Looking for Multi-bagger!! HFCL
Invest In Company Not In Tickers
As Peter Lynch has aptly put it, only if you could explain the stock you are buying to a toddler within 90 sec then it is a real deal. Assuming that my readers trust Peter Lynch, I can preach the same prophecy here,
HFCL is a leader in the production of wifi and connectivity related products. It’s the market leader in Optical Fiber Cable production, while indegeniously developing all its products. Domestication has increased its profit margin as compared to its peer while maintaing its research budget to stay at par with the ever evolving needs of the industry. It has consistenly given positive revenue and profit growth for last 5 years. Thanks to its recent partnership with JIO and India’s ever increasing thirst for internet, it will continue to amaze its shareholders with its stellar performance in the coming years.
It would be injustice to leave my readers in dilemma to whether trust peter’s fancy method or be sceptical and do their own research. I think one should definitely choose the latter as that is the right thing to do in the market. Don’t buy a stock just because your uncle or aunty suggested you to do so, always do your own research. To relieve my readers of any major research struggle I am going to present here some facts and financials of the company and try to remain as neutral as possible.
Industry
The internet needs of Indians are rising at an exponential rate, as can be seen by the graph attached below. As the data of 2020–21 becomes more clear and public we can hope of some optimistic numbers because more and more companies are switching to work from home.
2021 is not even half complete and we are looking at 45% internet penetration. There are many other statistics ranging from social media usage to download rate to support the increasing demand of internet. Internet is going nowhere but what about the doom of physical delivery of internet i.e. optical fiber cable and etc. Companies like Tesla, AT&T are increasingly looking at the prospects of direct internet propogation from satelites. Starlink is already offering such services. Can this be considered a threat to the physical internet delivery services? Sure, It can be but lately it has been facing regulatory hurdles from various government agencies including Indian DoT.
Apart from that, the fees is abhorrently higher as compared to optical fiber connection, which makes it unlikely participant to penetrate mass market. But to the good fortunes of sceptic and R&D loving shareholders, HFCL has remained proactive in its R&D, expending about 120 crore last year itself. It also recently partnered with Qualcomm to jointly develop Wifi-5 tech. We can be rest assured about the technology advancement as HFCL has very well been addressing it.
Financials
We are going to take a look at all the financial statements of HFCL, staring with Balance Sheet.
Balance Sheet
- The company increasing reserves represent the money it is saving for any future liability payments. It covers the current borrowing quite comfortably, which is again a good sign.
- Company is holding off payments of its suppliers. It is again a good sign as money delayed is money earned for the company holding it.
- Increasing accounts payable is a direct affect of increasing trade receivables, which is bad sign as any delayed payment from customers is money lost. But the company is proactively addressing it by delaying the payments to its suppliers.
- The company has also been increasing its liquidity (Cash Equivalently) quite robustly, which is again a very healthy sign as company would be in the position to respond to any immediate cash needs, without raising any debt or equity.
- I have not highlighted borrowings row here even when it has been increasing quite consistently because the company did some acquistions last year which helped it to increase its revenue. But if such borrowing continues without any revenue translation then I would suggest readers to invest with caution.
- Other entries are not that significant in my opinion but if readers are interested they can go through them and post their queries in comment section.
Profit & Loss and Cash Flow Statement
- Operating profit has been increasing quite consistently while maintaining steady profit margin.
- Interest is a major concern as it is eating away approximately 32% of the operating profits. The company has to ensure that the assets and companies it is buying should soon turn out to be profitable to make this interest chunk unnoticeable.
- Net profit remains undeterred inspite of high interests.
- Dividend offered by company is uncertain and low. It is of course a bad sign but going by the expansion plans of company it would be quite unreasonable to expect more than this.
While net income is high but cash is nowhere to be seen. This is primarily because of huge investment undertaken by the company. Next annual report might show some good cash flow results (Inference based on accruals, you can search about this on google).
I am not stretching it too long nor going too deep. So that’s it with the financials! If you want to research more about this company you can visit the following link: https://www.screener.in/company/HFCL/consolidated/ . Don’t look at its pros and cons as those are lame and discrete. Do your own analysis.
Final Comments
What you should do? You have seen the financials, market penetration, its ups and its downs, etc. Throughout the article I have made it a surety to highlight all the negative points of this company, so that you don’t blame this article for your lost money. Now, it is upto your discretion to invest in this stock. It has risks like any other stock. For example, JIO, which contributes 34% of revenue to HFCL might break its contract tomorrow and stock may come tumbling down. But the chance of such event is probabilistically bleak (but not impossible) as HFCL Managing Director, Mahendra Nahata, is a sitting member of Reliance JIO BOD. Entering stock market has its own risks, but at the same time huge upside.
My Opinion: Follow your own instincts. You can buy this share now or on the next dip or do not buy this at all. It is upto you. Just remember:
Invest in Company Not in Ticker
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Edit 1 : 1st July, 2021
As is expected from good company, Mahendra Nahata in his recent interview clarified that high receivables are mainly attributed to new defence contracts, wherein government releases funds on milestone basis. So, one can stay assured about the quality of A/C receivables as they are owed by A rated customer i.e. government.
