Can HFCL Grow its defence segment and revenue in the future? Trade Brains Trade Brains

The Internet has unlocked the potential of the future economy. It has helped to connect people across the world. The connection has been growing further with many people leveraging it with their daily usage. The Internet is connected through optic fibre cables under the ocean which often goes unnoticed.

The current digital economy is fueled by optic fibre connections. In this article, we will look at HFCL which operates primarily in the telecommunications industry and is even venturing into defence segment. They are entering into Data Centres which command a higher growth with growing Internet usage.  

Company Overview Of HFCL

HFCL manufactures and exports broadband equipment and optical fiber cables for the telecommunication industry. The company operates two business segments: Telecom Products and Turnkey Contracts Services. In the Telecom Product segment, HFCL produces optical fiber cable, optical fiber, and telecom equipment.

The Turnkey Contracts and Services segment delivers telecom infrastructure and communication network systems for various clients, including Telecom Operators, Defence Services, Railways, and Safe and Smart Cities. HFCL offers products and solutions in Telecommunication, Fiber optics, Passive Networking Components, and Defence sectors.

About HFCL’s business and its products & solutions 

The company has 4 manufacturing sites, one site each in Telangana and Goa, and two sites in Tamil Nadu which is into optical fibre manufacturing.  They are one of the Top suppliers of Optical Fiber Cable supplier in India. They have 3 Research & Development centres. HFCL has 884.01 million broadband subscribers in the Wireless and Wirelines segments in FY24. Some of the prominent clients include Jio, BSNL, Vodafone Idea, Larsen & Toubro, Tata, Airtel and others. 

HFCL’s order book as of Q1FY25 stood at Rs. 6,776 crore. Their revenue in the recent Q1FY25 was 96% contributed from Telecom, 2% from defence, and the remaining 2% from Railways. It’s presence is in over 45 countries. Their revenue share from exports stood at 11.21% in FY24, down from 17.23% in FY23.

Their Business units 

The company develops 5G FWA CPE, Unlicensed Band Backhaul Radios, Switches, Routers and others. They expect significant revenue growth in this segment.

5G Business Unit: The company’s 5G business unit serves enterprises, communication providers, and industry verticals globally. They focus on products, system integration services, and innovation. The company partners with Microsoft to introduce private 5G solutions for enterprises.

FWA CPE Products: HFCL develops India’s first indigenous 5G FWA CPE for both SA and NSA technologies.

5G RAN Products: The company offers ORAN-compliant products, including Macro RU and All-in-One Small Cells.

5G Transport Products: HFCL provides IP/MPLS Routers with capacities like 5G transport network modernization.

Global System Integration Services: They offer 5G integration, lab-as-a-service, private networks, and autonomous network operations services.

Indian Railway Telecommunication: The company modernises railway communication systems for Metros, Main-line railways, and Dedicated Freight Corridors. They deploy telecom networks for freight corridor projects and implement video management systems at railway stations to enhance safety and security.

Defence: HFCL create MPLS networks, microwave radio links, optical transmission networks, and GSM-based fiber monitoring systems. The company also produces electronic fuzes, thermal weapon sights, and surveillance radars.

Industry Overview and Outlook Of HFCL

The India Optic Fiber Cable And Accessories Market expects to grow at a CAGR of 14.27% during the forecast period. India’s optic fiber and accessories market is growing fast. People want high-speed internet, and the government is pushing for digital change. This drives the market’s growth.

As 5G networks expand quickly and more people use fiber-to-the-home (FTTH) services, the market will likely grow a lot in the coming years. More investments in telecom infrastructure and wider use of optic fiber cables (OFC) in different sectors also help the market grow.

In India, the 5G technology rollout is driving the optic fiber market forward. 5G networks need dense fiber infrastructure for fast data speeds and low latency. This has caused a big increase in demand for optic fiber cables and their accessories.

As the company works in the defence sector too. This is important because India’s defence budget of US$ 74.7 billion ranked fourth highest globally in 2024. As of 2022, India spends the fourth most on defence in the world. India wants to export around Rs. 50,000 crores worth of defence products each year by 2028-29. In 2023-24, India exported Rs. 21,083 crores of defence products. This is 31% more than the year before.

To boost the defence sector and get more foreign direct investment (FDI), the government changed the rules in September 2020. Now, it allows up to 74% FDI through the automatic route and 100% through the government route in areas that might give access to new technologies. The Ministry Of Defence wants 70% self-reliance in weapons by 2027. This creates big opportunities for companies in the industry.

Financial Overview & Its Segments Of HFCL

The company’s revenue from operations was Rs. 4,465.05 crore in FY24, down 5.86% YoY from Rs. 4,743.31 crore in FY23. Net Profits stood at Rs. 337.52 crore in FY24, improved 6.23% YoY from Rs. 317.71 crore in FY23. The EPS increase from Rs. 2.18/share in FY23 to Rs. 2.33/share in FY24 has improved shareholders value.

The Material cost has reduced YoY as it was 17.90% in FY24 compared to 20.67% in FY23 as a revenue percentage. Other income contributed more to net profits as there was an increase in interest income, and Provision was written back.  

The RoE of the company was around 9.56% in FY24, which is lower than 10.76% in FY23. RoCE in FY24 was 13.25%, down from 15.14% in FY23. RoE and RoCE have been in decreasing trend every year and HFCL’s debt-to-equity ratio in FY24 stood at 0.27 compared to 0.29 in FY23. Over the period, the ratio stood below 0.5 which shows its financial strength. 

They recognise revenue from operations under Telecom products which account for 41.71%, and Turnkey Contracts and services account for 58.28% in FY24. They company saw a degrowth in both segments.  

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Future Plans Of HFCL

Expanding into the European market for optical fiber cables, leveraging their exemption from anti-dumping duties.

Increase production and sales of 5G Fixed Wireless Access Customer Premises Equipment for domestic and international markets.

The new products of the company include Unlicensed Band Backhaul Radios, Switches, Routers, and the Development and export of products like electronic fuzes, thermal weapon sights, and surveillance radars. These new products can diversify their portfolio.

HFCL is looking to increase revenue from the Telecom Equipment Segment to approximately Rs. 2,000 crores in FY25.

Focus on the enterprise market for telecom products, targeting banks, hospitality, and educational institutions.

Increase business in Passive Connectivity Solutions, aiming for Rs.750 crores revenue in 2-3 years.

Participated in the BharatNet Phase III Project tender of Rs. 60,000 crore.

The company plans to Integrate Artificial Intelligence into its telecom and networking products.

The company is still in plans regarding the capex involved in installing an in-house preform plant for optical fiber production.

They expect overall revenue growth of 25% to 30% in the current fiscal year despite slowdowns in some sectors.

HFCL is looking to increase its fiber optic cable capacity from 25 million to 35 million fiber kilometers.

The company aims to grow its telecom equipment business in the next three years amounting to around Rs. 3,000 crores.

HFCL plans to set up a manufacturing facility in Poland with a capacity of 3.5 million kilometers of optical fiber cable.

The company will continue developing its defence product portfolio and expects to announce new defence orders soon.

The company is developing high-count fiber optic cables (up to 3,400 fibers) and other products for the growing data center market.

By FY27, HFCL is looking to generate around 10-15% from the defence segment of its total revenues, mainly driven by global and domestic opportunities.

HFCL: Will it continue the rally?

The stock has moved around 117% in the past year from Rs. 71.60/share to around 155.50/share currently. Over the past 5 years, the stock rose 727% which resembles the confidence of the company by the public. Recently, they made a strategic partnership with General Atomics to supply and develop critical sub-systems for GA-ASI’s advanced UAS (Unmanned Aircraft Systems). These initiatives can bring more competitive edge for the company over its competitors to further increase their expertise in that field.

Conclusion

As we near the conclusion of the article, we have looked at HFCL’s business, financials, and plans. The company is entering into new ventures and further expanding its portfolio which can improve its profitability. Their entry into defence and data centers possesses more growth, especially with a self-reliant objective.

The driving force of the company is dependent on the order they get and depends on the execution. On the financial side, the company needs to improve its RoE further to enhance value for its shareholders. What do you think about the company’s prospects? Which of these segments can possess a high growth potential? Let us know your views in the comments section below.

Written by Santhosh S

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The Internet has unlocked the potential of the future economy. It has helped to connect people across the world. The connection has been growing further with many people leveraging it with their daily usage. The Internet is connected through optic fibre cables under the ocean which often goes unnoticed. The current digital economy is fueled
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