Fundamental AnalysisIndia

HFCL Research Report

Overall Rating – Race Car 🏎️

What is the national economic outlook?

  • How well are we recovering from the pandemic? [High 🟢]
    • Overall Indian economy is posting a strong recovery post the 2nd COVID wave. Though there is recent concern on the rising inflations, the majority of the pundits still believe it to be transitory.
  • Change in purchasing power [High 🟢]
    • Based on FY20 data, the overall purchasing power of the Indian customer is on the rise and poses a strong economy in the immediate future.

What is the industry outlook?

  • What is the current industry category for the company?
    • Telecom Manufacturing
  • What are the growth prospects? [High 🟢] 
    • With Jio’s revolutionary entry and the government push to build a digital India, the industry for optical fibres and future telecom equipment is prime.
    • Additionally, the race to 5G has further broadened the outlook and opportunity for the sector.
  • What is the competitor landscape? [High 🔴]
    • HFCL is one of the market leaders in optical fibre and has been supporting most of Jios’s expansion in the northern region.
    • But recent increases in efforts from other relatively small and similar enterprises, such as ITI and GTL Infra, makes the overall industry fairly concentrated with relatively less pricing power.

What is the company profile?

  • Business Overview
    • HFCL is an infrastructure developer, system integrator, and manufacturer of telecom equipment, optical fibre cables, Passive Interconnect Solutions and high-end Transmission and Access Equipment.
    • Its technologically advanced offerings span the entire value chain, from manufacturing hi-tech communication network products to providing specialized services, which get deployed across Telecom, Defence, Railways, Utilities and Security & Surveillance Networks, both in the Private and Government Sector.
HFCL Revenue
  • Financials
    • How are company financials changing?
      • HFCL posted strong recent financials pushing a jump of 72% in revenue and a +4% increase in PAT margin.
      • The majority of this change is attributed to the growth of in-house produced equipment sales which further adds to the profitability.
  • What are the stand-alone future financial prospects? [ High 🟢]
    • HFCL poses strong future prospects across both their telecom and defence segments.
    • Fibre-to-the-Home or FTTH cable line is where HFCL is betting the most. Given the in-house manufacture and stronger margins. The surging demand from both partners (Airtel & Jio) is expected to drive the accelerated growth.
  • Pipeline deals and possible future risk and gains [High 🟢]
    • HFCL and VVDN Technologies, a product engineering & manufacturing company along with i2e1, a core solutions provider, announced setting up a model PM-WANI village in Baslambi, Haryana. PM-WANI villages have been the recent flush into their growth numbers and future tie-ups show the potential to capitalize on this new stream.
  • Beyond the numbers – ProCapitas Think Tank 🧠
    • Let’s look beyond these numbers and try to answer – “What Matters”
      • What is HFCL betting on?
        • HFCL is hoping to continue its trajectory through expansion in both the defence and telecom sectors. The increasing push for at-home wifi and rapid commercialisation opportunity for 5G pose a strong telecom opportunity. Additionally, India’s strong future investment in defence adds the opportunity for high vision technology supported by HFCL.
        • Government contracts supporting the PM-Wani initiative are expected to further fuel this growth.
      • What has changed?
        • High Promoters Pledge (45%) – Promoters take loans against their own company share – has always been the concern for HFCL but based on a recent quarterly report 33.5% of this 45% has been released.
        • This is a strong indicator of improving companies finances with belief that these gains aren’t transitory and can be used to pay off debt.
      • What are the major risks of this highly lucrative looking company?
        • The company’s Contingent Liabilities have increased over the year from 806 Crore to 1057 Crore. The majority of this change is attributed to the bank guarantees on behalf of the group. Also, Contingent Liabilities towards Income Tax & Sales Tax jumped 234% in 1 Year. Though growing top line could be the factor of this increase, the future track of this change would be critical.
        • On top of all this HFCL has been added to ASM(Additional Surveillance Measure) list by SEBI. The majority of this is attributed to recent high volatility in the share prices and stronger client concentration.
Procapitas HFCL

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