial cables FTTH cables Premises distribution cables Ribbon cables SYSTEM INTEGRATION Radio & Fiber Networks Access Networks Broadband Networks Site and Infrastructure built-up Green Tower Solution Network Engineering, Installation and Commissioning Project Management Services Railway Communication Network Defence Communication Network Provisioning and Integration of Wi- Fi Hotspots, Interactive Information Kiosks, Surveillance Cameras, Environmental Censors, Smart Lighting Solution and so on. EQUIPMENT MANUFACTURING Transmission Equipment Access Equipment HFCL provides single window solution for telecom projects by offering design, equipment supply, installation, system integration, operation and maintenance services. The Company's activities cover the entire value chain from manufacturing of telecommunication products to implementation of telecommunication networks. HFCL provides solutions expertize in the telecommunication and related infrastructure domain and the Company is now leveraging its inherent strengths in addressing complex needs of emerging sectors, such as Railway Communication and Signaling, Defence and Smart City Projects. HFCL caters to an array of institutional customers including Private and PSU Telecos, Defence, Railways, Civic Utilities and so on. HFCL offers an agile portfolio of products and services backed by manufacturing facilities in Solan (HP) and Salcete (Goa) and Chennai (Subsidiary HTL Ltd.) along with providing Turnkey contracts and project offices on a Pan India basis. India has led the Telecom Revolution from the front with expanding 4G Coverage, evolving consumption patterns along with various Government initiatives such as Bharat Net Program and Smart Cities Mission. OFC CONTINUES TO BE THE BACKBONE OF THE DIGITAL WORLD. Aiming to counter supply vagaries of OFC and also strengthening its position in the value chain, HFCL has forayed into manufacturing of Optic Fiber with an installed capacity of 6.4 MfKm thereby strengthening its backward integration and Profit Margins. HFCL is also expanding its current OFC manufacturing capacity by 10 MfKm which is expected to be commissioned by May 2019 at Hyderabad and under its subsidiary (HTL Ltd.) at Chennai. The Consolidated OFC manufacturing capacity of HFCL post expansion would stand at 22 MfKm which would catapult HFCL into WORLD S TOP 10 OFC MANUFACTURERS. HFCL is continuously engaged in developing innovative Solutions and Products to expand its global footprint in the OFC segment. HFCL developed the new compact design for Micro OFC with lesser diameter suitable for the FTTx Networks and secured a 3 year contract from Nokia to supply OFC under the Digital Poland Project funded by EU. Exhibit 1: HFCL s Cable Production Facility at Goa HFCL provides comprehensive Turnkey Solutions offering bouquet of services which includes feasibility study, planning and engineering and so on for building of wireless and Optical Telecomm Networks. HFCL has strengthened its network design, implementation and maintenance capabilities while implementing many assignments in terms of technology, topography, cost and time complexities. 2

3 In order to clout the OFC and Turnkey capabilities, HFCL has entered into Railways, Smart Cities and Defence each offering a sizeable opportunity for HFCL. HFCL is capitalizing its expertise by deploying Telecom Products and Network Development Capabilities towards uphauling the Railway Systems; venturing into manufacturing for Defence Sector and Supplying; Installing and Commissioning of Networking Equipments under Surveillance and Incident Response under the Smart City Projects. Technology led innovations are core to the Company s business. We believe HFCL is on a right trajectory to deliver excellent growth amidst increase in fiber capacity, growing pan India presence in turnkey projects, innovative telecom solutions across defence, railways, smart cities, power transmission and robust order book. Presence across OFC manufacturing, Turnkey Solutions, Railways Network Development, Defence and Networking of Smart Cities. Margin benefits to flow from setting up a 6.4 MfKm backward integrated Optical Fiber manufacturing facility at Telangana HIGHEST EVER order book of Rs. 10,200 Crs.+ as on October 2018 Exclusive Telecom solution provider for Reliance Jio for Nothern States KEY STRENGTHS Fiber development and revenue visibility During FY2018, HFCL retired Rs. 70 Crs. of debt and successfully exited from the Corporate Debt Restructuring mechanism. HFCL recorded the HIGHEST EVER REVENUE, EBITDA and NETWORTH for FY2018 HFCL post expansion will reach 22 MfKm by May 2019 which would propel the Company into World s Top 10 OFC Manufacturers. II. SHRI MAHENDRA NAHATA A PIONEER IN THE TELECOM SECTOR Shri Mahendra Nahata, the Promoter Director and Managing Director of HFCL is the visionary behind the Company s R&D, technology partnerships, business development and marketing initiatives. Shri Mahendra Nahata having Business Experience of over 35 years has been Member of Board of Governors of Indian Institute of Technology Bombay, Madras and Allahabad and a Member of Council of Scientific & Industrial Research, Government of India. Shri Mahendra Nahata occupies a position of eminence on Board of Reliance Jio Infocomm since HFCL being an EXCLUSIVE TELECOM SOLUTION PROVIDER for Reliance Jio in North India and Shri Mahendra Nahata having occupied a position of eminence on the Board of Reliance Jio - HFCL will continue to enjoy patronage of Reliance Jio as it gradually ascends to be the Numero Uno in the Telecom Sector. 3

4 III. HFCL ISSUE OF WARRANTS AT A PRICE OF RS. 16 PER WARRANT. HFCL in October 2017 had issued and allotted 4,50,00,000 (Four Crore Fifty Lacs only) Warrants convertible into Equity Shares on preferential basis at a price of Rs. 16 per warrant to Promoters and Non Promoters aggregating to Rs. 72 Crs. Ace Proprietary Investor Mr. Shankar Sharma, First Global Group, well known for his investments in Mid and Small Cap Companies has subscribed for 1,00,00,000 (One Crore only) Warrants of HFCL aggregating to Rs. 16 Crs. Issue of Convertible Equity Warrants to Promoters and Non Promoters exudes a lot of confidence towards the future of the Company. IV. HFCL s AT A BRIGHT INFLECTION POINT DEFENCE SECTOR The Indian Defence is in a Network Build Cycle, with the Army, Navy, Air Force and Border Security Force all building Intrusion Proof Networks. These are large - scale and mission - critical infrastructure investments. Union Budget has allocated Rs. 2,95,511 Crs. towards Defence, of which Rs. 99,563 Crs. have been set aside for Capital expenditure. HFCL has planned to venture in the manufacture of equipment under three major disciplines: Opto-electronics, Electronic Fuses and Unmanned Aerial Vehicles (UAVs). HFCL has successfully submitted the RFPs for Electronic Fuses - the first of its kind in India for approximately Rs 7,300 Crs. (USD 1 Billion) with a 10 year supply clause and has successfully cleared the Technical Evaluation for the Mini UAVsTender for the Indian Army. The Defence sector has witnessed a powerful influx of progressive reforms and the sector presents vast opportunities for indigenous manufacturers like HFCL in years to come. INDIAN RAILWAYS Indian Railways is One of the Largest Rail Networks in the World covering more than 1,21,400 route kms. To meet the demands of an ever growing urban and intracity travelling population, there is a need for safe, secure and speedy surface transport - Signaling and Telecom Systems being an integral parts of the same. Indian railway systems date back to 1853 and there is a need to renew legacy infrastructure as well as construction of new inter and intracity passenger and freight rail lines that will deploy next generation Telecom and Signaling Systems. Indian Railways would spend around Rs. 85,000 Crs. (USD 12 Billion) over the next six years to overhaul the signaling system on its entire rail network and promote Make in India. This gives an immense opportunity for HFCL which is an established player in this sector. SMART CITY PROGRAMME The government has identified 99 centres for development under the Smart City Programme. These cities are well equipped with WiFi, Traffic, Surveillance, Data, Disaster Response Management, Command Control Centres and so on which helps in bringing in efficiencies, reduce the cost, better disaster management and thus improving the quality of life. HFCL is poised to gain from the Smart City projects considering its prudent track record at Ludhiana and Jaipur and HFCL s focus on manufacturing CCTV Surveillance, Traffic Enforcement, Data Centres and so on. 4

5 EXTENDED CAPACITY HFCL is focused on driving the Topline and Profitability growth on the back of volume buoyed by growing demand for fiberizing network coming from 4G, 5G, FTTH amd data centres. OFC demand globally has been growing at accelerated pace driven by shift in technology trends in domestic and international market, the demand for data is expected to grow at an exponential rate from 1 Zettabyte to 3 Zettabytes by As a result the demand for fiber, systems and network integration service will only increase. Sensing this opportunity and in view of future market potential, HFCL forayed into manufacturing of 6.4 MfKm Optical Fiber and 7 MfKm of OFC at Hyderabad at a total outlay of Rs. 300 Crs. thereby strengthening its backward integration and financial visibility. INTERNET OF THINGS(IoT) IoT is the network of physical devices, vehicles, home appliances, and other items embedded with electronics, software, sensors, actuators, and connectivity which enables these things to connect, collect and exchange data. The high speed and low latency networks will require DEEP FIBER INFRASTRUCTURE and high densification. Currently India is only 20% fiberized, in order to support 5G and its enabling technologies such as IoT, Artificial Intelligence, Augmented reality and so on, the number needs to go upto 80-85% by 2022 thus providing an exponential opportunity for HFCL in coming years. 5G NETWORK Data is fast becoming the focal point of competition for an industry that derived over 75% of its revenue from voice. The monthly data usage per smartphone in India is expected to increase from 4 GB in 2017 to 18 GB by 2023 and with IP traffic expected to grow 4 fold by 2021, OFC continuous to be the backbone of the digital world. OFC has played a crucial role with every new Generation of Technology ( G Era). From 2G to 3G global OFC consumption increased by around 1.9 times and from 3G to 4G the consumption jumped by 3 times. 5G the next evolution in the G Era with its speed reaching 20x faster than 4Gis set to open up lots of new avenues such as Autonomous vehicles, Augmented / Virtual Reality, Media on Demand and so on, all the while keeping cost and energy use low, requiring both technology and architecture innovation. Vast majority of India s population still resides in rural areas, Broadband penetration at just about 25% is way below the prevalent 65 80% penetration in the developed countries and Government s plan to auction 5G spectrum in the 3,300 Mhz and 3,400 Mhz band would act as a key growth driver in coming years. OFC deployment of 4G is expected to be completed by 2020 and with 5G roll out fast approaching the new dense fiber infrastructurewill be required. Globally, the densification of 4G network and trials for 5G networks are leading to the creation of the newer fiber -network deployments which will benefit OFC manufacturers and turnkey solution providers such as HFCL. BHARAT NET THE BACKBONE OF DIGITAL INDIA Bharat Net THE LARGEST RURAL CONNECTIVITY PROJECT IN THE WORLD and the first pillar of the Digital India Programme is the Flagship programme of Honourable PM Mr. Narendra Modi. The Government s commitment to extend the reach of telecom network to the remote and rural villages it is implementing the flagship Bharat Net project in two phases to link each of the 2,50,000 Gram Panchayats of India through OFC network. HFCL plays a strategic role in implementing Government s vision with the Company winning order from Bharat Broadband Network Ltd. and Telecommunications Consultants India Ltd.to carry on the turnkey projects under the Bharat Net II Programme. Bharat Net with its potential to bring over 1 Billion people online will enable access to quality education, healthcare and government services in the remotest parts of the country. HFCL has demonstrated technology capability in building a Digital India through Bharat Net Project. 5

6 V. HFCL HIGHEST EVER ORDER BOOK HFCL boasts of a robust and highest ever order book of Rs. 10,200 Crs. plus as on 31 st October, 2018 from key public and private sector customers such as BSNL, Larsen and Toubro Ltd., Reliance Jio and so on. The Company is winning significant orders for DWDM, GOFNMS, Wi-Fi Network & Towers, GSM Towers, Rail and Smart cities. Existing Order Book and Future Growth Opportunities would substantially contribute to the Topline and Profitability of HFCL and we believe the Company is strategically poised to meet the growing demand for OFC in domestic as well as in international markets. Date Orders Amount (Rs. in Crs.) Opening Orders as on 30 th June, th August, 2018 Bharat Broadband Network Ltd. 8,700 Scope of Work 583 Survey, Planning, Supply, Installation, end to end Integration, Testing and Commissioning of OFC GPON network and Radio Network, Operation and Maintenance for a period of six years and facilitating services provisioning of the created network in the State of Punjab under Bharat Net Phase II programme. 19 th September, 2018 Bharat Sanchar Nigam Ltd. 611 Survey, Procurement, Supply, Trenching, Laying, Installation, Testing and Maintenance of OFC, Accessories and GPON Equipment in the State of Madhya Pradesh under Bharat Net Phase II programme. 24 th September, 2018 Bharat Sanchar Nigam Ltd. 558 Planning, Designing, Procurement, Installation, Integration, Commissioning, Testing, Training, Documentation and Maintenance of Hybrid Microwave broadband radio links including repeaters, EMS/NMS and antenna towers and accessories on turnkey basis for pan India Defence Network. 5 th October, 2018 Telecommunications Consultants India Ltd. 879 Survey, Procurement, Supply, Trenching, Laying, Installation, Testing and Maintenance of OFC, Accessories and GPON Equipment in the State of Madhya Pradesh under Bharat Net II programme. Miscellaneous Orders 106 Miscellaneous in Nature 22 nd October, 2018 Bharat Sanchar Nigam Ltd. 366 Survey, Procurement, Supply, Trenching, Laying, Installation, Testing and Maintenance of OFC under Bharat Net II programme. Tentative Order Book as on 11,803 October 2018 Execution during July 1,537 October 2018 Orders on Hand 10,266 6

7 Considering the recent orders bagged by the Company, the tentative order book as on October 2018 stands at Rs. 10,266 Crs. This gives a revenue visibility of over 3 years to the Company based on its FY2018 revenue of Rs. 3,278 Crs. We believe, HFCL is well poised to grow at an exponential rate with robust Order Book coupled with significant capital investment in Telecom Infrastructure by the Government and Private Sector Operators. HFCL growth shall continue unabated with multifold rise in Internet Population, Higher Data requirement, the Bharat Net Programme, progressive participation of Private Sector into Defence, being an exclusive Telecom Service provider in Northern States for Reliance Jio, IP traffic expected to grow at a 30% CAGR, 5G roll out fast approaching, massive upgradation of railway connectivity, Smart City initiatives and so on. VI. HFCL FINANCIAL PERFORMANCE AT A GLANCE Particulars (Rs in Crs.) FY2014 FY2015 FY2016 FY2017 FY2018 Total Income 2,133 2,711 2,646 2,224 3,278 EBITDA PAT EPS Equity Share Capital Networth , ,151 BVPS Debt D/E Ratios EBITDA Margin (%) 12.6% 14.4% 11.7% 9.6% 9.4% PAT Margin (%) 22.3% 11.9% 4.8% 5.6% 5.2% ROE (%) 74.9% 33.8% 11.7% 12.8% 14.9% ROCE (%) 54.7% 27.8% 11.0% 12.3% 18.1% 1 Includes Credit Exceptional item to a tune of Rs. 272 Crs. 2 Inculdes Debit Exceptional item to a tune of Rs. 110 Crs. Critical Analysis 3,500 3,000 2,500 2,000 1,500 1, ,500 1, FY2014 FY2015 FY2016 FY2017 FY2018 Networth Debt Exhibit 2: Total Income Exhibit 3: Networth to Debt Comparision 7

8 FY2016 FY2017 FY2018 Exhibit 4: Interest Coverage Ratio (x) Exhibit 5: Cash to Current Ratio Cash Current Ratio HFCL recorded the HIGHEST EVER REVENUE AND EBITDA in FY2018 Topline grew by 47% to Rs. 3,278 Crs. (Rs. 2,224 Crs.), EBITDA was up by 44% to Rs. 309 Crs. (Rs. 214 Crs.) and PAT increased by 39% to Rs. 172 Crs. (Rs. 124 Crs.). HFCL Topline grew at a CAGR of 11.3% from Rs. 2,133 Crs. in FY2014 to Rs. 3,278 Crs. in FY2018. PAT grew at a CAGR of 16.7% from Rs. 126 Crs. to Rs. 172 Crs. between FY2016 to FY2018. HFCLTopline for H1FY2019 grew by whopping 52% to Rs. 2,177 Crs. (Rs. 1,436 Crs. in H1FY2018), EBITDA grew by 42% to Rs. 172 Crs. (Rs. 121 Crs.) and PAT surged by 66% to Rs. 84 Crs. (Rs. 51 Crs.) The level of Debt compared to the Networth has been reducing over past 5 years. HFCL retired close to Rs. 70 Crs. of debt in FY2018 which improved the D/E ratio for the Company to 0.3:1. Interest payments on debt are well covered by the earnings made by HFCL (Interest Coverage 4.5x). HFCL is also able to meet its short term commitments with its holdings of cash and other short term assets (Current Ratio 1.73). VII. HFCL VALUATION AND RECOMMENDATION HFCL WILL COMPLETE ITS EXPANSION AND MODERNIZATION PROGRAM INVOLVING A CAPEX OF OVER RS. 300 CRS. WHICH WILL AUGMENT ITS MANUFACTURING CAPACITY TO 22 MFKM BY MAY USHERING EXCITING TIMES FOR THE COMPANY STAKEHOLDERS. HIGHEST EVER ORDER BOOK WILL FURTHER RAMP UP ITS FINANCIAL PERFORMANCE WHICH WOULD STRENGTHEN HFCL S FINANCIAL POSITION. TRAI s recommendation of Zero Net Import of telecom gears by 2022 would serve well in transforming the Indian Telecom Equipment sector from being importdependent to export oriented. We believe the robust FY2018 would be followed by an even stronger FY2019 for OFC as well as Turnkey Projects backed by impetus provided by the government, around Rs. 7.3 lakh Crs. expected investment in Telecom sector by 2022, global per capita data consumption set to multiply, data cost at an all time low, strong demand, improvement in capacity utilization and an all time high order book. 8

9 Every new generation of technology ( G Era) adds demand for fiber deployment. Today only 20% of sites in India is fibrised, a number that needs to go upto 80-85% by 2022 to support 5G, with high speed internet connectivity and seamless data flow becoming a necessity, demand for OFC networks is set to spiral upwards thus providing a revenue visibility to HFCL. HFCL in FY2018 allotted 4,50,00,000 (Four Crores Fifty Lakhs) Convertible Equity Warrants at Rs.16 per share to Promoters and Non Promoters aggregating to Rs. 72 Crs. This exudes a lot of confidence towards the future prospects of the Company. HFCL, at CMP of Rs. 21 per share, is available at an P/E multiple of 10 times its FY2019E EPS of Rs At current valuation, the stock is currently available at a discount to its peers like Sterlite Technologies Ltd. (FY2019E P/E 22x, M.Cap Rs. 11,485 Crs.) We believe the twin impact of reasonable P/E Multiple expansion vis a vis improved forward earnings would be visible in the foreseeable future. We believe HFCL would benefit from opportunities in Railway Signalling, OFC Networks for Smart Cities and the recent participation in the bids for Defence Equipments. We believe the Company is available at low valuations in comparision to the growth and opportunity offered by the various sectors in which HFCL operates. We believe inbuilt triggers for the Company would translate into a price range of Rs in next 12 to 18 months. WE RECOMMEND THE INVESTORS TO LAP UP THIS OPPORTUNITY FOR EXCELLENT CAPITAL APPRECIATION AND GROWTH AT HFCL THE STORY HAS JUST BEGUN THE BEST IS YET TO COME Disclosures and Disclaimers: This note has been prepared and issued by NVS Wealth Managers Pvt. Ltd. "SEBI registered Investment Advisers". NVS Wealth Managers (NVS) is a subsidiary of NVS Brokerage Pvt. Ltd. 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