Nelco ltd. : Driven By High Growth Potential
The company offers a range of innovative and customised solutions for businesses and government institutions and is one of India’s leading VSAT providers, thus chalking out a visibly strong growth curve
Nelco Ltd., a part of USD 116 billion Tata Group, started in 1940 as a revolutionary electronics company and has had many firsts to its name over the years. The company has aligned its businesses and set new goals for itself. Nelco is focused on helping its enterprise and government customers unlock potential by offering solutions in the areas of VSAT connectivity, satellite communication projects and integrated security and surveillance solutions. To address the needs of its customers across industry verticals, these solutions are backed by Nelco’s values and proven expertise in consulting, customisation, system integration and end-to-end management.
It also provides robust infrastructure and processes. Nelco holds a VSAT license, internet service provider (ISP) license as well as in-flight and maritime communication (IFMC) license issued by the Department of Telecommunication, Government of India (DOT). It offers a range of innovative and customised solutions for businesses and government institutions and is one of India’s leading VSAT providers. It connects businesses to what is critical for their pan-India spread and remote operations through reliable, flexible, swift and cost-effective satellite communication services.
In addition, it also offers end-to-end networking solutions and maintenance of private hubs and hybrid networks for its customers both from government and corporate sectors. Nelco is also a preferred partner for the government, defence and enterprise sectors when it comes to security and surveillance in India. From keeping the borders safe to checking pilferage and sabotage in factories, the company’s solutions have been deployed everywhere. Nelco Network Products Ltd. is a wholly owned subsidiary of Nelco Ltd.
Sector Overview
The satellite communication industry in India provides reliable data connectivity solutions across the country, and particularly in its very remote areas and difficult terrains. The size of the industry is currently reported at Rs 800 crore. In fact, the satellite communication industry in India has been highly regulated so far and there are currently four key VSAT license-holders in the country with diverse backgrounds. The government has identified the Indian space industry as a crucial growth sector and is aiming to bring regulatory changes. A new space communication policy is under preparation by the Department of Space (DoS). It is strongly believed that the new policy will enhance the private sector’s participation in the space sector, thereby giving a boost to the industry.
The global satellite industry has rapidly evolved in the last 2–3 years than in the previous 25 years with large funds infused in innovations and technology advancements. Globally there are major developments taking place in low earth orbit (LEO) satellite technology, which has the potential to revolutionise the satellite communication industry by significantly increasing its addressable market. Ecosystem collaborations and newer business models are emerging. India’s space sector also bears the intent and potential to catch up with the global industry in the coming years. With the right regulatory changes and technology advancements, satellite communication will enable penetration of digital services across various sectors in the remotest corners of the country.
Financial Overview
The company’s financial performance shows that on a consolidated quarterly basis the net sales and other operating income increased to Rs 55.10 crore in Q1FY22 as compared to Rs 49.52 crore in Q1FY21, clocking gains of 11.27 per cent. The operating profit was recorded at Rs 13.65 crore in Q1FY22 as compared to operating profit Rs 10.83 crore in Q1FY21, robustly growing by 26.04 per cent. Q1FY22 recorded a net profit of Rs 4.38 crore as compared to net profit of Rs 1.84 crore in the same quarter in the previous year, clocking significant gains. On the annual front, its net sales and operating income improved by a mere 2.81 per cent from Rs 219.93 crore in FY20 to Rs 226.12 crore in FY21.
The operating profit contracted by 8.71 per cent in FY21 as compared to FY20. The net profit declined by 14.05 per cent in FY21, recording Rs 12.36 crore as compared to Rs 14.38 crore in FY20. The company operates in only one reportable segment which is network systems consisting of satellite communication services, including equipment sale, maintenance and other allied services. The company has two wholly-owned subsidiaries – Tata Net Services Ltd. (TNSL) for delivering satellite communication services and Nelco Network Products Ltd. (NNPL) which has commenced its business operations in the last quarter of FY21 by providing in-flight and maritime connectivity services.
The share of the total installed base of VSATs in the industry is around 26 per cent from Nelco Ltd. Sectors like ATMs had a quick recovery post lifting of the lockdown restrictions while sectors like education and oil and gas exploration are yet to recover. Some of the segments like aerospace and maritime will stretch over a longer period to recover to pre-pandemic levels. There is, however, a higher level of digitalisation and remote management applications in many of the sectors, which is predicted to increase the overall bandwidth off-take.
Market Opportunities
The pandemic has largely impacted the economy. The mid to long-term fundamentals however seem to be intact for all those sectors which use satellite communication services. Following is a list of the prevailing market opportunities for market leaders like Nelco in various sectors of the economy:
• In-Flight and Maritime Communication Services (IFMC): The growth prospects for satellite communication services in India are quite bullish in the coming years bearing large potential for IFMC services. The company foresees that the IFMC services will eventually give a boost to the growth of the Indian satellite communication services sector in the coming 4–5 years.
• Oil and Gas Exploration: The government’s drive to reduce import of crude oil, further reforms and private sector participation are likely to contribute to the steadiness of activities in this sector.
• Renewable Energy: Satellite communication services cater to the needs in these areas as remotely located renewable energy sites and the transmission-distribution network require reliable connectivity for improving operational efficiency and for real-time transmission of power data.
• Government: The potential opportunities for deployment of satellite communication services in the government sector are on the verge of expansion in future due to the thrust on rural connectivity, education, healthcare, warehousing and public distribution system, especially in remote locations.
Outlook
The satellite communication industry in India has the potential for multi-fold growth in the coming years due to market expansion and the impact of newer satellite technologies like high throughput satellites (HTS) and LEO. The government has granted permission for the use of satellite communication for in-flight and maritime communication services in India from December 2018. In-flight and maritime communications is a potentially high opportunity for satellite communication services in India, in line with the trend across the rest of the world. IFMC services are global in nature as these cater to international vessels – aircrafts and ships in the Indian region as well as domestic aircrafts and ships when they go to other parts of the world.
The focus of the company is to post sustainable profitable growth in its satellite communication services business. Nelco strives to be the most customer-centric digital solution provider, bringing the benefits of the digital revolution to un-served and under-served customers using satellite communication in India and beyond. In FY21, Nelco signed a cooperation agreement with Telesat which is one of the major global satellite players launching LEO satellites. The LEO satellites, providing an alternative solution to terrestrial networks, can act as ‘fibre-in-the-sky’. Through this the company will be able to serve high-bandwidth segments like cellular backhaul, village connectivity, telecom networks, etc., specifically in remote locations and difficult terrains.
Overall, LEO satellites are a potential disruptor for the industry and once available in India possess the opportunity for high growth for satellite communication services. Additionally, the company is focusing on making continuous investments in augmenting its infrastructure for providing reliable and highquality satellite communication services. It holds a technologyagnostic approach and internalises the technology best suited for serving its customers’ requirements. Currently, it has deployed the latest technologies for its multiple satellite gateways in Mahape and Dehradun. Plans are also afoot to deploy HTS capacities in the near future, which will help to zooming in on more market opportunities. Based on the strengthening of the company’s position in the overall market, we recommend investor-readers to BUY this stock.