Investors can refrain from taking an exposure in the initial public offering of equity by XL Telecom. The offer is being made in the price band of Rs 125 to Rs 150 per share. The company's latest foray into retail marketing of CDMA mobile handsets for high-end models is likely to expose it to fluctuating earnings performance and tighter operating margins. Besides this, the company's core business of CDMA mobile handset assembling/manufacturing technology in partnership with Kyocera, an international brand, is a high-volume, low-margin business, dependent largely on the R&D efforts of its technology partner.
In our view, the expansion in the solar photovoltaic modules business to cater to orders from Europe and the company's entry into ethanol (mixed with petrol) business to service public sector oil units are opportunistic forays, and may not provide any long-term competitive advantage. Moreover, the ethanol business remains subject to regulatory vagaries and order flows from public sector majors.
The XL Telecom stock also appears priced on the higher side at 14.5 times (upper end) its per share earnings for the year ended June 30 vis-à-vis other growth stocks trading at this price earnings multiple with relatively lower risk.
Business units
The company has a CDMA handset assembling/manufacturing unit, a switching mode power system (SMPS) facility that has been operational since 2000, a solar photovoltaic module manufacturing facility, and an ethanol fuel facility with a production capacity of 1.5 lakh litres per day. The supplies from this facility to the PSUs started in 2006.
Through this public offer, expected to garner Rs 59.3 crore (at the upper end of the price band), the company plans to set up surface mounting technology lines to produce PCBs (printed circuit boards) used for CDMA mobile and FWPs (fixed wireless phone) at a project cost of Rs 20.4 crore.
It also plans to expand the solar photovoltaic module plant at a cost of Rs 8 crore to cater to a European order. It has entered into an exclusive distribution agreement with Forta In Ex SL, a Spanish company with a minimum commitment of 3MW per annum, valid for three years, with total commitment of 12 MW. The total contract value is estimated at Rs 220 crore.
In addition, XL Telecom proposes to repay the term loan from IDBI for Rs 9 crore and provide for long-term working capital for fixed wireless phone business (for which it has a partnership with Axesstel of US).
While the growth from the CDMA handset sales business has been robust for the past few years, most of the scale and margin benefits are likely to accrue to telecom service providers such as Tata Teleservices, BSNL, MTNL or Reliance Communications. For other players in the telecom chain, including XL Telecom, it will remain a high-volume, low-margin business. For instance, for the year ended June 30, on revenues of Rs 395 crore, the company recorded an operating margin of 6.8 per cent.
In this backdrop, the recent decision by XL Telecom to go directly to customers through a retail business model for high-end mobile phones is likely to expose them to vagaries of the marketplace. In the absence of any internal R&D, they will remain largely dependent on their partners/service providers to meet customer expectations for new and fancy phones. For low-end models, however, the telecom carriers/service providers will continue to source them in bulk from the company.
Offer details: The post-diluted equity of promoters will be 62.37 per cent. The offer to be listed at BSE and NSE opens on December 4 and closes on December 7. Anand Rathi Securities and Centrum Capital are lead managers to the offer.