Tejas Networks Limited (TEJASNET)

April 19, 2018 CMP: ₹332

Time Horizon – 12 Months Target: ₹427

Key Data (In ₹ Mn.) FY-17 FY-18E FY-19E FY-20E

Bloomberg Code TEJASNET IN Net Sales 8,782 9,027 12,204 15,133
V NSE Code TEJASNET EBITDA
EBITDA Margin
1,709
19.5%
2,018
22.4%
2,728
22.4%
3,534
23.4%
BSE Code 540595
A Sector
Industry
IT
Technology Hardware & Equip.
PAT
EV/Sales
632
3.5
1,043
3.4
1,599
2.5
2,170
2.0
L Face Value (₹)
BV per share (₹)
10.0
55
EV/EBITDA
P/E (x)
16.7
48.4
14.3
29.3
10.6
19.1
8.2
14.1

U Dividend Yield (%)

52 Week L/H(₹)
0.0%
257 / 472
Price Performance
Absolute
CY14
-
CY15
-
CY17
54%
YTD
-15%

E Market Cap. (₹ mn.) 30,152 Relative - - 39% -13%

Shareholding Pattern (as on Mar’18) Relative stock performance (Jun’17=100)

175

P Promoters
Mar-18

0.0%
Dec-17

0.0%
Sep-17

0.0%
Jun-17

0.0%
150

I Institutions 27.5% 29.9% 30.5% 29.7%

125

100

C Others 72.5% 70.1% 69.5% 70.3%

75

Jul-17
Jul-17
Jun-17

Nov-17
Nov-17

Apr-18
Aug-17
Aug-17
Sep-17
Sep-17

Dec-17
Dec-17

Feb-18
Feb-18
Mar-18
Mar-18
Jan-18
Jan-18
Oct-17
Oct-17
k Total 100% 100% 100% 100%

Nifty 500 TEJASNET

Source: Company, Anand Rathi Research, Bloomberg

Analyst: Narendra Solanki Anand Rathi Research

narendrasolanki@rathi.com
Tejas Networks Limited (TEJASNET)
Better prospects for both top line growth and improvement
in profitability.
 Tejas Networks Limited (TEJASNET) is an India-based optical and data networking products company founded in 2000 with
customers in over 60 countries. The company 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”) while maintaining itself asset-light through outsourcing
manufacturing.
 The company’s current product portfolio targets access networks, metro networks and long-haul networks. It has also setup an
in house research & development which has enabled it to develop over 40 carrier-grade equipment, over 300 high-speed PCB
and over 250 silicon intellectual properties (“IPs”).
 As of Dec-17 it has filed 338 patent applications, with 205 filings in India, 92 filings in the United States and 6 filings in Europe,
out of which 56 patents have been granted and have also filed 35 patent applications under the Patent Cooperation Treaty.
 During the latest quarterly results, the company has recorded a de-growth of 14% in its revenues at ₹2,299 million in Q3-FY18
as against ₹2,673 million in Q3-FY17. Its EBITDA margins stood 22.1% at ₹507 million as against 23.5% at ₹627 million. The
decline in revenues was mainly due to few projects getting shifted to the next financial year and lower international revenues.
 Going ahead, we expect Tejasnet to end FY-18 with marginal growth over FY-17 due to lumpiness and spillover of order
execution to FY-19. However, the management has confirmed that this spillover of order is over expected growth of early 20%
in FY-19. Thus FY-19 growth could well be higher at around 30% plus rate. The company is also in process to grow its
international business aggressively in few quarters.
 In long term it is well-poised to take advantage of the growth in the communication industry due to its end-to-end portfolio of
products coupled with government’s preference for sourcing from domestic suppliers for its projects like Bharat Net.
 We expect Tejasnet with its focus on innovation through R&D, expansion ofhigh growth segment product portfolios and asset
light business model to continue to provide traction in business in medium to long term. In medium term, we believe the stock
at current price is attractive owing to better business prospects in FY-19E onwards. We thus re-iterate BUY rating on Tejas
Networks Limited with a target price of ₹427 per share.

2 Anand Rathi Research

Tejas Networks Limited (TEJASNET)
History and key milestone achieved.

Year Key Milestones

Tejas Networks incorporatedin Bangalore; Sanjay Nayak, Dr. Kumar N Sivarajan and Arnob Roy joined the
2000
company
2001 Procured order from TATA Power Company Limited
2004 Procured order from Railtel Corporation of India Limited through Electronics Corporation of India Limited
2005 Named in the ‘Red Herring 100 Asia’ by Red Herring
2006 Received the CSIR Diamond Jubilee Technology Award from the Council for Industrial and Scientific Research
2007 Received Carrier Ethernet certification from Iometrix
Named in the ‘Red Herring 100 Global’ by Red Herring
2008 Tejas receives ISO9001:2008 and TL9000-H certification
2009 Received the NASSCOM Innovation Award from NASSCOM
2010 Signs an OEM contract with an international partner to supply complementary products
2011 Procured order for 3G rollout in multiple circles
2012 Entered into a new OEM contract to supply complementary products
Recognized amongst the top five Indian applicants for patents in the field of information technology by the Office
2013
of the Controller General of Patents, Designs, Trademarks and Geographical Indication
2014 Selected as a supplierfor Africa’s West Indian Ocean Cable Company network
2015 Procured order under Optical Fiber Cable Network Development in 1,000 Union Parishad Project
2016 Tejas recognized as a Two Star Export House by Ministry of Commerce
Received Carrier Ethernet 2.0 certification from Iometrix certifying TJ1400, TJ1400P, TJ1600
Procured international order for 100G upgrade on TJ1600 equipment
Tejas procured order for installation, commissioning and maintenance of GPON equipment for a national fiber
2017
optic network project
Tejas Networks executes Terabit-Scale Optical Backbone Network in Bangladesh.
Tejas Networks successfully completes supply and deployment of over 40,000 GPON equipment for BharatNet
2018
Phase-1 project
Tejas Networks wins expansion order of Rs. 336 Cr from BSNL for BharatNet
Source: Company, Anand Rathi Research,

3 Anand Rathi Research

Tejas Networks Limited (TEJASNET)
Telecom Industry Eco-system and Tejasnet presence

Telecom Industry
Network Infrastructure

Active Equipment Passive Infrastructure

Wireless Access Tower Operators

Optical Transmission Cables & Accessories

Switches & Routers System Integrators

 Tejas Networks is currently operating out of optical transmission vertical within the telecom industry network
infrastructure industry. The company’s prospective customers range from telecom operators in both private as
well as Government space along with various internet service providers.
 The key competitors for the company within this segment are Ciena, infinera and ALU type of companies.
Source: Company, Anand Rathi Research,

4 Anand Rathi Research

Tejas Networks Limited (TEJASNET)
Focus from Access to Metro networks

 Long-haul Networks: Networks that interconnect metro networks using high bandwidth transmission) networks.
 Metro Networks: Networks that aggregate and distribute traffic collected from access networks within a large city or region.
 Access Networks: The outer perimeter of a telecommunications network which connects to the end consumers.
Source: Company, Anand Rathi Research,

5 Anand Rathi Research

Tejas Networks Limited (TEJASNET)
Offering differentiated products with software defined
hardware.

Incorporates key
Multi-gen Support Seamless Network Cost effective
requirements of
2G-3G-4G Transformation lifecycle upgrades
markets

Programmable Advanced Catering to NFW,

hardwares with hardware-software CPO transport
uniform code base integration networks

Advantage to costumers Advantage to Tejas

Source: Company, Anand Rathi Research,

6 Anand Rathi Research

Tejas Networks Limited (TEJASNET)
Enabling it to maintain leadership in high-capacity circuit
emulation.

Core PTN Equipment extracts

emulated circuits and hands-off
over high-speed TDM interfaces

Edge PTN Equipment "emulates"

low-speed TDM circuits over
Tejas hardware can be reprogrammed to
high-speed Packet interface support a seamless and phased transition

Source: Company, Anand Rathi Research,

7 Anand Rathi Research

Tejas Networks Limited (TEJASNET)
Strong pick-up in optical capex in near future expected as
Indian data market is under invested in fiber and data usage
Internet Penetration Braodband Subscribers (Mn.)

Optical Capex vs Mobile Broadban Subscribers Ratio of Optical capex to subscribers

Source: Company, Anand Rathi Research

8 Anand Rathi Research

Tejas Networks Limited (TEJASNET)
Higher fiber connectivity of cell cites drives higher bandwidth
needs which further drives capex; benefiting Tejasnet.
Optical Capex Distributoin
Undersea &
Bandwidth
Management,
5%

LH/ULH, 32%

Metro &
Access, 63%

 Tejas is focusing on high-growth Metro & Access segments with focus on Intra-city networks where there is need
for large investments in both capacity and fiber-reach and Inter-city backbone- investments for upgrade in
capacity
 Also, the significant investments by government in rural areas for delivering broadband connectivity under
Bharate Net project also augurs well for companies like Tejasnet as it enhances business proposition.

Source: Company, Anand Rathi Research

9 Anand Rathi Research

Tejas Networks Limited (TEJASNET)
Investments into R&D to pay off as higher patent filings and
product innovation could add niche to its offerings

Source: Company, Anand Rathi Research

10 Anand Rathi Research

Tejas Networks Limited (TEJASNET)
Sustained focus on digitisation and increase in data
consumption to drive capex leading to higher revenues.
Sales (₹ Mn.) & EBITDA Estimates
16,000 24%

12,000 18%

8,000 12%

4,000 6%

- 0%
FY-16 FY-17 FY-18E FY-19E FY-20E

Revenues (₹Mn.) EBITDA Margins % (RHS)

 We expect Tejas networks Limited to grow its revenues at a CAGR of around 20% for the next three years to reach
almost around ₹1,500 million by FY-20E. The main drivers for the growth are increased capex in data
infrastructure from telecom industry, BharatNet project, Rail, Electric and Smart City networks.

 On profitability front, we expect the company to improve its operating margins gradually going ahead as
operating leverage due to its asset light model kicks in. While at profit after tax levels we expect Tejasnet to post
mid double digits margins by FY-20E.

11 Anand Rathi Research

Tejas Networks Limited (TEJASNET)
Valuation and Recommendation:

 With large investment outlay in rural connectivity Relative stock performance (Jun’17=100)
through BharatNet project, higher connectivity 175

infrastructure spend by telecom industry coupled with 150

preference for domestic players augurs well for
125
companies like Tejasnet.
100
 Tejas Networks Ltd stands to benefit being one of the
bigger and incumbent player to benefit from pent- 75

Jul-17
Jul-17
Jun-17

Apr-18
Aug-17
Aug-17

Nov-17
Nov-17
Dec-17
Dec-17

Mar-18
Mar-18
Sep-17
Sep-17

Jan-18
Jan-18
Feb-18
Feb-18
Oct-17
Oct-17
updemand for data & Government.
 At CMP the stock is trading around 19x times FY19E Source: Bloomberg, Anand Rathi Research

earnings and 14x times FY20E earnings.

 We initiate our coverage on Tejas Networks Limited
with a BUY rating and a target price of ₹427 per share. (In ₹ mn) FY-17 FY-18E FY-19E FY-20E
EPS (₹) 7.0 11.5 17.6 23.9
P/E (x) 47.7 28.9 18.9 13.9
P/B (x) 6.0 2.8 2.5 2.1
ROE 12.6% 9.8% 13.1% 15.0%
ROCE 18.5% 13.7% 17.6% 20.2%
EV/EBIDTA (x) 16.7 14.3 10.6 8.2
Source: Company, Anand Rathi Research

12 Anand Rathi Research

Tejas Networks Limited (TEJASNET)
Consolidated Financials:

(In ₹ Mn.) FY-17 FY-18E FY-19E FY-20E (In ₹ Mn.) FY-17 FY-18E FY-19E FY-20E
Net Sales 8,782 9,027 12,204 15,133 Liabilities
Operating Expense 7,073 7,009 9,477 11,600 Equity Share Capital 740 902 902 902
EBITDA 1,709 2,018 2,728 3,534 Reserves & Surplus 4,267 9,747 11,347 13,517
Other Income 120 124 167 207 Totat Shareholder's Funds 5,007 10,649 12,249 14,419
Depreciation 564 652 705 787 Minority Interest - - - -
EBIT 1,265 1,489 2,190 2,954 Long-Term Liabilities 20 20 20 20

Interest 315 152 139 172 Other Long-term Liabilities 166 166 166 166
Deferred Tax Liability - - - -
Misc. items (305) - - -
Short-term Liabilities 4,100 3,048 3,613 4,480
PBT 645 1,337 2,051 2,782
Total 9,292 13,884 16,048 19,085
Tax 13 294 451 612
Assets
Minority Interest - - - -
Net Fixed Assets 1,107 1,367 1,071 913
PAT 632 1,043 1,599 2,170
Long-Term L&A 591 591 591 591
Non Current Investments - - - -
Margins FY-17 FY-18E FY-19E FY-20E Other Non-Current Assets 1,000 1,000 1,000 1,000
Sales Growth % 40.0% 2.8% 35.2% 24.0%
Current Asset 6,594 10,925 13,385 16,580
Operating Margin % 19.5% 22.4% 22.4% 23.4%
Net Margin % 7.2% 11.6% 13.1% 14.3% Total 9,292 13,884 16,048 19,085
Source: Company, Anand Rathi Research

NOTE: *FY-16 number are for 9 month period due to accounting year change.

13 Anand Rathi Research

Tejas Networks Limited (TEJASNET)
Key Risks:

 The company’s business is exposed to swift technological changes and any delay by the company in adapting could
affect its business negatively.

14 Anand Rathi Research

Tejas Networks Limited (TEJASNET)
Rating and Target Price history:

TEJASNET rating history & price chart TEJASNET rating details

175
Date Rating Target Price (₹) Share Price (₹)
150
23-Aug-17 BUY 418 325
125
25-Oct-17 BUY 418 321
100
19-Apr-18 BUY 427 332

75
Jul-17
Jul-17
Jun-17

Nov-17
Nov-17

Apr-18
Aug-17
Aug-17
Sep-17
Sep-17

Dec-17
Dec-17
Jan-18
Jan-18
Feb-18
Feb-18
Mar-18
Mar-18
Oct-17
Oct-17

Source: Bloomberg, Anand Rathi Research Source: Bloomberg, Anand Rathi Research

NOTE: Prices are as on 19th Apr 2018 close.

15 Anand Rathi Research

Tejas Networks Limited (TEJASNET)
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16 Anand Rathi Research

Tejas Networks Limited (TEJASNET)
Disclaimer:

Contd…

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17 Anand Rathi Research

Tejas Networks Limited (TEJASNET)
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Contd.

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18 Anand Rathi Research