Birla Ericsson: Hold/Buy on declines

Recommendation: Hold/Buy on declines

S. Vaidya Nathan

EXISTING shareholders could stay invested in the Birla Ericsson stock as its prospects could improve with the emergence of bandwidth creation in telecommunications infrastructure. The company is an early entrant and a major player in the optical fibre cables industry.

The possibility of an improvement in the optical fibre cables industry and the stability provided by the jelly-filled telecom cables (JFTC) business may augur well for the company's fortunes. Though any spectacular jump in earnings may not materialise this fiscal, from a 2-3 year perspective, the company's performance may hold scope for steady capital appreciation.

Another factor that could play a role in the price formation process is the possibility of a consolidation of the telecom cables business in the M. P. Birla group. The other group company, Vindhya Telelinks, which has had a presence in JFTC cables, is now entering into the optical fibre cables segment.

With overlapping business profiles, the possibility of a consolidation cannot be ruled out. A factor that could come in the way is Ericsson's ownership stake in Birla Ericsson, but this may not be an insurmountable hurdle.

While this is speculation, it is likely that volume growth in optical fibre cables may see good growth rates. Apart from the government-owned entities, a number of companies have announced plans to build an optical fibre cables network.

This could improve business volumes in this segment. But profitability may continue to be under strain as there are several players in the industry, and pressure on price and the import of inputs may also cut into profitability in the short-term due to the rupee's depreciation. The rise in prices of optical fibres in the global market and imposition of an anti-dumping duty on imports from South Korea could also have a bearing on the performance in the near run.

As far as jelly-filled telecom cables are concerned, the company may continue to receive sizeable orders from the Department of Telecommunication Services. The company entered this segment in the mid-1990s as the expectations of a spurt in volumes for optical fibre cables then did not materialise.

The situation now is unlikely to be as bad as it was then. Though the telecommunication policy is still in a tangle, the demand for bandwidth and the emergence of big names on this horizon may mean that prospects for good demand growth is more realistic. In what is an emerging opportunity, capacity may emerge as a constraint for Birla Ericsson. This is were the prospect of consolidation may assume some significance.

The company however appears well placed to capitalise on improvements in demand. It may also be able to push through capacity expansion programmes, given the sharp reduction in the gearing levels in the past year or so.

The company appears to have benefited from payments made by the telecom authorities for purchases made on the deferred payment basis. The company's debtor levels have fallen from 261 days in the year ended March 1998 to 113 days in March 2000. This appears to have enabled the company to cut its long-term borrowings. This could have a beneficial effect on profitability.

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For 1999-2000, sales was at Rs. 134.20 crores, operating profit margin at 16.90 per cent, and post-tax earnings at Rs. 10.22 crores. For the first quarter of 2000-01, the company reported sales of Rs. 15.75 crores and post-tax earnings of Rs. 1.04 crores. The share declined by more than 50 per cent in 2000. It may be better to stay invested at current prices and evaluate exposures six months hence, based on the emerging demand levels for optical fibre cables.