Lessons in survival

PENNY WISE

A survivor of the dot-com crash, Aksh Optifibre has staged a smart turnaround.

Things seem to be finally falling in place, for now, for the long-suffering investors of Aksh Optifibre, one of India's earliest entrants in the once lucrative fibre optic industry.

The company and the value of its shares, both of which slipped into a deep recession as the post dot-com-bubble supply glut took over four years ago, have made an equally spectacular comeback in the last year. But more fireworks seem to be in store with its planned entry into the network services business.

Aksh, which tripled its turnover to Rs 117.38 crore in FY06 over previous year and moved from a Rs 3.2 crore loss to a Rs 14.83 crore net profit, seems set to reap the benefits of the impending broadband revolution in India.

While the increasing roll-out of fibre optic broadband connections in India has already started reflecting in the top line of this largely domestic supplier, the company has also made public its intention to capitalise on the emerging opportunities in the domestic service sector with the planned amalgamation of group company Aksh Broadband.

"From around Rs 150 crore of combined revenues of the two companies, the aim is to grow to around Rs 250 crore by the end of the year," says Kailash S Choudhari, managing director, Aksh Optifibre.

Trading at a price of nearly 11 times its trailing 12-month earnings at around Rs 75, the Aksh stock has gone through one boom and bust cycle along with the dot-com mania of the late nineties and the blood-letting that followed it.

During the height of the bubble in late 2000, the stock was regularly trading in the range above Rs 150 for ten months, nearly double its current price. Subsequently, starting from the mid-2001, it lost more than 90 per cent of its value over the next two years as the entire industry grappled with problems of supply glut and the inability of utilising already deployed resources.

The stock hit a sorry Rs 11.55 by March 2003, but has climbed steadily for the past two years to its present levels. Aksh had to shut off its special fibre manufacturing unit set up nearly a decade ago.

"Things are more realistic now," says Choudhari, "the best way to see it is by looking at our own business. Though we are selling more cable now, our revenues are still less than they were in 2000-01, but our profits are bigger."

As companies shelved plans of rolling out triple-play services and connecting the whole of India at the end of a lighted glass tube, both the company's top line and bottom line fluctuated wildly, leading many investors to exit the stock. With the company not able to achieve sales of even Rs 40 crore a year till a year-and-a-half ago, the bottom line seemed permanently written in red, with the company moving to profits in December 2004.

But the March quarter has been bumper for Aksh, as its quarterly sales zoomed to more than Rs 42 crore. The sudden spurt has been caused by the implementation of a year long, Rs 400-crore contract with the Andhra Pradesh government to connect nearly 40,000 government buildings spread over all the villages in the state using a fibre optic backbone.

However, only a Rs 100 crore order was awarded to the listed Aksh Optifibre, while group company Aksh Broadband walked away with the lion's share.

"Since August 2005, we have supplied nearly Rs 50 crore worth of cable to the project and expect similar business to happen over the next two quarters from this contract alone. However, Aksh Broadband has nearly Rs 250 crore worth of work yet to be executed over the next five quarters," says Choudhari.

As a result, the company had only Rs 73 crore worth of business coming from its other projects in FY06, including around Rs 15 crore from other long-term contracts to supply high-quality fibre-optic cable to Japanese contractors implementing a three-year 'fibre-to-home' project for the country's biggest land-line operator NTT.

But the company's cash flow will undergo a sea change as a result of the amalgamation with the Aksh Broadband which has presence in a variety of service areas such as providing broadband, lease line and cable TV services in Rajasthan to setting up e-governance and village projects including e-kiosks. It also carried out small turnkey operations for telecom service providers and government agencies.

Chaudhari adds that the company is in "advanced stages of discussion" with two state governments as well as with a government in Africa.

The company also has a 51 per cent stake in the Special Purpose Vehicle (SPV) set up by the Andra Pradesh government that will be running, and as a result receiving revenues from, the optic fibre backbone being put in place by the company. Having learnt the bitter way the perils of very narrow specialisation in a fast-changing and often unpredictable industry, Aksh's current approach seems to be guided by the principle of security by diversification.

"The idea is to have cash flow from all the three streams. The traditional manufacturing business at the base level, the project execution and implementation business at the second level and finally, also have a presence in the services-business from running such networks," he adds.