TNL IPO review: Medium to long term investment
Tejas Networks Ltd (TNL) is an India-based optical and data networking products company with customers in over 60 countries. 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 Makein-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 capitalise on the expected growth in optical capital expenditure globally. Further, optical equipment expenditure in India is expected to grow from USD 391 million in 2014 to USD 869 million by 2020, at a CAGR of 14.2 per cent. 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 per cent in the overall optical networking market. TNL’s hardware is modular and software-defined architecture which allows it to remotely upgrade its hardware with new capabilities and features. This enables TNL’s customers to adopt a ‘pay-as-you-grow’ model (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 realise 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. 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.
With regards to 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 mobilise Rs 767.79 crore to Rs 776.69 crore based on lower and upper price band. The company is issuing 1,27,11,605 equity share of Rs 10 each as offer for sale and also issuing fresh equity worth Rs 450 crore ( approximately 1.75 crore shares at the upper price band). Issue opens for subscription on June 14, 2017 and will close on June 16, 2017. The minimum application is to be made for 55 shares and in multiples thereon, thereafter. The company has reserve 75 per cent of the issue for QIBs, 15 per cent for HNIs and 10 per cent for retail investors. Post allotment, shares will be listed on BSE and NSE.
On performance front, the company has (on a consolidated basis) posted turnover/net profits (Loss) of Rs 386.83 crore / (Rs 17.87 crore) (FY15), Rs 627.46 crore / Rs 29 crore (FY16) and Rs 878.20 crore / Rs 63.22 crore (FY17). Thus it’s 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 crore / Rs 408.79 crore (FY15), Rs 644.21 crore / Rs 486.45 crore (FY16) and Rs 730.17 crore, / Rs 546.17 crore (FY17) and capitalised on an average 70 per cent 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 capitalising salaries of around Rs 453 crore (70 per cent). (Refer Page 107 of RHP). P/E ratio is higher if compared with the latest S&P BSE Sensex P/E trading at 22.65 as on June 5, 2017. 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.
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.