Tejas Networks incorporated in 2000 is an India based optical and data networking company with a customer base across 60 countries. Tejas designs, develops and sells products to telecommunication service providers, internet service providers, utility companies and government entities. The products are used to build communication network that carry voice, data and video traffic.
As of FY17, 63% of the business is derived from India and 27% is derived from rest of the world (Africa, Latin America, Malaysia). The company plans to raise Rs7,766mn through issue of 30.7mn shares (of which Rs4500mn is amount raised from fresh issue of shares and Rs3276mn is offer for sale of shares from existing investors). The funds raised would be predominantly used for Working capital requirements. We note the company has show strong
growth with revenues growing at 27.5% CAGR over FY14 ‐ FY17. However, historic performance of earlier years (FY07 ‐ FY11) shows huge volatility in the revenue as well profitability.
Also, Tejas Networks derives a huge chunk of business from PSU’s which contributed to 44% of net revenues for FY17 (Bharat Broadband Network Limited, BSNL, Power Grid Corporation of India, Railtel Corporation of India Limited). The strong revenue growth over the past two years was led by PSU clients and international markets. Our view is that company would have benefited from government initiatives to expand Broadband connectivity to villages. Business is also working capital heavy with net working capital cycle at 166 days as on FY17.
We have also observed volatile operating and free cash flow trajectory over the past five years. We believe strong growth might not be accompanied by free cash flow generation (For FY17, company generated Rs315mn in FCF, implying a FCF yield of 1.3%). At Rs250 ‐ 257/sh, the IPO is priced at 24x FY17 Adjusted EPS on post issue diluted equity capital. While growth might remain strong over next two years, we believe cyclical volatility and high dependence on PSU’s is a concern. IPO appears to be priced at 15.5x FY19E. We recommend “Avoid” the issue.
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