Tejas Network IPO

About the company

Tejas Networks is one of the leading optical and networking products company with customers from over 60 countries. The company is engaged in sale of data networking products to communication service providers, that include telecommunication service providers, internet service providers, utility companies, defence companies and govt entities. Optical and networking products are further used to build high speed communication networks that carry voice, data and and video traffic from fixed line, mobile and broadband network over optical fibre. It is particularly engaged in outer perimeter of telecommunications network which connects to the end consumer, metro (i.e. networks that aggregate and distributes traffic collected from access networks within networks in a city or large region) and long hails (i.e. networks that interconnect metro networks using high bandwidth transmission).

About the Issue

The company is planning to raise Rs.450 crore by issue of equity shares of Rs 10 each. Out of these Rs 450 crore, the company will utilise Rs.45 crore towards payment of salaries and wages of research and development team, Rs.303 crore to meet working capital requirement and remaining will be used for general corporate purposes. This Issue will remain open from June 14, 2017, and will close on June 16, 2017 with a price band of Rs.250-257 per share. Minimum order quantity will be of 55 shares.

Industry Analysis

According to Ovum, the total telecommunication access network traffic is expected to grow at CAGR of 25% over the period from 2015-2020.The access traffic volumes are expected to grow from 3.4 lakh peta bytes (PB) in 2015 to over 1 million PB in 2020. This will be driven by proliferation of powerful networking devices and smart phones growth in enterprise cloud services, data centres, applications, games, hi-definition video content driven data consumption. Some of the government initiatives are supporting the growth in telecommunication industry. These initiatives include Digital India, national optical fibre network, national knowledge network, 'Smart Cities', etc

The optical networking growth is fundamentally dependent on three major factors, namely, geographic extension, capacity expansion and interconnection among CSPs. The global optical network market is expected to grow at CAGR of 4.1% from 2014-2020. Based on renewed focus on high-performance business services, cloud adoption and DCI, CPO, 100G, greater than 100G, OTN and ROADM technologies. According to Ovum each of CPO,100G, OTN and ROADM are expected to grow at a CAGR of 7.8%,9.2%,14.6% & 11.1%, respectively from 2014-2020. The revenues from optical fibre-based PON equipment's will continue to be the largest segment under wired broadband access equipment from 2014-2020

Business model

Tejas Networks outsources most of its manufacturing to reputed electronics manufacturing services (EMS) firms, which allows the company to stay asset-light and enables the company to scale up the production without requirement of corresponding increase in capital expenditure towards manufacturing operations.

Further, its business model and operations are strategically located in India, which gives it significant cost advantage in research and development, product development, sales and marketing, customer support etc. It further helps to allow the company to sell cost-competitive products in India and abroad.

However, the company’s 60% of revenues comes from five clients (BSNL, Bharat Broadband, Bharti Airtel, Aircel and Tata Communications) which exposes it to high level of client concentration risk.

Also, 45% of FY17 sales were due to PSUs, which will again result in strain on working capital.

Financial Performance

The company has registered revenue growth of 24% CAGR from year 2013-17. Its EBITDA margin is rising at CAGR of 12%. The revenue for FY17 was Rs 878 crore, with EBITDA of Rs 174 crore and EBITDA margin of 19.8% .But this growth was not stable, as in FY15, it top line contracted by 9% YoY. In FY13, its PBT was negative at Rs.79 crore, which turn around to profit of Rs 3 crore in FY14 which again reversed to Rs 18 crore net loss in FY15, then again making net profit of Rs 29 crore in FY16. In FY15, the company made a net profit of Rs.64 crore. These wild fluctuations in company's financials show unstable growth.



Our View

In the current scenario, there is intense competition in the telecommunications industry, so there will be always need of innovations in network technology to provide better connectivity, speed and to provide increased network reach. We expect some recovery in telecom industry after two years. Also, the company expects to benefit from government’s Digital India and Make in India campaigns. We expect this company will perform in the same manner Infibeam an E-commerce company performed after listing in the market . Currently, the company seems to be expensively valued at 14x EV/EBITDA. However, considering the company's future growth prospects and market leadership in its segments, we suggest investors to invest in the IPO for long term gains.