Tejas Networks IPO Analysis

Tejas Networks IPO
Tejas Networks Limited, which designs and develops products for telecom service providers, is coming out with an IPO in the coming week. Tejas Networks IPO comprises of both fresh issue of shares and offer for sale for an aggregate amount of Rs. 777 crore. Tejas Networks Ltd is a Benguluru  based home grown optical and data networking products company with customers in over 60 countries. The company claims to be India’s first electronics design and product firm and has enjoyed good backing from venture capital funds over the years. These ventur fund includes names like Mayfield, Goldman Sachs, Argonaut , Osher LP, Cascade, Frontline Ventures, Goldman Sachs, Intel Capital, Samena Capital etc. Apart from fresh issue to raise funds, Tejas Networks IPO aims at providing a part exit to some of these venture funds and other individuals.

Tejas Networks IPO Issue Details
Tejas Networks Limited IPO
Issue Period  Wednesday,June 14, 2017  to Friday, June 16, 2017
Price Band Rs. 250- 257
Minimum Bid Lot 55 Equity Shares 
Issue Size  Fresh Issue of Equity Shares aggregating upto Rs.450 Crore
  Offer for Sale of 12,711,605 Equity Shares 
Total Issue Size ( Rs.) Rs. 776.69 crores (at upper end of Price Band)
Issue Structure :  
QIB 75% of the Net Offer- Rs.582 Cr
NIB 15% of the Net Offer Rs.  117 Cr
Retail 10% of the Net Offer  Rs.  77.67 Cr
Lead Manager Axis Capital, Citigroup Global Markets, Edelweiss Financial, Nomura Financial
Registrar Link Intime India Pvt. Ltd.
About Tejas Networks

The company was originally incorporated as Tejas Networks India Private Limited on April 24, 2000 at Bengaluru, Karnataka. Subsequently the Company was converted into a public limited company and its name was changed to Tejas Networks India Limited in 2002 & was further changed to Tejas Networks Limited in 2008. The company was founded by US-based tech evangelist Gururaj Deshpande and Sanjay Nayak with seed funding from ASG Omni. It makes optical networking products and has customers in 60 countries. It caters to telecom operators, Internet service providers, utility companies, defence firms and government entities.

For 2015-16, Tejas Networks ranked as the second-largest optical networking products company with a market share of 15% in India. Nearly 70% of its workforce is deployed in R&D. Within the telecom industry, Tejas Networks operates in the business of enhancing the bandwidth i.e. the backbone network. During Fiscal Years 2015, 2016 and 2017, Tejas Networks generated 42.7%, 27.9% and 34.9%, respectively of its consolidated gross revenue from operations from international customers. Among Indian clients it has a high concentration among Government/PSU clients.

Tejas Networks: Major Clients over the years
FY 2015 FY 2016 FY 2017
Bharat Sanchar Nigam Limited Bharat Sanchar Nigam Limited Bharat Broadband Network Limited
Bharti Airtel Limited Bharti Airtel Limited Bharat Sanchar Nigam Limited
Ciena Corporation Ciena Corporation Ciena Corporation
Railtel Corporation of India Limited SACOFA Sdn Bhd SACOFA Sdn Bhd
Tata Communications Limited Tata Communications Limited Tata Communications Limited

Tejas Networks is a professionally managed company and in the strict sense does not have any promoter group. The company also manufactures products in India through partnerships with reputed EMS(Electronics manufacturing services) companies, Sanmina Corporation and Cyient helping it stay asset-light and cost-efficient in production. Tejas Networks also has an in-house manufacturing facility focused on final integration, testing and quality control

Objects of the Offer:

Though the OFS, several shareholders plan to sell their holdings which includes Cascade Capital Management Mauritius (5,330,000 shares), India Industrial Growth Fund Ltd. (2,514,147 shares)and private equity firm Frontline Strategy (1,066,361 shares). A number of individuals are also selling their shares including CEO Sanjay Nayak and CTO Kumar N Sivarajan.

The proceeds from the fresh issue are intended to be used for:

  • Capital expenditure & towards payment of salaries and wages of R&D team amounting to Rs. 45.29 cr.
  • Meet Working capital requirement of Rs. 303.00
  • General corporate purposes Rs 102 Crore

Tejas Networks IPO Issue Proceeds

Tejas Networks IPO: Financials: 
Financials  ( Rs.  In Crores)
2017 2016 2015 2014 2013
Net Revenue from Operations 936.14 674.49 407.09 440.31 386.42
Revenue Growth (%) 38.79% 65.69% -7.54% 13.95%
EBITDA  174.23 113.05 68.52 94.97 44.17
EBITDA Margin (%) 18.61% 16.76% 16.83% 21.57% 11.43%
Profit Before Tax 64.5 29.01 -17.87 2.78 -78.81
Net Profit  63.22 29.01 -17.87 2.78 -79.04
Net Profit  Margin 6.75% 4.30% -4.39% 0.63% -20.45%
Face Value 10 10 10 10 10
Share Capital 74.01 66.52 125.53 100.98 100.98
Reserves 426.66 294.01 205.63 223.48 220.21
Net worth 500.67 360.53 331.16 324.46 321.19
RoNW (%) 12.63% 8.05% -5.40% 0.86% -24.61%
NAV Per Equity share (Rs.) 70.78 54.2 49.78 50.36 49.85
EPS (Rs.)  9.40 4.71 -2.90 0.45 -12.84
IPO Price 257
PE ratio 27.34
P/BV ratio 0.89
Post Issue Share Capital 89.55
Earning on Diluted equity 7.06
PE ratio (Post Issue Equity) 36.40
Market Cap 2301.43
Market Cap/Sales Ratio 2.46
Tejas Networks IPO: Pros
  • Tejas Networks enjoys leadership in the fast growing Indian optical equipment market and could benefit from various government initiatives. Tejas Networks end-to-end portfolio of optical networking products positions it well to take advantage of the expected industry growth.
  • Tejas Networks expects high growth in segments such as 100 Gbps, greater-than 100 Gbps, Optical Transport Network (“OTN”), Converged Packet Optical (“CPO”) and Reconfigurable Optical Add-drop Multiplexer (“ROADM”) in the near future. This is on account of 100 Gbps and greater-than 100 Gbps technologies which are  displacing both 10 Gbps and 40 Gbps in metro and core networks.
  • CPO continues to be the preferred optical aggregation platform. Global CPO Revenues are expected to grow at a CAGR of 7.8% from US$ 8.3 billion in 2014 to US$ 12.9 billion by 2020. Further, the demand for optical switching technologies, ROADM and OTN, is growing rapidly at a CAGR of 11.1% and 14.6% respectively. The global revenue for ROADM is expected to grow from US$ 4.5 billion in 2014 to US$ 8.4 by 2020. The global market for OTN is expected to grow from US$ 3.6 billion in 2014 to US$ 8.2 billion by 2020
  • Tejas Networks has demonstrated high client retention from both private and public sector clients  as well as from overseas clients. The Company derives a significant proportion of its revenues from repeat business. In Financial Years 2015, 2016 and 2017, Tejas Networks generated 94.06%, 96.16% and 88.47%, respectively, of its revenue from operations  from existing clients. 
  • Tejas Networks aims to take further Benefit of Policy for Preference to domestically manufactured telecom products in procurement by Government due to security considerations.
  • Company has a Track record and culture of innovation leading to product and technology leadership. It has been seeded by Shri Gururaj Deshpande who has an excellent reputation and knowledge of the area and is a well known as an Indian American venture capitalist and entrepreneur,and known for co-founding the Chelmsford, Massachusetts based internet equipment manufacturer Sycamore Networks, Deshpande Center for Technological Innovation at MIT and the Deshpande Foundation. Incidentally he is married to sister of Mrs Sudha Murthy (wife of Infosys founder )
  • Tejas Networks has focus on Software defined hardware with ease of use. Tejas follows cost and capital efficient business model with considerable outsourcing and asset light model.
  • Tejas Networks has a strong professionally managed team with significant industry experience.
  • Tejas has over 250 silicon IPs and has filed 326 patent applications and expects good business as it offers software led hardware design in its products that helps telecom operators to use their voice networks to offer data.

  • Tejas Networks intends to work towards expanding in emerging markets like South East Asia, Africa, and Latin America. It considers these regions are like India where infrastructure is not there and there is need to transform from voice-based to data.
Tejas Networks IPO: Cons
  • The company operates in a highly competitive industry and is prone to rapid obsolescence and this is also reflected in company’s financial performance which shows many  ups and downs
  • Majority of Tejas customers operate in the telecommunications networking industry. Factors that adversely affect this industry or product spending by companies within this industry may adversely affect its prospects & business.
  • Company has made loses in the past & had difficultly in paying wages for R&D.
  • There are pending cases against the company by Tax authorities and the amount involved is approx Rs. 158 crores
  • Tejas Networks top five customers amounted to 58.81% of its consolidated revenue from operations. These include Bharat Broadband Network Limited, Bharat Sanchar Nigam Limited. Ciena Corporation, SACOFA Sdn Bhd, Tata Communications Limited.
  • In the past, Tejas Networks has faced declines in revenue from operations on account of a large customer filing for bankruptcy protection and many of its Indian PSU telecom service providers reducing capital expenditure, due to regulatory and operational reasons (in Fiscal Years 2012 and 2013).
  • Many of its key customers are large Communications Service Providers and may be reeling under considerable competitive pressure
  • The networking equipment market is highly competitive, rapidly evolving and characterized by rapid technological changes, with new product introductions, technology enhancements and evolving industry standards with respect to the protocols used in data communication and telecommunication networks. Company’s future performance will depend on the successful development, introduction and market acceptance of new and enhanced products that address these changes as well as current and potential customer requirements. New products based on new or improved technologies may render existing products obsolete.
  • Tejas Networks faces competition from large global companies such as Huawei Technologies Co., Nokia Corporation, ZTE Corporation, and Ericsson, specialized optical network equipment providers such as Ciena, Coriant, Fiberhome, Adtran, Adva, ECI and Infinera and Ethernet switches and IP router providers such as Cisco, Juniper, Huawei and HP.
Tejas Networks IPO: Overall Assessment
  • Tejas Networks had earlier planned an IPO in 2008-09 but same had to be abandoned due to certain unfavorable conditions including filing of Bankruptcy by Nortel Networks which had bought a 2.44% stake in the company in the year 2007.
  • Tejas Networks IPO is priced at an PE of about 27 times its FY17 earning and based on expanded equity, post IPO, the issue is priced at about 37 PE. Even as prospects for optical data networks may be considered reasonably good, the ratio is on an upper side for a company that can be considered to offer a mix of hardware and software
  • In the strict sense Tejas Networks has no Indian peers with which it can be compared. Dlink India which is subsidiary of D-Link Corporation,  a Taiwanese multinational is also providing networking equipment but enjoy considerably less PE ratio even though it is debt free.
  • Tejas Networks has considerable dependence on Govt sector sector clients which has resulted in blocking of working capital and long payment cycle involved. 
  • A part of issue proceeds is going to meet wages of R&D staff, which is not a good indicator. 
  • Tejas Networks predominantly operated in Telecom sector which may see considerable disruption in coming months due to entry of Reliance Jio. Factors that adversely affect Telecom industry or product spending by companies within this industry may adversely affect its business
  • Even though Tejas Networks has demonstrated considerably on technical prowess and has a strong product portfolio, its performance has not been consistent over the years which brings to fore the challenging environment its faces and perils of operating in a high end technology area.conditions including filing of Bankruptcy by Nortel Networks which had bought a 2.44% stake in the company in 2007. Inability of Tejas Networks to pay its R&D staff shows the pressures under which it operates even as it scores high on technology & innovative approach.
  • The high stakes involved in operating in this sectors are demonstrated by the rise and fall of Sycamore Networks which made the promoter Gururaj Deshpande one of the wealthiest self-made businessmen in the world as at one point of time his promoted Sycamote Networks enjoyed a capitalization of 45 billion US $ and was looked at the next big thing and a leader in the race to direct digital traffic across the Internet. The company was subsequently wound up  in 2013. This show how difficult it is to maintain leadership and even survive in high technology areas
  • While Tejas Networks strictly does not have a promoter as per SEBI norms, its was seeded by people including Gururaj Deshpande  who is well known in investing circles and was also appointed by President Barack Obama to the Co-Chairmanship of the National Advisory Council on Innovation and Entrepreneurship, a group established to support the US President’s innovation strategy team of Mr. Obama. He has contributed extensively to philanthropy and universities like MIT. Even as his star company Sycamore met an ignominious end, he may still be commanding a good degree of respect among foreign investors
  • With backing of several PE investors and only 10% portion reserved for retail, the Tejas Networks IPO issue should sail through.
  • Even as I like the company as it dared to make high technology products and has no parallels in its field in the country, its is difficult to predict the impact of Technology & Market forces on company’s fortunes  and some caution  may be warranted   as telecom sector is reeling under pressure amid fierce competition and mounting debt in balance sheet of companies. A lower pricing would have certainly helped the company and at this juncture I am more inclined to AVOID this IPO due to issues enunciated above.
  • Watch this space for final update on the IPO, a day or two before the closing date

Standard disclaimer: I am not a SEBI registered analyst. I may have vested interest in every stock I discuss. Please do your own due diligence as stock market investments have high degree of inherent risk.

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