IPO Review

February 26, 2015

Rating matrix

Ortel Communications

Rating

Price band | 181-200

Avoid

Too small a player; expensive valuations

Issue Details
Issue Opens
Issue Closes
Issue Size (| Crore)
Price Band (|)
No of Shares on Offer (Crore)
QIB (%)
Non-Institutional (%)
Retail (%)

3-Mar-15
5-Mar-15
| 217 - 240 crore
| 181 - 200
1.2
75
15
10
75 shares and in
multiple of thereof

Minimum lot size

Objects of the Issue (| Crore)

Half of the IPO is an offer for sale while the other half will be
ploughed back in the company towards network expansion and
capex on cable and broadband services. New Silk Route - PE
Mauritius LLC (33.58% pre-issue) is the selling shareholder for 0.6
crore shares while the remaining 0.6 crore shares are to be issued
afresh

Shareholding Pattern
Pre-Issue

Post-Issue

Promoter & promoter group

64.0%

51.4%

Institutional & Non- Institutional

36.0%

44.7%

0.0%

4.0%

Public & Others

Valuation Summary (at | 200 ;upper price band)

P/E
EV/EBITDA
P/B
ROCE
ROE

FY11
34.0
16.9
4.4
14.4
13.8

FY12
20.5
11.0
3.6
22.2
19.3

FY13
16.7
9.5
3.0
22.7
19.6

FY14
13.2
8.6
2.5
21.1
20.9

Research Analyst
Karan Mittal
karan.mittal@icicisecurities.com
Sneha Agarwal
sneha.agarwal@icicisecurities.com

Ortel Communications (OCL) is a regional cable television and a high

speed broadband services provider focused on Odisha, Chhattisgarh,
Andhra Pradesh and West Bengal. It also offers broadband service and
has an estimated home pass of about 808352. Though it owns the last
mile and is not dependent on LCOs in cable operations, it has a small
subscriber base of 0.5 million. Moreover, the current business model is
not scaleable, given the dominance and regional influence of LCOs in
India. The topline and EBITDA have grown at a CAGR of 14.6% and
19.1%, respectively, in FY10-14. Though the company has been incurring
losses, it recently turned PAT positive in H1FY15 clocking a PAT of | 0.7
crore. However, since 95% of its subscribers fall in the Phase III markets,
there may be limited scope for price hikes. In addition, the presence of
80% analog subscribers needs to be digitised and involves a subsidy
burden of about | 900 per box given. High capex with limited ARPU
growth can hurt return ratios, going ahead.

Investment Rationale
Triple play with last mile connectivity and hence lower leakages
OCL claims to have an ability to provide triple play services (video, data
and voice) with last mile connectivity, though it may not launch voice
operations. The absence of the LCO channel helps it minimise its revenue
losses, control the subscriber churn, cross-sell its products.

Network assets spread across 21600 km.

The company offers broadband services in 48 towns and adjacent areas
with 21600 km of cables as on December 31, 2014. OCL leverages its
network infrastructure by leasing out capacity on its network to corporate.
The stream contributed about | 7.8 crore to the revenues in FY14

Concerns

Scalability issues due to absence of LCO support

Aggressive depreciation policy of STB depreciation of 12 years
95% Phase III subscribers limits the ability to take price hikes
80% analog subscribers to be digitised, higher subsidy of | 900
per box will impact profitability.

Available at 20x FY14 EV/EBITDA; recommend AVOID

At the upper price band of | 200, the company is available at FY14
EV/EBITDA of 20x. The valuations look very expensive in comparison to
peers. Secondly, scalability looks a concern, given lack of LCO support.
Lastly, relatively smaller size (0.5 million subscribers against ~12 million
each of national players like Den and Hathway) may limit competitive
positioning. We recommend AVOID to this issue.
Exhibit 1: Key Financials
| crore
Net Sales
EBITDA
EBITDA Margins (%)
Other Income
Depreciation
Interest
Exceptional & Extraordinary
PAT
PAT Margins (%)
EPS (|)

Source: RHP, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research

FY10
74.63
17.9
24.02
6.9
15.88
11.6
(2.6)
(3.54)
(1.1)

FY11
95.26
21.4
22.52
3.0
23.62
19.9
(19.0)
(19.98)
(0.2)

FY12
119.33
37.9
31.76
1.9
28.04
27.4
1.38
(16.9)
(14.18)
(0.2)

FY13
119.80
34.1
28.48
2.0
36.32
24.9
(25.1)
(20.95)
(0.1)

FY1
128.50
36.0
28.04
6.5
27.04
23.4
4.17
(12.1
(9.39
(0.3

Company Background
OCL is a regional cable television and high speed broadband services
provider focused in of Odisha, Chhattisgarh, Andhra Pradesh and West
Bengal. It has a two-way communication network for Triple Play services
(video, data and voice capabilities) with control over the last mile. The
company holds a dominant position in Odisha, with a fast-emerging
presence in three other markets, covering an addressable market of
approximately five million homes. The business is broadly divided into (i)
cable television services comprising (a) analog cable television services;
(b) digital cable television services including other value added services
such as HD services, near video on demand (NVoD), gaming and local
content; (ii) broadband services; (iii) leasing of fibre infrastructure; and
(iv) signal uplinking services. As on December 31, 2014, about 87.21% of
its cable subscriber base was on its own last mile network.
OCL currently offer services in 48 towns and certain adjacent semi urban
and rural areas with over 21,600 km of cables supported by 34 analog
head-ends and five digital head-ends. It uses HFC (combination of optic
fibre in the backbone and coaxial cable in the downstream) to build its
network.
The company serves both retail and corporate customers. As of
December 31, 2014, it had 372,979 retail subscribers for analog cable
television services, 95,295 retail subscribers for digital cable television
services and 58,277 broadband subscribers including 121 corporate
customers with provisioned bandwidth of 806 mbps adding up to a total
of 526,551 RGUs. The company has grown both organically and
inorganically through sale of its services directly to the cable television
subscribers and buyout of network equipment, infrastructure and
subscribers of other MSOs and LCOs.
Key financials
Exhibit 2: Revenues grow at 14.6% CAGR in FY10-14

Exhibit 3: Topline bifurcation

200.00

150.0
100.0

| crore

150.00

100.00

119.33

119.80

128.50

95.26

0.0

74.63

FY12

50.00

FY10

50.0

FY11

FY12

FY13

FY14

FY13

FY14

Cable Subscription Fees

Internet Subscription Fees

Channel Carriage Fees

Connection Fees

Income from Infrastructure

Signal Uplinking Income

Source: RHP, ICICIdirect.com Research

Source: RHP, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research

Page 2

Exhibit 4: EBITDA & EBITDA margins trend

Exhibit 5: PAT & PAT margins trend

40
35
28.5

30.0
24.0

20.0
17.9

22.5

28.0

25
37.9

34.1

36.0

21.4

20
15
10

FY10

FY11
EBITDA

FY12

FY13
EBITDA Margins (%)

Source: RHP, ICICIdirect.com Research

FY11

FY12

FY13

FY14
20

(2.6)

15

(5.0)

30

(12.1)
(19.0)

(10.0)
| crore

31.8

| crore

40.0

10.0

FY10
-

(15.0)

(16.9)

5
(25.1)

(3.54)

0
(9.39) -5

(20.0)

-10
(14.18)

FY14

(25.0)

10

50.0

(19.98)

-15
(20.95)

-20
-25

(30.0)
PAT

PAT Margins (%)

Source: RHP, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research

Page 3

Valuations
Available at 20x FY14 EV/EBITDA; recommend AVOID
At the upper price band of | 200, the company is available at FY14
EV/EBITDA of 20x. The valuations look very expensive in comparison to
the peers. Hathway is valued at 19.4x FY14 EV/EBITDA. OCL is a very
small player in comparison to Hathway, which has a subscriber base of
about 11.7 million subscribers, and should be at a considerable discount
to that of Hathway. However, as that is not being the case we recommend
AVOID.

Objects of issue
The issue comprises offer for sale and fresh issue:
The proceeds of offer for sale
The funds from the offer for sale - | 120 crore based on the upper price
limit (net of issue related expenses for the selling shareholder) shall be
received by the selling shareholder (New Silk Route) and the company
shall not receive any proceeds from the offer for sale.
Objects of fresh issue
The activities for which funds are being raised by the company through
this issue, after deducting the proceeds from the offer for sale and issue
related expenses for the Company are:
1. Expansion of the network for providing video, data and telephony
services;
2. Capital expenditure on development of digital cable services;
3. Capital expenditure on development of broadband services; and
4. General corporate purposes
Exhibit 6: Objects of issue
SNo
1
2
3
4

Particulars
Expansion of network for triple play
Capex on development of our digital cable services
Capex on development of our broadband services
General corporate purposes
Total

Estimated

Amt to be

Cost
679.8
167.4
105.1
[]
[]

deployed
679.8
167.4
105.1
[]
[]

Proposed schedule
FY16
305.9
75.3
47.3
[]
[]

FY17
373.9
92.1
57.8
[]
[]

Source: RHP, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research

Page 4

Key risks and concerns

Scalability issues due to absence of LCOs
OCL has a small subscriber base of about 0.5 million subscribers vs. 11.7
million and 13 million of the likes of Den and Hathway. Though the
absence of the LCO channel in its business model insulates the company
from the risk of revenue leakages, the company is prone to scalability
issues. The LCOs have access to a huge subscriber base. Going by the
single handed route the company may lose out on prospective
subscribers.

Depreciation policy appears aggressive

The company follows a policy of depreciating its STBs over a time frame
of about 12 years, which is quite large in comparison to the industry
standards of about five to seven years. This makes the numbers at the
PAT level appear higher than it would be in the other case. Though the
company takes a one time write-off for any damaged STBs, we still feel
OCL should revisit its depreciation policy.

Total 95% Phase III subscribers limit ARPU expansion opportunity

Phase III subscribers typically belong to the low income category. The
management enunciated that the digitisation of the base in Phase III will
lead to ARPU expansion by | 40 as digital ARPU for the company stands
at | 190 vs. analog ARPU of | 150. We believe the ARPU expansion is
difficult as the subscribers will already have to bear the brunt of | 600
towards the STB while any ARPU hike may lead to subscriber churn.

Total 80% analog subscribers, high subsidy may hurt profitability

About 80% of the subscribers of the company are still on analog systems.
The company provides a subsidy of about | 900 per set top box.
Digitising these subscribers coupled with limited ARPU hikes may
increase the losses for the company.

ICICI Securities Ltd | Retail Equity Research

Page 5

Financial Summary

Exhibit 7: Profit and Loss Statement

Profit and Loss Statement
Total Income
Growth% (YoY)
EBITDA
EBITDA Margin (%)
Depreciation
Finance Costs
Exceptional items (C)
Tax Expenses
Adjusted PAT

FY10
81.49
NA
17.92
24.0
15.88
11.56
(2.64)

FY11
98.25
20.56
21.45
22.5
23.62
19.85
(19.04)

FY12
121.28
23.43
37.91
31.8
28.04
27.36
1.38
(16.92)

FY13
121.81
0.44
34.12
28.5
36.32
24.91
(25.10)

FY14
135.04
10.86
36.03
28.0
27.04
23.42
4.17
(12.06)

H1FY15
71.93

FY10
82.3
0.1

FY11
28.4
36.2

FY12
28.4
19.3

FY13
28.4
-5.6

FY14
37.3
-17.6

H1FY15
24.4
-4.1

62.7
14.0
0.9

119.7
16.2
0.7

64.3
11.5
1.1

130.3
8.6
1.2

125.5
6.9
0.3

111.6
4.0
0.3

5.1
7.1
49.1
0.0
221.3

10.0
4.8
68.0
0.2
284.2

10.0
10.2
131.1
0.1
276.0

10.0
11.2
62.8
0.0
246.9

9.7
19.6
56.9
0.0
238.5

10.0
20.4
79.8
0.0
246.3

153.0
19.8
15.9
0.3
2.8
4.4

187.4
23.5
18.4
0.3
3.8
6.7

211.3
18.0
10.5
0.3
3.0
1.8

194.9
15.1
5.3
0.3
2.5
2.7

186.1
10.6
4.9
0.3
2.3
3.8

186.9
7.9
7.6
0.3
2.2
5.9

0.2
7.2
4.4
12.9
0.4
221.3

0.3
6.3
23.8
12.9
0.7
284.2

0.2
13.1
6.3
10.8
0.7
276.0

0.1
12.8
5.9
6.1
1.1
246.9

0.1
13.9
5.5
7.2
3.6
238.5

0.5
21.7
4.2
8.6
0.6
246.3

23.51
33.4
12.95
11.14
0.26
0.66

Source: RHP, ICICIdirect.com Research

Exhibit 8: Balance Sheet

Balance Sheet
Share Capital
Reserves and Surplus
Non - Current Liabilities
Long -Term Borrowings
Other Long-Term Liabilities
Long-Term Provisions
Current Liabilities
Short- Term Borrowings
Trade Payables
Other Current Liabilities
Short-Term Provisions
Total
Non - Current Assets
Tangible Assets
Intangible Assets
CapitalWork-In-Progress
Non - Current Investments
Long-Term Loans and Advances
Other Non-Current Assets
Current Assets
Inventories
Trade Receivables
Cash and Bank Balances
Short-Term Loans and Advances
Other Current Assets
Total

Source: RHP, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research

Page 6

RATING RATIONALE

ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns

ratings to its stocks according to their notional target price vs. current market price and then categorises them
as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional
target price is defined as the analysts' valuation for a stock.
Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction;
Buy: >10%/15% for large caps/midcaps, respectively;
Hold: Up to +/-10%;
Sell: -10% or more;

Pankaj Pandey

Head Research

pankaj.pandey@icicisecurities.com

ICICIdirect.com Research Desk,

ICICI Securities Limited,
1st Floor, Akruti Trade Centre,
Road No 7, MIDC,
Andheri (East)
Mumbai 400 093
research@icicidirect.com

ICICI Securities Ltd | Retail Equity Research

Page 7

ANALYST CERTIFICATION
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