FPO Analysis: ITI Limited

Recommendation – AVOID

About the Issue

ITI Ltd, a PSU under Dept. of Telecommunications (DoT), has come out with its Further Public Offering (‘FPO’). The issue opens on January 24, 2020 and closes on January 28, 2020. The price range for the FPO is fixed at Rs 72-77 per equity share.  Through FPO the company is expected to raise Rs 1386 crore at Cap Price of Rs 77 per equity share and an additional Rs 13.86 crore from the portion reserved for the eligible employees; taking the total issue size to Rs 1399.86 crore. The company intends to utilize for funding its working capital requirements for FY2020 as well as repayment of existing debt.

About the company

ITI Ltd, a PSU under Dept. of Telecommunications (DoT), offers diverse suite of products, solutions & services across various industry segments. The company has modern manufacturing infrastructure, equipment & technology at its manufacturing facilities located at Bengaluru, Mankapur, Naini, Palakkad & Raebareli; R&D centre in Bengaluru and skill development centres under Pradhan Mantri Kaushal Vikas Yojana (PMKVY) in Bengaluru & Srinagar.  The company is engaged in Government of India (GoI) projects of national importance such as ASCON, BharatNet, Network for Spectrum, Smart Energy Meters, Space Programs and various E-governance projects. Being a PSU company enjoys strong relations with various PSUs such as BSNL, BBNL, MTNL, EESL; Ministry of Defence, Ministry of Rural Development (MoRD), Ministry of Urban development, Registrar General of India among others. At the end of Dec 31, 2019 Company has strong order book comprising of diversified products & services across various sectors and stood at Rs 11,051.12 crores.

Financials

During FY15-19, the company recorded 24.7 per cent revenue CAGR. Total income of the company increased from Rs 664 crore to Rs 2004 crore. The company turned profitable in the same period and its losses of Rs 297 crore turned into profit of Rs 92.5 crore, thanks to managerial expertise and grants given by the government. In the nine months ended Dec’19, the company has already posted a revenue growth of 36 per cent on yearly basis. The net profit in the same period grew by 380 per cent.  Such growth was primarily attributable to its low base, along with grants from the government. In the first nine month of FY20, the company had already managed to post 84 per cent of its entire FY19 revenue, thereby showcasing its growth potential. In addition, ITI is in process of repaying its loan obligations, which is also evident by its half yearly balance sheet filing according to which borrowings decreased by Rs 60 crore. Moreover, part of this FPO issue will be used for reducing debt, which will further reduce company’s interest burden that stands at Rs 106 crore for the nine month ending December 2019. Grants from the government have helped the company in turning its financials around.

Valuation and recommendation

At the higher price band of Rs 77, the offer is demanding market cap of Rs 8307 crore on its post equity dilution. The market cap to sales (FY20 annualised) of the company comes out be around 4.42 times, which looks on expensive side.  In terms of PE, the offer is made at around 54.64 times its annualised FY2020 consolidated EPS of Rs 1.41 on a post-issue equity share capital of Rs 107.3 crore of face value of Rs 10 each.

Although the current offer price even at higher price band of Rs 77, is lower than the current share price (January 24, 2020) of Rs 91, the issue looks expensive on valuation front. Hence, we believe that you should stay away from the FPO. It also presents an arbitrage option for those who are holding this stock now. They can sell in the market and can apply in FPO.