Birla Ericsson: Hold

Recommendation: Hold

S. Vaidya Nathan

The Birla Ericsson stock took a beating in the last six months along with other optical fibre majors such as Aksh Optifibre and Sterlite Optical.

In the US and to a lesser extent in some other markets, the demand for optical fibre dropped, after the huge demand of 1999-2000. With the technology sector taking a beating and telecom companies cutting down on capital spending, OFC spending is down.

This is reflected in lower prices and an overhang of excess supply. With some kind of plateauing likely to be in place in the US for some time to come, this situation may remain.

International price trends influence domestic trends; the low levels of import tariff on optical fibre and optical fibre cables also explain this strong linkage.

But what may help the domestic players is the likely growth in volumes. With a number of service providers creating the telecom infrastructure, the domestic volume growth is likely to be fairly steady over the next few years. This may help Birla Ericsson which does not have a significant presence in the export market. Companies such as Sterlite and Aksh Optifibre, with larger capacities, have been looking at the US market and now find themselves in some bind.

Birla Ericsson also has a presence in jelly-filled telecom cables. This avenue could provide steady cash flows though the sector as such may not be poised for any growth. If anything, the volumes may slowly start declining. But along with its sister-concern, Vindhya Telelinks, Birla Ericsson is well established and this should help generate a steady revenue stream over the next few years.

As for its performance, Birla Ericsson managed total revenues of Rs 27.62 crore in the 2001-02 first quarter against Rs 21.91 crore (in the corresponding 2001 April-June quarter.)

Post-tax earnings rose to a healthy Rs 5.14 crore (Rs 2.55 crore). But this level and pace of growth may not be sustained in the remaining quarters. For the year as a whole, the earnings may turn out to be much lower than what is indicated by the first quarter numbers.

The company has an equity base of Rs 30 crore. The stock appears to have declined sharply enough to cover for the dent to performance likely in the next two-three quarters. There may be some scope for gains as well as a decent dividend yield at the stock's current price.

Suitability: This stock is appropriate for investors with an above-average risk appetite. Here too investors have to look for profit-booking opportunities as the stock has moved in the Rs 18-45 range quite a few times in the past four years and a buy-and-hold strategy may not, therefore, work.