Right Place Right Time, the Indian telecom industry suppliers are at the perfect cusp of growth inflection with several tailwinds to boost their growth for the next decade. The growth is going to come from several key factors: 1) New 4G & 5G tower set up for upscaling existing network and managing load on existing network capabilities and Upgradation (Fiberisation) of existing 2G & 3G towers in the network to 4G & 5G towers. 2) The FTTH role out of private players like Jio & Airtel along with government impetus of providing highquality fiber network across India 3) Impetus of government on providing Wi-Fi (Internet) access across the country including Rural India via PM-WANI & BharatNet schemes to ensure e-governance.
These shall drive demand for HFCL‟s core portfolio offering of OFC (Fiber Cables & FTTH), Telecom Services outplay and newly developed 5G Network ancillary products such as Wi-Fi 6 & high frequency radios.
Strike on Hot Iron – Two recent developments have heated the growth environment 1) The recent 4G Auction concluded on 2 nd March 2021 where we have seen some keen investment from Reliance & Airtel for becoming 5G ready and investing into their existing 4G capacities to add more subscribers for future growth. 2) India‟s focus on reducing imports and Atmanirbhar Bharat has further incentivized domestic producers like HFCL. With the recently announced PLI scheme from the government which allocated INR12,000 Cr for Telecom equipment manufacturers with FY20 as the base year for the production benchmark. This is going to benefit HFCL‟s decision in its product development initiative and investment into telecom and networking products.
A Bird in the Hand “AND” Two in the Bush – HFCL‟s Revenue growth is currently volume-driven backed by several tailwinds (The Bird in Hand) But the prices of OFC have bottomed out lately in Q2 & Q3 of FY21 and may move north from here, as per our research, which will further boost HFCL‟s margin performance (First Bird) HFCL is also investing heavily into innovation with a focus on R&D for New Product Development which has slowly started yielding results as two of the company‟s products are in the advanced stage for Defense Contract Approval. Company is continually innovating to increase its product pipeline. This will bring necessary product diversification, improve stability to Revenue, and increase margins.
Valuation point-of-view: We believe HFCL‟s growth and profitability levels are likely to improve significantly compared to its recent historical performance. Also, the quality of the revenue mix is set to improve as the share of product revenue is likely to go up. Also with easing out of cash flows with impending fund inflow and unpledging of promoter shares we shall see a significant rerating of the stock.
We Initiate our coverage on HFCL with an Overweight position based on our target price of INR 86 which we have derived from applying 25x PE multiple to FY23 earnings in our base case scenario forecast.
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