Birla Cable - Fibre Optic Player

Stock Opportunities
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Birla Ericsson Optical Ltd.

http://www.screener.in/company/?q=500060

Market Cap: 188 Crores

Last quarter sales was 97 Cr and a net profit of 8 Cr

Birla Ericsson Optical Ltd (BEOL), is an ISO-certified company under the MP Birla Group of Industries . The company is into design and production of fibre optic cables in technical and financial collaboration with Ericsson Cables AB, Sweden.

Optical Fibre Cable (OFC) is mainly used in long distance networks and generally forms the backbone of all telecom networks.

Theme of investment:

The company has reported good numbers for past 3 quarters and looks like a good case for turn-around story to unfold.

The key drivers for OFC deployment in India include the growing demand for broadband services, proliferation of next-generation broadband technologies, increasing OFC deployments in last-mile connectivity (FTTx), and availability of low-cost smartphones and tablet PCs.The deployment of fourth-generation wireless networks in India is likely to propel growth of OFC in the Indian subcontinent. In addition, several state-level e-governance projects funded by the central government and state govts will include OFC networks as a key component.

Main players in the industry:

In the order of their size:

Sterlite Technologies,Finolex Cables,Vindhya Telelinks Limited (also part of the MPBirla Group)Aksh Optifibre,Shilpi Cable,Birla Ericsson Optical Limited

Finolex and Shilpi are already extensively discussed in the forum.

Sterlite is the biggest player but sits on a debt of 2770 Crores!

BE has installed capacity for producing 36414 Optical Fibre Telecommunication Cable Km. per annum . BE has facilities to manufacture all the internationally accepted cable constructions.

BE also has the capability to produce specialty cables for use in medical equipment, computers and Local Area Networks, Cable TV Network or any other type of special fibre optic cables based on customer specifications.

They export OpticalFibre Cables to Sri Lanka, Middle East, European countries and other African countries. Exports have been consistently increasing.

Key Risks:

  • This is more of a turn-around story. Company has in the past failed to provide consistent, quality earnings.
  • Being a small company, there is very little information out in the open
  • The Competition is getting fierce and there are possibilities of emergence of certain integrated overseas players

Disclosure: Invested in Birla Ericsson Optical (from lower leves) and hence my views may be biased

Information sourced from annual reports/company website/other open forums

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Birla Ericsson makes for a compelling investment opportunity. With the aggressive planned increase in telecom infrastructure in connecting rural India, the Co. is going to be amongst the major beneficiaries. The turn around in the numbers has already started to show. If Q1 is anything to go by, the Co. should do Sales, EBIT & PAT of 375Crs, 45Crs & 27Crs for the current year 14-15, thereby giving an EPS of about 9. The CMP of Rs. 67 gives a P/E multiple of about 7.5 times, which given the healthy return ratios for 14-15, gives plenty of room for upside from the current levels. The Co. returned to paying a dividend after many years in 13-14, with a 10% div. Promoters holding 66.35% with technology partner Ericsson Cables, Sweden holding a 27.5% stake.

Disc: Invested

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The opportunity size does seem huge given NaMoâs declared intentions of broadband connections. Notwithstanding this, I am not sure how much Birla would benefit from this.

As per my understanding, the company appears to be a converter i.e. buying optic fibre and combining them into different combinations of cables. Sterlite on the other hand, also manufacturers optic fibre and hence is more backward-integrated. However, it comes with its own set of problems â debt, power sector issues (50% of the business is from power cables) management quality etc. So Sterlite is a clear no.

However, given the above, I am not sure whether Birla has any pricing power in view that the value addition does not look to be significant. Suppliers of optic fibre, which typically are the bigger multinational companies, appear to have more bargaining power. Birla has already acknowledged in their annual reports of 2013 and 2014 that their bargaining power with customers is not high due to competition and over capacity. In this scenario, an intermediary company can get squeezed in between.

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Recently there has been some news on Erricson bagging big ticket orders:

http://articles.economictimes.indiatimes.com/2014-10-23/news/55358875_1_ericsson-reliance-jio-infocomm-rjio

Not sure how these deals would impact Birla Ericsson Opticals !

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A lot has happened to this Co. over the last couple of years. The erstwhile co-promoter Ericsson has departed. Their share has been taken over by the other promoter, the M.P. Birla group, run by Harsh Lodha. The group now holds 66.35% in the Co.

The same group has another listed Co. in the same line of business, Vindhya Telelinks which in addition, is also into EPC projects. Vindhya is much bigger in terms of numbers. Interestingly, the promoter holding in Vindhya is much lower at 43.52%, Now, EPC projects are not exactly rocket science, & Birla cable has in fact just approved a postal ballet enabling it to go in for EPC projects!
So going forward it’s not totally illogical for the promoters to favour Birla Cable over Vindhya Telelinks!

The sector itself has plenty of tailwinds going for it & the Co’s performance too is showing steady growth. If the last two quarters are anything to go by, it could do Sales & PAT of 350 crs & 20 crs respectively for 18-19. Its trades at a current market cap of about 230 crs., & looks interesting.

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How can company of this size give guarantee of 1850 cr to group co -Vindhya tele?

Screenshot_2018-04-09-14-37-05
Screenshot_2018-04-09-14-37-051280×720 150 KB

What if management favor BCL over VTL?

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The AR for 2017-18 throws more light on the scope & size of the Optical fibre cable opportunity, which is likely to get accentuated with the coming of 5G technology.

http://birlacable.com/pdf/Annual-Report-BCL-2017-18.pdf

The Co. is gearing up for this opportunity & are already in the process of expanding capacity.

One can look forward to some good numbers in the current year.

Disc: Invested

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Hi Rajeev,

I was going through the AR of Birla Cable and found certain observations:

(1) Birla Cable & Vindhya Telelink belongs to MP Birla GRP.Product of both the companies are almost similar (screen shot attached). Especially fibre optical cable which is in demand dese days. Vindhya Telelink is holding 19.33 % in Birla Cable & they both have common supplier which is also related party-Birla Furukwa Fibre Optics Pvr Ltd. Isn’t conflict of interest?

(2) Universal cable anothe listed group co. holding significant equity in both the above companies and involved in sale & purchase with VTL.Why they need to have so many listed companies in same biz and common unlisted group supplier?

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Hi Gaurav,
Cross holdings amongst group companies is a legacy issue with the Birla group. The control of the M.P.Birla group was taken over by R.S.Lodha after the death of Priamvada Birla & are now being run by Harsh Lodha. The group is not exactly known for its corporate governance! Infact, this lack of corporate governance forms a part of my investment thesis. As mentioned in my earlier post, as the promoter holding in Birla Cables is substantially higher than Vindhya Tele, the mgt. is more than likely to favour it over Vindhya Tele. If the last two quarters are anything to go by, this process may already have begun!

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Thanks Rajeev! So you are taking corporate governance issue in stride… In fact, raw material supplier to both the companies is also MP Birla Group Company. Too many corporate governance issues… You never know when management will change the stand, however, I do agree with your thesis that more interest in that Co. where shareholding is more.

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The Birla Cable stock hit a 52 week high post the AGM. The Q1 results are due on August 9 & will be closely tracked. The stock is up 34% in the last four months in a bad market. This stock could potentially be a snow ball having found wet snow on a really long hill!!

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Birla Cable came out with a great set of Q1 numbers. This story keeps getting better!

The Co. is on a growth trajectory, & should keep growing in the foreseeable future. The increased capacity should come into play by the end of the the current fiscal & take care of growth for next year. Hopefully, by then we may start seeing revenues coming in from EPC projects as well.

Disc: Adding with every quarterly results.

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@RajeevJ - Have you compared Birla corp. and Universal cables? I can see there is good growth in balance sheet in all 3 - Birla, universal and Vindhya… Keeping Vindhya aside, i would like to explore more of Birla and Universal… Please share your thoughts on growth prospects and are such numbers are sustainable…?

PS: Not invested, but interested.

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When is Birla Cable coming out of ASM? Is anyone tracking the BSE announcements on ASM? Will appreciate feedback. It should happen sometime this month.

@Radiozammy
Can you please share your work on Universal cables & how it compares with Birla Cables? That will help. Thanks.

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Q2 results: Excellent results by Birla cables. Revenue up from 80 cr to 140 cr YoY… PBT up from 4 cr to 22 cr YoY.

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@RajeevJ- My apologies for the delay here. I had a personal emergency and was away for a few days. I will get back to you here once i check my notes. Also i did end up buying Birla cables after comparing it to Universal and Vindhya.

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Birla Cable came out with a superlative Q2. The Co. is on a roll, with each successive quarter showing all time high Sales & profits, a trend likely to continue for some more time with capacity expansion already underway. What also goes in its favour is that the promoters are big players in the optic fibre cable industry doing about 3000 crs in turnover, so scaling up this Co. will not be an issue. The Co. is also relatively unburdened with too much of unproductive investments in other group Co.'s, making it leaner in structure with better return ratios.

The stock has appreciated more than two & a half times in the last 7 months, but I see substantial upside even from current levels as the story is still unfolding.

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@RajeevJ any idea of the capacity utilization? I was not able to find the data about it.

Also, the company buys the fibre option from a related party (group company), so any idea how much of the value addition is consumed by them vs Birla Cables?

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@basumallick Birla cable had intimated BSE about its expansion plans in May this year. Attaching the link of the same.
https://www.bseindia.com/xml-data/corpfiling/CorpAttachment//2018/5/db00f039-fe58-4916-92aa-692497e799d8.PDF
Going by the Annual report & other info, the demand for fibre optic cable is going to be good for at least the next couple of years, not only in the domestic market, but also exports. The other group Co. Vindhya Tele is also doing very well.The above expansion should take care for the next 12-15 months, by which time it is reasonable to expect the next round of expansion if required, given the market situation at the time. I guess we investors can also take a call in the interim. The larger point being that the mgt. has the necessary bandwidth, both financial and more importantly managerial to scale up if required, which is not always a given for a regular small cap.

As regards the break up of spoils between the group companies is concerned, I’m afraid my guess is as good as yours, but my take is that the industry is in a sweet spot & there is enough for both. Besides, with at least one eye on the market cap, if not both, many companies tend to at least treat the listed companies fairly, if not favourably!

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In my opinion, Birla Cable will generate quite better returns than Sterlite Technologies. Reasons -

  1. Narrow base.
  2. Huge domestic demand for at least couple of years pushing up the topline, i.e. sales growth.
  3. Improving bottom line, i.e. margin expansion.
  4. Low debt.
  5. High promoter holding. This will promote the promoters to make this company more profitable.
  6. Low investments in unproductive assets as mentioned by Mr. Rajiv.
  7. As the company catches up the high earnings growth, it will lead to PE-led growth. Thus, ultimately increasing the share price substantially. For instance, on the pretext of high growth prospects Sterlite Technologies is currently trading at 35 PE. Vis-a-vis, Birla Cable is currently trading at 14.7 PE. In my opinion, as the micro-cap company enters the small or mid-cap segment, it will attract institutional investors like Mutual Funds. This will be a PE booster.

Disc: Invested. Birla Cable forms the core part of my portfolio. Views may be biased. I appreciate the work done on this forum. Your feedback is welcome.

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