Date: 11th July 2000
Himachal Futuristic Communications Ltd. - where eagles dare
Current market price - Rs1311
BSE Sensex - 4898

"HFCL surges ahead…" says the ad. We are not talking about the share price. No it is the advert talking about the March 2000 results. We expect the stock prices to do the same. Yesterday's pariah has today turned into the one of the most sought after stock in the bourses. So is everything hunky dory? Is it a sure shot winner? Difficult to say. But there is one thing that one can say with certainty - "Yeh stock kuch ko crorepati banayega!". It not only has the backing of the operators, but also has the blessings of Reliance in the form a close working relationship.

What is the Business?
According to the company's annual report in FY99, "HFCL's mission has always been to provide cost effective yet futuristic telecom solutions with added values". We do not know what it means. But according to analysts, HFCL has transformed itself into a total telecom solutions provider with ever increasing emphasis on research & development. The increasing investments by the private sector are providing newer opportunities to HFCL. In a couple of year's time, 75-80% business (presently 34%) is expected to be derived from turnkey projects and about 15-20% from sale of manufactured products. The balance will come from software services. It has been successful in bagging turnkey orders from World Tel, Shyam Telecom and Essar Commvision. The company recently made a foray into the software services and has products in the area of telecom and hospital management. HFCL is also planning to foray into dot.com with strategic stakes in select portals.

Who is the Management?
This is a fataka stock yaar. Why are you bothered about management? Anyway if you insist, for the records, Vinay Maloo is the Chairman. The other major promoter is Mahendra Nahata. The promoters gathered notoriety in the early 90s when they bid a phenomenal Rs850bn bid for various telecom circles and their proximity to the then telecom minister, Sukh Ram.

HFCL was incorporated on 11th May 1987 by the Himachal Pradesh government to manufacture telecom equipment. The Himachal Pradesh State Electronics Development Corporation (HPSEDC) (a public financial and investment institution owned by the government of the state of Himachal Pradesh) promoted it as a joint sector company. The company had a private placement in February and then later 10% of the company was acquired by Kerry Parker's Consolidated Press Holding at a price of Rs1450 per share totaling 71,65,650 shares. The company raised Rs17.74 bn through the two deals. The company is targeting a turnover of Rs15.50 bn and a net profit of Rs2.5 bn for the next fiscal year.

Whither Cash flows?
For a business that is not capital intensive, Himachal has the distinction of having negative cash flows form its operating activities. This is mainly due to its high receivables and inventory levels as the business remains working capital intensive. In the telecom equipment industry, vendor financing plays an important part in securing orders.

Why should I Buy?
The stock is liquid and has one of the highest turnover - so entry and exit is not an issue. Punters and fund managers love the stock - they are convinced that the management is onto good things. It is difficult to find a mutual fund scheme that does not have HFCL in its portfolio. So much so that the pharma fund of a major mutual fund at one time had HFCL in its holdings! Lighter quips aside - telecom is one infrastructure area that is seeing actual investments on the ground. The demand for telecom equipment and telecom software is expected to witness exponential growth. If HFCL indeed delivers the performance it is promising, then the stock would see further rerating. So as a savvy fataka investor, get into the stock, ride the wave and get out fast. As the bard said, "There is a tide in the affairs of human beings that taken at the flood leads to fortune". If you do not swim with the tide, the fortunes would vanish as fast!

Where can I go Wrong?
With stocks like these there are no limits either on the downside or the reasons for downside - accounting practices, past track record of management, sudden drying up of operator fancy, operator holidaying in London etc. etc. But then if you are the strong-hearted person investing in fataka stocks, then such issues should not bother you. Fundamentally the company's paradigm shift in business composition is yet to be tested. Management's past track record does not suggest great things. Hence, by conventional wisdom there are plenty of risks. In fact, too many recount here. In the markets decline in April, the stock lost more than 50% of its value in no time.

Abhijeet Dey

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