Tejas Networks

Catering to telecom companies

Fluctuating performance in a competitive market

CM RATING

38/100

Incorporated in 2000, Bangalore-based Tejas Networks (TN) is an optical and data networking products company. It was the second largest optical networking products company by market share in India, with a market share of 15% in the overall optical networking market, in FY 2016. The only India-based optical transport systems company is TL9000 certified and professionally managed, with no identifiable promoter.

TN designs, develops and sells products to telecommunications service providers, internet service providers, utility companies, defence companies and government entities in India and over 60 countries. These products are used in building high-speed communication networks to carry voice, data and video traffic from fixed line, mobile and broadband networks over optical fiber. The products utilize programmable software-defined hardware architecture with a common software code base that allows an app-like ease to develop and upgrade new features and technology standards.

TN's hardware is modular and software-defined architecture allows remote up-gradation of hardware with new capabilities and features. This enables customers to adopt a pay-as you-grow approach (i.e., purchase our products/services incrementally as needed) while adopting new services and also to extend the life of installed systems through regular feature upgrades without having to invest in new hardware purchases. The software-defined hardware architecture permits deploying the same products across multiple hardware platforms in multiple geographies by making country-specific adaptations, thereby saving costs and realizing economies of scale.

There is consistent investment in R&D over the years. New products are launched by keeping pace across technology cycles. The R&D staff comprises nearly 52% of total employees.

TNL had filed 333 patent applications, with 203 filings in India, 89 in the United States and six in Europe end April 2017. Of these, 56 patents have been granted. Also, 35 patent applications have been filed under the Patent Cooperation Treaty.

The company received 88% of its revenues from repeat customers and 58% from top 5 customers in FY 2017. Three of its top 5 customers are clients for over a decade now. India accounted for 63% of the consolidated net sales, while rest international sales from USA around 14% and 23% from rest of the world last fiscal.

The Offer and the Objects

The offer comprises fresh issue of Rs 450 crore. At the lower price band of Rs 250 per share, the issue size is 1.80 crore shares. At a higher price band of Rs 257, the issue size works out to 1.75 crore shares. The offer also comprises offer for sale of 1.27 crore shares. At the lower price band of Rs 250 per share, the size works out to Rs 317.79 crore and at the higher price band of Rs 257, the issue size works out to Rs 326.69 crore. The minimum bid lot is 55 equity shares and in multiples of 55 equity shares. The issue is to be made through the book-building process and will open on 14^th June and close on 16^h June, with anchor investor bidding on 13^th June 2017.

The offer for sale of 1.27 crore shares is made by selling shareholders, comprising institutional investors Cascade Capital Management Mauritius, Sandstone Private Investments, Intel Capital (Cayman) Corporation, its senior management team and other individual shareholders.

The objects of the issue are working capital requirement of around Rs 303 crore, capital expenditure towards payment of salaries and wages for R&D team of around Rs 45.29 crore and rest for general corporate purposes (over Rs 101 crore), apart from the benefits of listing the equity shares on the BSE and the NSE to enhance its visibility and brand image and provide liquidity to its existing shareholders. The allocation of over 22% of issue proceeds for general corporate purposes is unusually high.

The issue has a low retail portion of 10% of the total issue size compared with a regular 35% portion size in most of the issues.

Strengths

Evolution of high-speed internet technologies, proliferation of powerful networking devices and smart phones, growth in enterprise cloud services and data centres and games and HD video are driving data consumption. The company is well positioned to capitalize on the expected industry growth.

Ovum (a leading market research and consulting company) estimates the Indian optical networking market revenues at approximately US$ 594 million in CY 2016 and expects it to grow to US$ 869 million in CY 2020. As per Ovum, the capex in optical equipment market in India will be the largest among the world from CY 2014 to 2020 and it will be more than twice that of China.

The company is well-positioned to take advantage of the growth opportunities arising out of the Digital India and the Make-in-India programs of the Indian government including national optical fibre network connecting around 2.5 lakh villages using fibre optic technology, robust IT connectivity and digitization of 100 cities.

The company outsources most of its manufacturing to reputed electronics manufacturing services (EMS) companies. This allows it to stay asset-light and scale up production without requiring a corresponding increase in capital expenditure towards own manufacturing operations.

The business model, with operations substantially located in India, gives it significant cost advantage in R&D, product development, sales, marketing, customer support and manufacturing and thus allows it to competitively sell high performance and cost-competitive products in India and globally.

Weaknesses

The market is highly competitive with large global competitors like Huawei corporation, Nokia corporation and Ericsson with deep pockets, known brands and much wider technical capabilities compared with TN.

High client concentration as 58% of the revenues comes from BSNL, Bharat Broadband, Bharti Airtel, Aircel and Tata Communication.

Trade receivables, which were at 265 days in FY 2015, have come down to 160 days but continue to remain high and stretch the working capital requirements. Nearly 45% of total consolidated FY 2017 sales are from public sector undertakings. Hence, working capital strain is likely to continue.

Total intangible assets stood at Rs 134 crore in FY 2013 and came down to Rs 83 crore in FY 2017 after the company wrote off intangible investments of Rs 39 crore in FY 2013 and Rs 30 crore in FY 2017. While it positions itself as R&D and technology provider, such write -offs are quite disturbing and affect the financials.

Financial performance is highly fluctuating. There was consolidated loss of Rs 79.04 crore in FY2013, net profit of Rs 2.76 crore in FY2014, loss of Rs 17.87 crore in FY2015, net profit of Rs 29.01 crore in FY2016 and net profit Rs 63.22 crore in FY2017.

A large part of the operating expenses is fixed. Any fall in revenues due to loss of client or any major order can affect the margins and profitability.

Valuation

Consolidated net sales were up 40% to Rs 878.20 crore and the OPM increased from 18% to 19.8%, resulting in a 54% increase in OP to Rs 174.23 crore in FY 2017. With a 147% increase in other income to Rs 8.68 crore, 36% reduction in interest cost to Rs 31.52 crore and 48% spurt in depreciation to Rs 56.42 crore, consolidated PBT was up 227% to Rs 94.97 crore. There was an EO loss of Rs 30.47 crore due to write-off of intangible assets in progress. Thus, PBT after EO stood at Rs 64.50 crore. After providing total tax of Rs 1.28 crore, consolidated PAT stood at Rs 63.22 crore, up 118% over FY 2016.

At the higher price band of Rs 257, the diluted equity share capital stands at Rs 89.54 crore with face value of Rs 10 each. EPS for FY 2017 after considering EO adjustments works out to Rs 10.5. The scrip is offered at P/E multiple of around 24.6 times FY 2017 earnings. There are no listed peers in the line of business.

Tejas Networks : Issue highlights

Tejas Networks: Consolidated Financials