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Summary: HFCL has rebuilt itself around AI data centre cables, replaced a government-heavy customer base with global hyperscalers and assembled an order book of Rs 21,200 crore in under two years. The business looks transformed on paper. Yet, the cash flow tells a different story.
HFCL just had its best year on paper. Export revenue quadrupled. Margins expanded. A single hyperscaler order worth Rs 10,159 crore over five years, locked in half its capacity.
And yet the business did not generate a rupee of free cash.
That is the story. A commodity cable manufacturer that spotted the AI data centre boom early, retooled fast, and replaced its entire customer base in two years. The transformation is real. But the cash register hasn't rung yet and with Rs 900 crore of capex still landing and interest costs nearly matching reported profit, the question is no longer whether the business has changed. It is whether the balance sheet can hold long enough for the change to pay off.
The pivot
A hyperscaler facility connecting tens of thousands of GPUs requires intermittently bonded ribbon (IBR) cables that pack anywhere from 1,728 to 6,912 fibres into a single duct, with precision tolerances that standard optical fibre cable machines cannot achieve. AI server racks demand up to 36 times more fibre than a traditional CPU rack. Manufacturing these high-fibre-count ribbons runs at 30 per cent lower line efficiency than commodity cables — the same machine produces far less output. That supply constraint, multiplied across a global shortage of qualified manufacturers, is what creates the premium.
HFCL had the certifications, the physical capacity, and an in-house R&D team that had already designed these IBR cables before the demand arrived. When hyperscaler buildouts accelerated in FY26, the company went from 45 per cent utilisation to full capacity. Export revenue jumped from Rs 497 crore to Rs 2,047 crore in a single year. Over 70 per cent of cable output was exported. Private customers now constitute 84 per cent of the business, up from 57 per cent in FY22, when the business was government-dominated.
One order tells the story: a single contract from an international hyperscaler worth Rs 10,159 crore over five years. It constitutes roughly half the entire order book and locks in over half of HFCL's optical fibre cable capacity over the medium term.
What the headline numbers mask
HFCL has seen a moderate but steady rise in sales and margins over the years
|
|
FY26 | FY25 | FY24 | FY23 | FY22 |
|---|---|---|---|---|---|
| Total sales (Rs cr) | 4,949 | 4,065 | 4,465 | 4,743 | 4,727 |
| EBITDA margin (%) | 15 | 11 | 13 | 13 | 14 |
| PBT margin (%) | 9 | 5 | 10 | 9 | 9 |
| EBITDA is earnings before interest, taxes, depreciation and amortisation | |||||
The consolidated margin expansion looks modest. That is because consolidated numbers increasingly mask the economics of HFCL's telecom products business.
FY26 profit before tax margin stood at 9 per cent. This includes a substantial drag from the legacy EPC division, which has been making losses for two years. EPC (engineering, procurement, and construction) refers to large infrastructure contracts in which HFCL manages the entire project, from sourcing materials to building and handing over the network. The telecom products segment, by contrast, operates at roughly 26 per cent PBT (profit before tax) margins. In Q4 FY26, aided by a particularly favourable product mix, the telecom products segment reached a 40 per cent margin for the quarter. Alongside optical fibre cable, the segment now includes 5G networking equipment, fixed wireless access gear, unlicensed band radios, and Ethernet switches, all designed and manufactured in-house.
The drag on consolidated profitability comes entirely from the legacy EPC business, which still constitutes 38 per cent of revenue and reported a PBT loss of Rs 336 crore in FY26. The principal cause is the army network project, where HFCL continues to incur costs without recognising revenue due to the warranty phase. Delays in state-led projects, including UP Jal Nigam, have added to the pressure.
Management is not exiting EPC but is becoming considerably more selective. New contracts such as BharatNet and Jio's North India fibre backhaul carry margins of 6-8 per cent and are accompanied by long-tenure operations and maintenance agreements that are more profitable. The Punjab BharatNet order alone carries over Rs 1,250 crore of future maintenance revenue. As legacy loss-making projects roll off and annual maintenance income scales up, the blended margin profile should improve. Management has guided to a 3-4 percentage point expansion in EBITDA margin over the coming year.
The cash problem
Rising receivables and orders are yet to convert into cash flows for HFCL
|
|
FY26 | FY25 | FY24 | FY23 | FY22 |
|---|---|---|---|---|---|
| Cash from operating activities (Rs cr) | −422 | 527 | −98 | 234 | 646 |
| Receivables (Rs cr) | 2,212 | 1,892 | 2,215 | 1,886 | 1,896 |
| Inventory (Rs cr) | 1,416 | 899 | 774 | 758 | 573 |
| Cash conversion cycle (days) | 157 | 108 | 83 | 56 | −23 |
| Cash conversion cycle is the number of days it takes to turn raw material into collected revenue. A lower number is better; negative means the business collects cash before it pays suppliers. | |||||
Operating cash flow was negative Rs 422 crore in FY26, against a reported profit of Rs 329 crore. The gap is working capital deterioration: receivables not converting, inventory piling and suppliers unwilling to extend credit terms.
Trade receivables stand at Rs 2,212 crore. Roughly Rs 400 crore is trapped in the army project. Another Rs 652 crore is unbilled revenue from fibre cable compliance delays that management says began converting in April and May 2026. If that timeline holds, some cash arrives in Q1 FY27.
The inventory line tells its own story. To service a Rs 21,200 crore order book, of which Rs 18,000 crore are physical products to be delivered over one to five years, HFCL has been aggressively accumulating raw materials. Shipments to its US subsidiary were stuck at customs for months. All of this sits on the balance sheet as inventory until it clears and sells. The cash conversion cycle, which ought to compress as a business shifts from long-cycle EPC to product sales, has instead expanded from a negative 23 days in FY22 to 157 days in FY26.
Return on capital employed has recovered from a low of 8 per cent to 11 per cent, but remains below where the company was before its expansion cycle began.
The business is not self-funding. HFCL is simultaneously running the most aggressive capital expenditure cycle in its history — Rs 900 crore, including a Rs 580 crore preform manufacturing plant that will bring a key raw material in-house — and expanding optical fibre cable capacity to 42 million fibre kilometres. Free cash flows are firmly negative. Interest costs reflect this, up roughly 30 per cent in FY26 to Rs 242 crore, against a reported profit of Rs 329 crore.
Promoter holding has declined from 39 per cent in FY23 to 29 per cent currently, largely due to equity fundraising through institutional placements rather than direct promoter selling. Promoters recently subscribed to warrants worth around Rs 555 crore to support funding for the new preform facility, and promoter ownership now appears to have stabilised.
Where it stands
At roughly 70 times earnings, HFCL is trading at nearly double its historical median of 36.1 times. The premium reflects how much the market has already priced into the transition: a half-idle commodity manufacturer rebuilt into a specialised, export-led business in two years, the entire customer base replaced, and a Rs 21,200 crore order book as evidence.
Three things are worth watching over the next two quarters.
Whether the receivables convert to cash, whether the anchor hyperscaler order begins executing on schedule, its timing now matters more than any other single variable. And whether incremental borrowings remain contained, because with heavy capex still to land and free cash flows firmly negative, the pace at which net debt grows will determine how much balance sheet headroom remains.
The business that exists today is genuinely better than the one that came before it. But a better business and a proven one are different things.
Until the cash conversion catches up with the story, that gap is the only thing worth watching.
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