Date: 11th July 2000
Global Telesystems Ltd - Make the right connection
Current market price - Rs1181
BSE Sensex - 4898

In the world of telecom, the right connection matters (pun intended). And Global has shown that it has the right connection. In the last one year, the stock price moved up from a low of Rs188 to a high of Rs3,309. But it has more going for it then just operator fancy. Fancied FIIs love this stock. Its status on the popularity charts would be the envy of Hrithik Roshan - the latest superstar in the Bollywood firmament. It has all the ingredients of a fataka stock - business plans laced with jargons that are today's buzzwords, a savvy management that plays up to the expectations of the market (making the right noises) and of course the omnipresent market operators and institutional investors.

What is the Business?
To quote from the company's annual report - "Our vision is to be #1 in Infosolutions. We have envisioned our role as offering end-to-end e-commerce solutions to e-transform today's corporations thus enabling tomorrow". We do not understand much of this - in case you do, let us know. But this is what the markets love and so be it. Global, originally a telecom equipment distributor has made a foray into telecom related software projects, enterprise networking, computer hardware etc. The company plans to increase focus on telecom and software business. The company's software and Internet services will be the major growth driver in the next two to three years. The division's growth will be driven by the rising appetite in the international and domestic markets for software services especially in the Internet, e-commerce and extended ERP areas. The company has the right skill base and alliances, which will help Global in capitalizing on the sector's growth.

The company's business is classified into different business divisions. They are - Engineering Services - The telecom network division undertakes design, installation and commissioning of integrated telecommunications networks and is further segmented into Telecom Network and Telecom Infrastructure group. This division contributed 43.4% to the company's turnover in FY2000 (46.2% in FY99).

Software and Internet Services - This division is mainly focussed in the field of e-commerce solutions, product development and software projects, and software rights. The division has also started system integration and software development in the areas of payment gateways, strategic sourcing and Intranet and Extranet solutions. Its solutions and services focus mainly on software solutions, extended ERP solutions and e-commerce business solutions. This division contributed 51.2% to the turnover in FY2000 - a significant jump from 36% in FY99. Microsoft has recognized it as a Center of Competence on Internet and E-commerce related businesses and its capabilities in applications based on Microsoft platforms. It also has an alliance with Oracle for developing solutions with Oracle products.

Consumer Telecom Business - This group focuses mainly in marketing and servicing of consumer telecom products like fax machines, cordless and key telephone systems. During FY2000, it contributed around 5.4% to the total turnover. Over the years, the contribution has been dipping (FY99 - 17.8%) which is in line with Global's policy to reduce exposure to products. This division was hived off during FY2000. With software support from Verifone, Global has set up an e-commerce/Internet payment gateway, which will permit companies to safely trade over the Internet, allow credit and debit card related transactions securely.

Who is the Management?
Global was incorporated on 1987 with an objective to distribute telecom-related equipment. The main promoters of the company are Manoj Tirodkar (Executive Vice-Chairman) and Fritz d'Silva (Managing Director). They must be credited for turning this company from a seller/distributor of phones and fax machines to a serious player in telecom software and e-commerce solutions. The management has a track record of growth and has successfully reinvented the company's business. The management is excessively self laudatory in the FY2000 annual report - "... People are now talking about e-commerce and application service providers model, whilst we had started our journey long before. It now feels good to be prophetic. … In substance we would like to describe ourselves as eclectic." Not bad, eh?

Whither Cash flows?
The cash flow from operating activities has been positive. Operating cash flows have been sufficient to meet its annual capex requirements. The company has utilized proceeds from divestments, securitization and operating cash flows to become virtually debt free.

Why should I Buy?
Upside is from the business potential - e-commerce, Internet software and engineering services. The software and Internet services group has seen its revenues growing by 66%yoy during FY2000 and accounted for 51.2% of the company's turnover. During FY01, the company's initiatives in the application services provider (ASP) modules like Global-E-Procure and Payment Gateway are expected to start generating revenues. The company has also initiated a drive towards globalization. During FY2000, exports grew to Rs1.23bn from Rs227mn in FY99. The thrust is expected to be maintained. But this is on the operational side. More importantly, the company is in businesses that are the toast of stock markets currently - convergence, e-commerce, dot.coms and Internet software. And the market operators just love it. The stock has retreated from its high of Rs3,051 in March to a low of Rs821 in May. It is now back at Rs1,181. With the merger of Global Electronic Commerce Services (GECS) with Global Tele, it is a cinch that Global shares would be re-rated.

Where can I go Wrong?
Have you seen the rockets during Diwali? They go up - zoom. And they fall equally fast as they burn out. That is the downside. April 2000 showed a glimpse of what can happen to the fataka stocks. If the promised businesses fail to materialize, then there would be a downside. Though the company's annual report is very informative and has a lot of details on corporate governance, its employee compensation numbers are ridiculously low for a company doing such hi-tech stuff. To a fundamental analyst, there would always be doubt whether all this is for real. Then there is the proposed merger with GECS. Just a few months (or is it weeks?) back, Global sold its 13% stake in GECS to certain investors. Now it is planning to merge it back. Why? What would be the valuations? Who will benefit? And at whose cost?

Bala Gopal Menon

Archives