XLTEL’s business is classified broadly into two segments - telecom and energy. In the telecom division, it assembles CDMA mobile handsets and fixed wireless phones.
XL Telecom & Energy Ltd (XLTEL), a Secunderabad-based company, has a presence in two of the most high-growth sectors such as telecom and energy, which lends it a twin advantage of steady growth and high margin. With huge order book positions of over Rs 300 crore for the ethanol division till March 2010, Rs 48 crore for the telecom division and Rs 220 crore for the solar division, the company’s total order book is a whopping Rs 568 crore till date.
Business
XLTEL’s business is classified broadly into two segments - telecom and energy. In the telecom division, it assembles CDMA mobile handsets and fixed wireless phones (FWP). The company has a tie-up with Kyocera for the CDMA phones and Axesstel for the CDMA FWP. It has a manufacturing capacity of 10,000 phones per day. Apart from assembling CDMA phones, it also assembles SMPS plants and joining kits and accessories. With telecom subscribers base growing at a healthy rate of 7 million per month and one-fourth of them opting for CDMA, there lays a huge opportunity for companies like XLTEL.
The energy segment is further classified into ethanol division and solar photovoltaic division (SPV). The present capacity of the ethanol plant at Nanded Maharashtra is 150 klpd. “We have firm orders of Rs 300 crore currently, which have to be executed by 2010,” said Vasudev Rao, executive director of the company.
In view of this long-term contract, XLTEL has decided to carry a backward integration programme by setting up a 150 klpd distillery at Solapur, Maharashtra. As per company sources, the project is expected to be on stream by April 2008. This project will ensure continuous supply of raw materials and help in better logistics due to its closer proximity to the source of raw material. It is expected to generate an additional Ebidta margin of 15%. Solar photovoltaic globally has been growing significantly and the $16 billion market is expected to grow to $65 billion by 2015 said Rao.
XLTEL has made a significant development in this business in the last two years and has already established a presence in the European market. The 100% export oriented unit with an annual capacity of 24 MW at Hyderabad has already started production from April 2007 and is awaiting TUV approval, a prerequisite for exports to several buyers in Europe. “We plan to start dispatches to Europe after the TUV approvals, which we expect to get by October 2007,” added Rao.
XLTEL has decided to invest Rs 265 crore in the solar cell manufacturing plant with an annual capacity of 120 MW, which is being sourced from Germany. The plant will produce XL solar cells and will be one of the largest players in the world. The company is also planning to invest Rs 40 crore in expanding the solar module making capacity to 65 MW It expects to strengthen its position in the market and double its solar cell manufacturing capacity to 240 MW in three years. XLTEL is planning to part finance $40 million through an FCCB or GDR issue and the rest though debt.
Investment rationale
Presence in both telecom and power sector is expected to give XLTEL excellent growth opportunities. While the increasing subscriber base in telecom is expected to generate demand for handsets, the SPV division is expected to grow significantly on the backdrop of global demand. However, the current capacity for the company’s ethanol business is enough to cater to the 5% blending. It can only blend upto 10%, which indicates a shortage. XLTEL has timed well its backward integration programme of both the ethanol and the SPV segment. While there are clear growth opportunities in all these segments, the margins are expected to increase on successful backward integration.
Concerns
Telecom handsets business is a highly competitive sector. Operators themselves negotiate prices of handsets leading to lower realisations. Further, Chinese threat of cheap handsets is also squeezing margins. Raw material for SPV accounts for around 70% of the cost. Demand is beating supply leading to pricing pressures. However, world over significant silicon capacity is being added, which may ease the pricing pressure. Forex fluctuation is another concern as it has significant exposure in exports, though to some extent the imports act as a natural hedge. Further any delay in project executions would affect the earnings.
Valuations
At the current market price of Rs 164.70, the stock is available at 11,53X its FY08 earnings and at 3.23X its FY09 earnings. The stock is expected to perform very well given the huge opportunities and a healthy order book position. Investors can take a long-term bet on this stock with a target return of over 50%.
Disclaimer: The author does not hold any shares in the company
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