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Review By Dilip Davda on June 7, 2017

Tejas Networks Ltd (TNL) is an India-based optical and data networking products company with customers in over 60 countries. TNL designs, develops and sell high-performance and cost-competitive products to telecommunications service providers, internet service providers, utility companies, defence companies and government entities (collectively, “Communication Service Providers”). Its products are used to build high-speed communication networks that carry voice, data and video traffic from fixed line, mobile and broadband networks over optical fibre. TNL’s products utilize programmable software-defined hardware architecture with a common software code-base that delivers an app-like ease of development and upgrades of new features and technology standards. Currently, India is its largest geographic segment (in terms of revenue) and 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.

The company has invested heavily in research and development in order to grow through multiple technology cycles and is well-positioned to capitalize on the expected growth in optical capital expenditure globally. Further, optical equipment expenditure in India is expected to grow from US$391 million in 2014 to US$869 million by 2020, at a CAGR of 14.2%. For the year ended March 31, 2016, TNL was the second largest optical networking products company in terms of market share in India, with a market share of 15% in the overall optical networking market. Company’s current product portfolio targets access (i.e., the outer perimeter of a telecommunications network which connects to the end consumers), metro (i.e., networks that aggregate and distribute traffic collected from access networks within a large city or region) and long-haul (i.e., networks that interconnect metro networks using high bandwidth transmission) networks.

TNL’s hardware is modular and software-defined architecture allows it to remotely upgrade its hardware with new capabilities and features. This enables TNL’s customers to adopt a “pay-as you-grow” approach (i.e., purchase our products/services incrementally as needed) while adopting new services, and also enables them to extend the life of installed systems through regular feature upgrades without having to Invest in new hardware purchases. Its software-defined hardware architecture also enables it to deploy the same products across multiple hardware platforms in multiple geographies by making country-specific adaptations, thus allowing the company to save costs and realize economies of scale.

As of April 30, 2017 TNL has filed 333 patent applications, with 203 filings in India, 89 filings in the United States and 6 filings in Europe, out of which 56 patents have been granted and it has also filed 35 patent applications under the Patent Cooperation Treaty. The company outsources most of its manufacturing to reputed electronics manufacturing services (“EMS”) companies. This allows it to stay asset-light and enables the company to scale-up production without requiring a corresponding increase in capital expenditure towards its own manufacturing operations.

Further, TNL’s business model with operations substantially located in India, giving it significant cost advantage in research and development, product development, sales, marketing, customer support and manufacturing. Its India-based operations also allow it to design, develop, manufacture and sell high-performance and cost-competitive products in India and globally.

To part finance its capital expenditure for paying salaries to research and development team, working capital and general corpus fund needs, the company is coming out with a maiden IPO to mobilize Rs. 767.79 crore to 776.69 crore based on lower and upper price band. The company is issuing 12711605 equity share of Rs. 10 each as offer for sale and also issuing fresh equity worth Rs. 450 crore ( approx 1.75 crore shares at the upper price band). Issue opens for subscription on 14.06.17 and will close on 16.06.17. Minimum application is to be made for 55 shares and in multiples thereon, thereafter. The company has reserve 75% of the issue for QIBs, 15% for HNIs and 10% for retail investors. Post allotment, shares will be listed on BSE and NSE. BRLMs to the issue are Axis Capital Ltd, Citigroup Global Markets India Pvt Ltd, Edelweiss Financial Services Ltd and Nomura Financial Advisory and Securities (India) Pvt Ltd. Link Intime India Pvt Ltd is the registrar to the issue.

On performance front, the company has (on a consolidated basis) posted turnover/net profits (Loss) of Rs. 386.83 cr. / (Rs. 17.87 cr.) (FY15), Rs. 627.46 cr. / Rs. 29.00 cr. (FY16) and Rs. 878.20 cr. / Rs. 63.22 cr. (FY17). Thus its top and bottom lines have shown tremendous growth in last three years. Post issue, its current paid up capital of Rs. 72.04 crore with stand enhanced to Rs. 89.54 crore.

For last three fiscals the company incurred expenses on R & D and Salaries were Rs. 489.58 cr. / Rs. Cr. 408.79 cr (FY15), Rs. 644.21 cr. / Rs. 486.45 cr. (FY16) and Rs. 730.17 cr, / Rs. 546.17 (FY17) and capitalized on an average 70% of salaries for these years. In Fiscal 2018 the company is expected to spend Rs. 932 crore on R & D and the salaries of Rs. 647 crore for the said activities and out of that it will be capitalizing salaries of around Rs. 453 crore (70%). (Refer P107 of RHP). If we co-relate the last three year’s spending on R & D with top line, one can very well judge the earnings for FY18. Management is confident of maintain the tempo of growth in coming years as India is on the threshold of fast forward mode in communication. Company is enjoying quality equipment provider status among emerging and advanced economies.

If we attribute latest earnings on the fully diluted equity post issue, then asking price is at a P/E of 36 plus ( at a P/E of 27 plus on the current paid up equity) and at a P/BV of 3.63 making it a fully priced issue. P/E ratio is higher if compared with the latest S&P BSE Sensex P/E trading at 22.65 as on 05.06.17. There are no listed peers to compare with. However, this being the first mover company in the segment, it will attract investments as witnessed in the past for such IPOs.

On BRLM’s front, the 4 BRLMs associated with this offer have handled 31 public issues in the past three years out of which 6 issues closed below the issue price on listing date.

Conclusion: Investors may consider investment for medium to long term in this first mover IPO from the segment, as company is set to benefit immensely under Government’s Digital India/Make-in-India campaign.

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