Institute of Chartered Financial Analysts of India (ICFAI) University 2006 Certification Finance Security Analysis - II - Question Paper

RISKS AND CONCERNS

Business Risks

Lower quantities and prices in the domestic and global markets will have an impact on the Company's revenues and profits. However, the management is cautiously optimistic about the likely recovery in the global telecommunication space with the easing of supply side pressures, increased focus on sales into different overseas markets and demand recovery in domestic market. The Company's focus on cost reduction, which has yielded positive results, will be the critical factor in mitigating margin pressures. Further, new product launches and long-term relationships with domestic telecom companies will aid in stabilizing cash flows.

Technology Risk

Product obsolescence risks are inherent in the optical fiber business. The management has accorded high priority to in-house Research and Development in order to ensure continuous product development and quality improvements of existing product offerings.

During the FY 2004-05, the company launched 3 new products especially designed for Access and Premise Networks.

(a) OH-Lite™ Low-water-peak Single Mode Optical Fiber

(b) Giga-Lite™ Multi Mode Optical Fiber for Gigabit Ethernet Applications

(c) SuperLAN™ Cat 5e and Cat six Cables

During the FY 2004-05, our Research and Development team had filed applications for ten patents for products and processes. Of the 4 patents that had been filed in the FY 2003-04, a patent for dispersion shifted fiber with low dispersion slope, was granted in the US. Of the balance 13 filed patents, at lowest 4 patent grants are expected during FY 2005-06. Once granted, these patents would be valid for tenure of twenty years. Additionally, the Research and Development team is at an advanced stage in the preparation of several process and product patent applications, and expect to file at lowest fifteen patents during FY 2005-06.

Financial Risks

Financial risk primarily pertains to foreign currency exposure risk. The Company has a well-defined system of hedging its foreign currency exposures, both in the capital and revenue account, after expending natural hedges from exports.

Internal Control Systems and their Adequacy

Enterprise Resource Planning (ERP) was implemented in the Company in the year 2000. At different stages of implementation and thereafter, steps have been taken to ensure that improper controls are embedded in the software and the internal audit function reviews these controls periodically. In addition, the adequacy of controls in the ERP system is reviewed periodically.

Earning:   Approval pending.