Tejas IPO: A high-risk bet on India’s digital future

Tejas Networks is raising funds through initial public offer (IPO) worth Rs 450 crore and offer for sale of 18 per cent of existing paid up shares worth upto Rs 327 crore. Domain expertise, international patents, and strong business growth over the past two years show the company’s ability to benefit from opportunities in high speed digital communication, given the rising data consumption. The IPO is more suitable for investors with high risk appetite considering the intense competition, ever evolving technology, and the company’s heavy reliance on a few customers and high working capital requirements.



BUSINESS
Bengaluru-based Tejas Networks was founded in 2000. Its products are used to build optical fibre networks for fixed and mobile communication and broadband internet services. It earns 63 per cent revenue from India: 44 per cent from public sector and 19 per cent from the private sector. Of its 607 employees as of May 15, 2017, 313 were in the research and development (R&D) team, highlighting its focus on innovation.

FINANCIALS
Revenue more than doubled to Rs 878.2 crore between FY15 and FY17. Profits have been volatile. In FY15, there was net loss of Rs 17.9 crore due to investments in R&D. In FY17, it reported net profit of Rs 63.2 crore after writing off Rs 30 crore worth of R&D spends. Operating margin before depreciation (EBITDA margin) improved to 20 per cent in FY17 from 18 per cent in FY16.

STRENGTHS
First, R&D costs are lower at over 8 per cent of sales compared with around 15 per cent for global peers. Second, it is strong on building intellectual property with 56 global patents. Third, the Indian government’s policy to use domestic electronic products with security implications for its various departments augurs well for Tejas.

RISKS
First, over half of the revenue comes from the top five customers. Second, trade receivable days were still quite high at 160 in FY17 even though they shrank by 100 days over the past two years. The company expects to reduce it in four-six quarters. Third, given the R&D-driven nature of business, more write-offs in the future cannot be ruled out. Fourth, it faces steep competition from China’s Huawei and ZTE Corporation, who are larger.

VALUATION
Tejas doesn’t have a listed peer in India. Its asking P/E multiple (preIPO) is around 19.5 on FY17 net profit (before write-off). The capital infusion will raise the P/E to 24. Forward valuation looks attractive if business momentum remains robust.