XL Telecom & Energy Ltd.

BSE Code: 532788

CMP:Rs.29.35

By Saarthi

XL Telecom & Energy Ltd. (XL) was incorporated as a private limited company in 1985 to manufacture and deal in cable splices, protection equipment and allied accessories used in electronic telephone exchanges and other establishments. In 1990, it converted into a public limited company and gradually emerged as one of the fastest growing telecom equipment manufacturers. In 1994, it ventured into solar energy sector albeit on a small scale and is a pioneer of solar modules having rich experience of 15 years. To cash in on the huge opportunity, it has aggressively moved into the non-conventional energy business especially the solar photovoltaic segment. As a result, the energy segment, which contributed to 55% of total sales last year, now contributes almost 90% of total revenue. Apart from solar energy, the company also has interest in ethanol production. Broadly, the company has divided its revenue model into two segments.

A. Energy Segment: This is sub categorized into two divisions:

==> Solar Photo Voltaic Systems Division: This division is now the core business and the revenue driver for the company. It makes solar photovoltaic modules/panels of various capacities ranging from 5Wp to 280Wp catering to both the domestic and overseas customers’ requirements. Beginning with an initial module manufacturing capacity of 24MW in 2005, it has increased the capacity multifold to 180 MW last year.

Moreover, it is in the midst of setting up a huge greenfield plant at Fab City (SEZ), Hyderabad, at a capex of Rs.360 cr. With this, it will add another 40 MW module manufacturing capacity taking the total to 220 MW. Besides, it has backward integrated and is putting up a solar cell manufacturing facility with a rated capacity of 120 MW. The capex has been fully funded and the plant is expected to begin commercial operation within 2009. Along with this backward integration, the company has also moved up the solar value chain by venturing into solar energy power generation through grid connected solar farms. During October 2008, its 100% subsidiary in Europe, ‘Saptashva Solar Ltd.’, has established the first solar farm in Spain with an installed capacity of 1.60 MW, XL has perhaps become the first and only solar cell manufacturing company in the world to capture the complete solar value chain of solar cell to module to system to solar farm or power generation. It has also signed a power purchase agreement for 25 years with a Spanish utility company, which ensures it stable revenue.

Importantly, Saptashva is looking to establish a series of solar farms across Europe, which may lead this subsidiary to become the largest customer of the holding company in terms of solar panels and EPC services. In fact, XL is very bullish of getting into the EPC segment of solar farms and targets to set up solar farms generating as much as 300 MW over the next three years. Recently, one of its end customer commenced operation at its largest 30 MW solar park using XL’s exported solar panels, which helps build XL’s credentials.

==>Ethanol Division: Earlier, the company had aggressive plans about this division but with the drastic fall in crude oil price and the unfriendly approach of the government, it has decided to go slow. It has an ethanol fuel facility at Nanded in Maharashtra with a production capacity of impressive 1.5 lakh litres per day. The plant has been inspected and cleared technically by oil companies both in terms of capacity evaluation and the quality of the product produced. To meet the raw material requirements for ethanol production, XL is contemplating to establish the distillery unit for which it has already incurred Rs.27 cr. out of total planned capex of Rs.72 cr.

B. Telecom Segment: This segment used to be XL’s main business earlier but given the saturation in the Indian market and better opportunities in energy sector, the company has reduced its focus and efforts on telecom. However, it still continues to manufacture and market the following products depending upon the demand scenario:

==>CDMA Handsets & Fixed Wireless Phones: XL is the first Indian company to set up a manufacturing facility for CDMA mobile handsets, as an independent company. It established an Assembly facility for manufacturing mobile phones in partnership with Kyocera Inc of USA and has a capacity of about 35,00,000 handsets per annum. It is supplying multiple models to all CDMA operators like BSNL, MTNL, Tata Teleservices and Reliance. Similarly, it has established a partnership with Axesstel of USA for Fixed Wireless Phones with BSNL as its main customer.

==>Switch Mode Power System: Under technology transfer from SMPS de Austria, XL manufactures and offers a full range of SPMS required by telecom operators in their exchanges as well as for the BTS stations in the mobile segment.

==>Outside Plant Accessories: XL has been a supplier of jointing kits, optic fibres accessories, fusion splicers etc. for over two decades and enjoys nearly 40% market share in jointing kit business. Its plant at Hyderabad with a capacity of 20,00,000 Heat shrink sleeve & 5,00,000 cable jointing kits was set up in technical collaboration with Corning Inc., USA.

Solar power is fast emerging as the most viable and eco-friendly power generation option with no moving parts, no noise pollution and zero emissions. Solar power systems are used for a variety of residential, commercial and industrial applications generally described as either 'on-grid' or 'off-grid' by nature.

The market for on-grid applications, where solar power is used to supplement electricity purchased from the utility network, represents the largest and fastest growing segment of the market and most of the XL products are used for on-grid applications, XL’s focus remains on emerging grid connected solar solutions as against conventional stand alone solar power systems. Although, the generation and distribution costs of solar power has come down substantially, thanks to technological breakthroughs, solar energy still constitutes only a small fraction of the world's energy output.

It is estimated that Spain, Italy, and France will drive the solar power demand in the near future along with Germany, Japan and USA being the largest markets for solar photovoltaic cells. As per consensus among global research organizations, solar products are slated to register 40% CAGR over the next 10 years.

In order to fund its growth plans, XL raised nearly Rs 59 cr. in December 2006 through an IPO route at Rs.150 per share and approx 175 cr. through the FCCB route and has allotted 52,50,000 warrants at Rs.135 each. With part of the FCCBs and warrants already been converted, its equity share capital currently stands at Rs.18.80 cr. The company has recently reset the FCCB conversion price to Rs.160 per share from Rs.260 originally. Despite this, the holders may not opt for conversion as the CMP is trading at a huge discount. For the year ending 30 June 2008, it recorded a 25% rise in the topline to Rs.654 cr. but net profit doubled to Rs.40 cr. posting an EPS of Rs.21.

Despite very poor performance for Q3FY09, the H1FY09 looks impressive with 40% and 60% growth in topline and bottomline at Rs.359 cr. and 15.80 cr. respectively. It may end FY09 with sales of Rs.700 cr. and PAT of Rs.25 cr. leading to an EPS of Rs.13 on its current equity of Rs.18.80 cr. The company’s bottomline is hit by the significant interest cost on the loan it took for expansion. But instead of capitalizing the same, XL is writing it off as a revenue expense. It has capital work-in-progress of nearly Rs.250 cr. against the current gross block of Rs.55 cr.

Thus the day its new plant comes into full production, XL will report a substantial jump in its topline as well as bottomline. Investors are, therefore, recommended to buy XL at current levels as its share price can triple in 24 months. However, investors should note that the company has high debt and receivables to the tune of Rs.378 cr. (including FCCB) and Rs.224 cr. respectively.