Tejas Networks

Research note

Author: Niranjan S.
C​ompany brief
Tejas Networks, founded in the year 2000, is a Bengaluru-based designer and manufacturer of optical &
data networking equipment used in networks of telecom service providers (TSPs), cloud service
providers (CSPs), Internet content providers (ICPs), cable operators, enterprises and utilities. Tejas has
developed a comprehensive, cost-effective product portfolio targeted towards applications in the access
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and metro2 parts of the network. Few of these products address the needs of core3 network as well.

I​ndustry trends/growth drivers

The communication industry has constantly evolved over the decades to meet the changing and
increasing demands of our society. The present evolution in the industry is being dictated by the
explosion in data usage globally. Proliferation of data centers, the advent of 5G and Internet of Things
(IoT) is expected to further boost global data traffic to 4.8 ZB4/year by 2022, more than three times what
it was in 2017 (1.5 ZB/year). Listed below are some key global (and India-specific) industry trends which
are and drive growth for the more nimble network equipment suppliers.

Microwave to Fiber
Previous generation telecom networks such as 2G and 3G employed microwave to transmit data. Optical
fiber can transmit large volumes of data reliably and quickly, close to the speed of light, and has thus
emerged as the chosen medium for modern networks. More base stations (cell towers) are being
connected by fiber and this in turn is spurring investment in active optical equipment, that transmits and
aggregates data over these fiber lines. In India, presently only around 25% of cell towers are connected
by fiber. This is expected to reach 60% by 2023 but will still be lower than the 85-90% levels enjoyed in
advanced economies.

Network modernization
There exist large legacy networks across the world that use inefficient transmission technologies based
on TDM5. Equipment used in these networks are inefficient in terms of usage of space and power and
are no longer being supported. Moreover, such networks are incapable of handling large volumes of
data. This legacy gear needs to be gradually replaced by next-generation equipment that transmit data
as packets. Network operators are also required to replace, or at least upgrade, their equipment each
time they migrate to a new standard, say from 3G to 4G or 4G to 5G. Telecom operators, throughout the
globe, are upgrading their networks to become 5G-ready, even if at present they might employ these for
4G purposes only. This is resulting in a multi-year capex cycle that should last for at least 5 more years.
These 5G-ready networks will be rolled out in phases and at different times in different geographies.
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An ​Access​ network connects a home or business premise to the service provider’s network
2
​A ​Metro​ network aggregates and distributes traffic collected from numerous access networks. A city or state network, where distances are
less than 1000 km, are typically regarded as a metro network
3
A ​Core​ or ​Long-haul​ network interconnects metro networks and generally spans several thousand kilometers
4
'Zetabyte' is a unit of information equal to one trillion gigabytes (GB)
5
'Time-Division Multiplexing' is a method of transmitting and receiving independent signals over a common signal path by means of
synchronized switches at each end of the transmission line so that each signal appears on the line only a fraction of time in an alternating
pattern

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Indian telecom operators, despite their stretched balance sheets, are investing in upgrading their
networks to become 5G-ready in order to stay level with competition, meet customer demands and
thereby ensure survival.
Large enterprises too are building cost-effective, scalable, secure and flexible networks so as to take
advantage of industry 4.0 technologies such as machine learning, IoT, artificial intelligence, big data and
advanced analytics, that require much higher bandwidth. Carrier Ethernet has emerged as a preferred
technology for such modern enterprise networks owing to its scalability, flexibility, low cost-per-bit and
security features.

Growing fixed broadband uptake

More households and enterprises are demanding broadband connections to meet their high-speed data
needs. ​Network operators are upgrading their access networks to cater to this demand. ​In advanced
economies, for every hundred individuals there are 30-50 people who have access to fixed broadband.
In these markets, fiber-based broadband is the preferred technology and is registering double digit
growth. In emerging markets, fixed broadband penetration is much lower. With less than 2 fixed
broadband users for every 100 citizens, India is one such market. As of July 2019, India had over 580
million mobile broadband users but only around 19 million fixed broadband users. This is why Indian
telecom operators, particularly Reliance Jio, are viewing fixed broadband as the next growth frontier.
Fixed broadband is projected to be adopted by ~100 million homes by 2022. Governments in emerging
economies, including India, are giving a big thrust to national broadband connectivity projects to bridge
the ‘digital divide’ between their urban and rural populace. In India, this is being carried out through its
Bharatnet program that aims to connect 250,000 villages with broadband.

SDN/NFV adoption & Disaggregation

Software-defined networking (SDN) and network function virtualization (NFV) are modern network
architectures that have seen increased adoption by networks in recent years. SDN/NFV enable new
services to be deployed faster and at lower costs. SDN networks are highly automated, elastic,
programmable and can be controlled via application programming interfaces (APIs). NFV allows network
functions such as routing, load balancing, firewalls and encryption, that were traditionally carried out by
proprietary hardware to be conducted by software residing in data centers. These emerging network
architectures have led to decoupling of hardware and software where the hardware is commoditized.
This phenomenon is termed as disaggregation. Disaggregation has given network operators flexibility in
choosing different vendors for different applications, as opposed to procuring everything from a single
vendor. A corollary of this is that vendors with the best products are able to break into new customers,
who would have hitherto relied on a sole vendor.

Industry consolidation
The network gear industry has undergone heavy consolidation over the last two decades. In 2000, when
telecom bubble (alongwith the dot-com bubble) was at its peak, there existed ~200 network equipment
vendors in the world. That number has dwindled to around 20 now. Canada’s Nortel and Germany’s
Siemens were among the notable casualties of this consolidation. To survive, others such as Nokia and
Ericsson had to undergo painful restructuring that involved tens of thousands of job cuts. While the
bursting of the telecom bubble kick-started this consolidation, what has sustained this over many years

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is the cyclical nature of this industry, cash-starved customers, high-cost operations and cut-throat
competition from Chinese peers. ​Tejas’ management expects, by the time 5G becomes mainstream,
there will only be some 10 network equipment vendors left standing, with Tejas being one of those
10.
A recent example of consolidation has been Infinera’s acquisition of Coriant for $430 million last year.
Consolidation has reduced competitive intensity among the remaining equipment makers. This effect is
however partially offset by consolidation among their customers, specifically telecom operators, which
reduces the number of potential clients. In the new-age economy, gear makers are tapping into new
customers such as data centers and web-scale companies that need to build high-tech networks.

P​roducts and applications

Tejas’ products can be broadly classified to fall in one of 5 product categories as detailed below.
Converged Packet Optical (CPO) products
CPOs can support transport, processing and switching of circuit and data traffic, within a single product.
This allows operators to reduce equipment footprint and thereby reduce capex. CPOs serve diverse
network applications such as mobile backhaul6, broadband access and enterprise networks.

Packet Transport Network (PTN) products

PTN products primarily transport data traffic and are also capable of transporting voice traffic by
emulating it as packets of data. Mobile backhaul, network modernization, data center interconnect (DCI)
and next-gen utility networks are some key applications where PTNs are used.

Dense Wavelength Division Multiplexing (DWDM) products

Through multiplexing, DWDM (Dense Wavelength Division Multiplexing​) products enable transport of
large volumes of data over a single optical fibre. This makes them suited for core, carrier-neutral7 and
data center interconnect8 (DCI) networks, that require very high bandwidth.

Fixed Broadband Access products

Tejas has developed GPON9-based broadband products for fiber-based networks as well as LTE10-based
broadband products for wireless access. Its GPON products have been widely deployed by the Indian
government in its Bharatnet program. LTE-based broadband products are used in areas where fiber is
hard to lay. This technology is expected to have a significant use case in 5G networks that will vastly
expand its addressable market.

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​Backhaul ​refers to the action of carrying data from base stations (towers) to the next element in the network
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​These networks sell bandwidth to other telecom operators, enterprises, data centers or retail customers
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Networks that move data between data centers
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​'Gigabit Passive Optical Network' technology enables the delivery of internet services to homes and businesses on optical fibre
10
'Long Term Evolution' technology is a standard for high-speed communication for mobile phones and data terminals and is the standard
technology used in 4G networks

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Switches
Tejas’ Ethernet11 switching and IP routing products find use case in large enterprise networks such as
those of state governments and industrial campuses.

C​ompetition
Tejas competes with much larger firms than itself in the network gear market. Huawei, Nokia, Ericsson
and ZTE are the giants of this industry and have carved out two-thirds of the market between them.
Huawei is the market leader with ~30% market share, followed by Nokia (17%) and Ericsson (13%). In
addition to the Chinese and European players, US-based companies such as Ciena, Infinera, Cisco,
Juniper and Arista, South Korea’s Samsung and Israel’s ECI also compete with Tejas.

Table: Tejas’ competitors by products

Products Competitors
CPOs products Huawei, Nokia, Ciena and ZTE
PTN products Cisco, Nokia, Huawei, ZTE, ECI
DWDM products Huawei, Ciena, ZTE, Nokia, Adva, Infinera
Broadband access (GPON) Huawei, Nokia, ZTE, Dasan, UTL, Alphion
Wireless broadband access (4G/LTE) Ericsson, Nokia, Samsung, ZTE, Huawei
Ethernet switches Cisco, Juniper, Huawei, HP

The Chinese
Huawei and ZTE, two of the largest vendors, are from China. Both have won large market shares for
themselves by virtue of their sophisticated product portfolio which are priced at steep discounts to
those of rivals. ​Huawei’s products span the length and breadth of communication networks and is
possibly the only company that can lay claim to having a truly end-to-end product portfolio. The
company is vertically integrated, making many of the chips and components that go into its products.
Huawei lagged behind its European peers in deploying 3G/4G networks but is now at the forefront of 5G
technology. Despite being labeled a security threat and blacklisted by the US and its allies, Huawei has
claimed to have signed over 50 commercial 5G contracts, ahead of key rivals Nokia and Ericsson. ​ZTE
also makes a wide range of network equipment that includes 5G mobile access equipment, mobile
hotspots and routers. It however lacks the vertical integration that Huawei enjoys, relying heavily on US
vendors for components. Last year, ZTE’s operations were brought to a grinding halt when the US
government had temporarily prevented ZTE from procuring from US firms. The US-China trade war has
disrupted the supply chains and reduced the number of addressable markets for these Chinese players.

The Europeans
Present day ​Nokia h
​ as emerged from initially buying out Siemens from their joint venture - Nokia
Siemens Network - for ~$2 billion in 2013 and then acquiring Alcatel-Lucent for another $18 billion in

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Family of computer networking technologies commonly used in local area networks and metropolitan area networks

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2015. Its present ​focus is to leverage its wide product range to grow its 5G market share, network
agnostic software business and enterprises business that sells IP routing and optical network products.
Ericsson’s core business is selling RAN12 and mobile core gear to service providers. After experiencing
flagging sales for many years, both Nokia and Ericsson have only recently returned to the growth path.
This growth is the result of increased capex spends by operators towards 5G and partially due to the
limited competition from Chinese peers who have been affected by geo-political tensions with the US.

The Americans
Cisco ​is the largest American company in this space. Its focus has been in making switches and routers
for core networks. It is gradually expanding its product range via acquisitions, powered by its robust
balance sheet. ​Ciena’s products are used in metro and core networks and emerging applications such as
DCI. Ciena procures CPO access products from Tejas so as to offer a complete CPO product basket to its
customers. Ciena does overlap with Tejas when it comes to metro PTN products. ​Infinera​’s main
business is DWDM products used in core networks. Mid-last year, it acquired Coriant for $430 million to
expand into metro and DCI applications, gain large telecom and web-scale customers, and make it more
vertically integrated. The acquisition also doubled its revenues to $1.6 billion overnight. Both companies
were struggling to reach profitability and are hoping this merger to expedite that process. ​ADVA targets
DCI and Cloud Access (Ethernet access and aggregation devices) applications. ​Arista makes switches
used by cloud services providers, web-scale companies and other high-tech enterprises. ​Juniper​, like
Cisco makes Ethernet switches and IP routers used by telcos, cloud service providers and enterprises.

The Rest
South Korea’s ​Samsung is a relative new-comer to the network gear industry. Like Huawei, Samsung
makes chips and smartphones in addition to network equipment. South Korea is among the front
runners in rolling out 5G networks. Samsung has benefited from this as it is able to showcase its 5G
technology ahead of the competition. Samsung will however find it difficult breaking into established
operators who will most likely prefer incumbent vendors as they can upgrade existing gear to 5G and
thereby incur minimal capex. Samsung is hoping to circumvent this problem by winning business from
new telecom companies such as India’s Reliance Jio who have to make fresh greenfield investments. ​ECI
Telecom ​of Israel is strong in packet optical transport products. India is an important market for ECI
where it competes aggressively with Tejas in metro applications.

C​ompetitive advantages
Tejas has successfully weathered the tumultuous past two decades of consolidation because of its ability
to ​develop relevant products, that can be delivered fast, at scale and at low costs​. Its key advantages
are explained in a bit more detail below.

Wide product range

Network operators prefer vendors who possess a comprehensive product portfolio as this enables to
reduce operational complexity. Out of the 20 odd reputed network gear makers spread across the globe,

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'Radio Access Network' includes key wireless elements, such as radio, that connect end-user mobile devices to the communication network

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only around 10 can claim to possess a wide product range. Tejas is among those 10. Tejas has evolved
from being a single product (optical transmission) company to one that provides solutions for diverse
network applications. Tejas has a ​complete set of products for access to metro core networks. Tejas has
developed PTN products that transmit data; CPO products, that can perform multiple network
applications from a single hardware platform; DWDM products, used for bandwidth scaling; broadband
access products, that deliver high-speed internet services to homes and enterprises; and ethernet
switches and IP routing products, used in enterprise networks. These products are future-ready as they
incorporat next-gen paradigms such as SDN and NFV. Tejas is now also being recognized as a maker of
world-class products by prestigious global technical forums. Last year, its GPON-based broadband OLT13
product was the finalist at Broadband World Forum event held in Germany. This year its ultra-converged
broadband product emerged finalist at the Leading Lights Awards event that took place in the US. All this
will aid Tejas when pitching to new customers.

Solid business model

Tejas runs an ​asset-light operation by outsourcing most of its manufacturing to EMS14 companies such
as US-based Sanmina and India-headquartered Sun Fiber Optics. This allows Tejas to scale rapidly and at
only incremental costs, a key advantage in this fast-paced technology-led industry. It also allows Tejas to
conserve capital by not investing in its own manufacturing facilities.
Further, by adopting a software-defined hardware architecture for its products using India-based
manpower Tejas is able to run a ​cost-efficient R&D and marketing operation​. Tejas claims this allows it
to generate four times the R&D output, compared to global peers, for every dollar spent. Over the last
two financial years Tejas has invested an average of 12.2% of its sales in R&D while peers such as Ciena,
Nokia, Juniper and Infinera have spent 16.5%, 20.9% and 28%, respectively.
The software-defined hardware model, based on reusable building blocks of hardware and software,
gives Tejas ​time-to-market advantage ​as it is able to develop even highly customized products quickly
and cost-effectively. This also leads to ​reduced life-cycle costs as these products are capable of being
remotely upgraded with new features/capabilities through a simple software update push. Ultimately,
this business model has enabled Tejas to post ​better margins than larger competitors, despite their
better scale economics. ​// Juniper, Cisco - better margins - why?

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'Optical Line Terminal' is installed at a service provider's exchange location, and enables communication with multiple end-user Optical
Network Terminals
14
Electronics Manufacturing Services

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Table: Tejas’ margins vis-a-vis competitors

Source: Company filings

Conducive domestic policy
The Indian government, through its various projects such as Smart cities, National Optical Fiber Network
(NOFN), National Knowledge Network (NKN), Digital India and Make in India, aims to provide pan-India
connectivity services and promote domestic network gear manufacturing. The government has targeted
‘net-zero’ imports of telecom equipment by 2022. Tejas is and will continue to be a key beneficiary of
such policy measures, helping it achieve scale and establish field-proven products, which it can later
market to clients globally.

S​trategy
Tejas has developed a good customer reference base​. It leverages this to initiate relationships with new
customers, winning small orders in applications where it has an established, field-tested product. Once
its product effectiveness is proven, Tejas is able to increase wallet-share with those customers through
higher order sizes and cross-selling for other applications. Tejas’ strategy is elaborated in further detail
below.

Develop products in high-growth areas and enter new applications

Tejas has chosen to ​focus on the access and core networks, ​areas where majority of future capex is
going to be spent, given the fact that these network segments will bear most of the increasing data
traffic. The company continues to ​invest heavily in R&D to develop world-class and sometimes even
world-leading equipment that address new applications and thereby increase its addressable market. It
has developed the world’s first ultra-converged access product that integrates gigabit speed fiber
broadband, LTE-based fixed wireless access, carrier ethernet & packet transport functions in one
platform. This product can easily be cross-sold as it can be tested for multiple applications by the client.
Tejas’ alien wavelength DWDM product takes advantage of ‘disaggregation’ in networks to break into
new customers who might already be using other vendors. These efforts have yielded Tejas significant
market share gains in India and helping it grow rapidly in overseas markets. It protects these
investments through patents and has already applied for 349 patents, of which 100+ have been granted.
Tejas’ greatest strength lies in its ability to foresee the way communication technology takes shape and

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develop products that cater to fast growing applications of the future. To this end, Tejas ​actively
participates in industry standards ​bodies​, both international and national such as ITU, 3GPP, TSDSI and
IEEE, in order to keep abreast of the latest developments/technologies and guide R&D investments in
the right spaces. Tejas can also, through these standards bodies, ​influence ​the direction of future
technologies​ that can play to its strengths.

Leverage incumbency in India

Tejas serves both the government and private sector clients in India. India as a region contributes to
majority of Tejas revenues, with government forming a significant source within that. Tejas aims to grow
its private sector business quickly in order to reduce the proportion of government project business,
which despite its advantages are lumpy in nature and come with long working capital cycles. Being in a
B2B business, a vendor that stays cost-competitive and technologically relevant, such as Tejas, can
expect to retain and grow with customers for long periods of time. Tejas claims to never have lost a
customer except when a customer might be involved in a merger, acquisition or altogether shut down.

India private
Tejas counts all three major telecom operators and internet service providers (ISPs) such as Sify and Tata
Communication as clients. With consolidation more or less complete in the telecom sector, the
remaining players have returned to focusing on providing reliable, high-speed connectivity. Large optical
investments are expected in upgrading mobile networks and rolling out large-scale broadband networks
for homes and enterprises. Fixed broadband is a focus area for telecom operators and ISPs, with 50% of
homes expected to be connected on fixed broadband by 2022 and contributing 30% of telecom sales by
2023. Tejas competes with strong competitors such as Ciena, ECI, Nokia, Huawei and Ericsson in this
market. Given its field-tested product portfolio, Tejas is well-placed to grab a decent share of telecom
capex. Tejas is also increasing wallet-share within existing accounts through new application wins such
as metro capacity upgrades and enterprise data services. Tejas supports its larger customers through
in-house marketing personnel while targeting smaller orders (0.5-1 crore) through system integrators
and channel partners.

India Government
Tejas is the largest supplier of communications equipment to several large critical infrastructure projects
of PSU clients. These customers come from diverse sectors such as power, rail, metro, oil and gas. Their
networks need upgradation to accommodate mission-critical, high-bandwidth applications. This business
segment generates good run-rate revenues for Tejas and is a key focus area. Besides this, Tejas also
plays a key role in Universal Service Organisation Fund (USOF) projects such as Bharatnet. Bharatnet, a
multi-year project, involves providing broadband connectivity to 250,000 rural villages. Once connected
by broadband networks, the government hopes to provide e-health, e-learning and other e-government
services to even the most remote rural areas. This business offers a high return on investment and helps
Tejas enjoy scale economics given the large order sizes involved. This business can however be lumpy
and involve long payment cycles. Tejas benefits from government policies such as Preference to Make in
India (PMI) aimed at promoting Indian companies involved in high value-addition activities, with
significant R&D and IPR creation. Tejas actively participates in tenders, either directly or through system
integrators, to win respective government businesses. In the future, the government is expected to

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promote smart cities in a big way. These cities will require smart, modern networks. This can act as
another growth lever for Tejas in the future.

Expand in existing overseas markets

Tejas has restricted itself to focus on a limited number of overseas markets. These include ​South-East
Asia, Africa & Middle East, Mexico and the US​. Markets in South-East Asia, Africa and Mexico are more
India-like in terms of sectoral characteristics such as user demographics, infrastructure constraints and
an accelerating demand for fiberization, broadband and mobile data services. As a result, Tejas’
field-tested products deployed in India find ready use cases in these overseas markets. Many of these
countries are seeking to build their own national broadband networks to bridge the digital divide
between their urban and rural areas. Tejas can leverage its success in India for winning such projects
internationally. Among developed markets, Tejas is only looking at the US, and even there it is targeting
only tier-II/III operators and cable companies. Tejas has consciously avoided large markets of Europe,
China and North-East Asia, where it might be difficult to dislodge incumbents and will unreasonably
stretch its resources.
North America, with addressable market size of $4.7 billion, is the largest for Tejas, followed by
South-East Asia ($1.9 billion) and Africa & Middle East ($1.1 billion). By 2023, these markets are
expected to grow to $5.7 bn, $2.4 bn and $1.3 bn respectively. International sales is expected to be a
principal growth driver going forward, growing to account for 50% of Tejas’ sales in a couple of years, up
from 21% now. Tejas hopes to achieve this by ​increasing investments in sales and marketing.

South-East Asia
Tejas has been operating in SE Asia for the past 4 years. SE Asia was the fastest-growing region for Tejas
in FY19. It has developed a reference customer base and is investing in sales and marketing, resulting in
new customer wins and increased wallet-share from existing customers. There are other tailwinds
helping Tejas in this region. Service providers are looking to diversify their vendor base so as to curtail
their reliance on Chinese vendors. The Indian government is also looking to increase telecom exports to
ASEAN/SAARC countries by extending govt-to-govt lines of credit.
Popular Tejas Applications:​ Ultra-converged access/edge product, Universal backhaul upgrade.

Africa & Middle East

Africa has over 200 service providers, a total addressable market of $1.1 billion and over a billion
telecom subscriptions. All this makes it a key market for Tejas. To establish pan-Africa presence, Tejas
has established offices in Algeria (North), Nigeria (East), Kenya (West) and South Africa (South). Tejas is
well positioned to take advantage of the significant investments in broadband and data networks
expected in many African countries. In FY19, Tejas had 15 new customer wins of which 4 are tier-I
service providers with pan-Africa presence. Growth in coming years will be propelled by such tier-I
accounts who gradually scale-up and become large annual run-rate businesses.
Popular Tejas Applications: Fixed broadband (ultra-converged broadband access/edge product), Alien
Wavelength - 100G/200G interoperable with existing DWDM vendors.

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US & Mexico
With an addressable market size of $4.7 billion and 450+ service providers, North America is another key
growth market. Tejas has chosen to focus on US and Mexico.
Tejas entered the ​US market by selling to OEMs, such as Ciena, but is now transitioning to making direct
sales. Tejas is targeting tier-II/III operators and cable companies here. Tejas’ network modernization and
ultra-converged broadband solutions find a good fit in this customer segment. The ​US-China trade war
has locked Chinese vendors out of the US market resulting in reduced competitive intensity for Tejas.
Chinese vendors served many rural network providers in the US as their products were significantly
cheaper than those of competitors. Tejas is looking to take advantage of this situation and recently hired
a senior sales professional (ex-Infinera) to accelerate sales and marketing efforts in the region.
Tejas has been operating in ​Mexico for the last 4 years. Like in SE Asia, Tejas has established a good
name for itself and can give solid customer references when seeking new business. Tejas targets all
service providers in this market through direct sales and even had one tier-I win last year. Mexico, as a
country, was the fastest growing for Tejas in FY19. Tejas will be able to post strong growth in FY20 even
if it is able to scale up well within existing customers and does not make any new customer wins.
Popular Tejas Applications: Network modernization (high capacity circuit emulation products), GPON
and rural broadband, Metro WDM/OTN products.

Financials
Table: Latest financials
Net Net- Net CF Net
EBITDA EBIT PBT PAT
Sales worth Cash Ops WC
FY20 Q1 157 21 7 10 6 1326 230 -122 725
FY19 877 196 130 150 147 1320 368 -82 581
FY18 740 153 92 106 107 1152 510 239 323
FY17 819 164 107 54 93 593 -159 150 456
Source: Company filings
Note: Net Sales is sales net of taxes and pass-through component sales

Table: Margins trend

Margins EBITDA EBIT PBT PAT
FY20 Q1 13.3% 4.2% 6.5% 3.8%
FY19 22.3% 14.8% 17.1% 16.8%
FY18 20.7% 12.4% 14.3% 14.5%
FY17 20.0% 13.1% 6.6% 11.4%
Source: Company filings

High operating leverage

Over the past 3-year period, Tejas’ net sales, EBIT and PBT have grown at a CAGR of 12.5%, 19.7% and
73.8% respectively. In FY19, 18.5% growth in net sales saw EBIT grow by 42.3% and PBT grow by 41.5%
pointing to the operating leverage inherent in Tejas’ business. Over the medium term, Tejas hopes to

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grow 20% annually. Better product mix, greater international sales, higher services sales in addition to
operating leverage will help in increasing margins.

Revenue diversification underway

Tejas is focused on growing its India private and International direct businesses to diversify its revenue
sources. Non-government business overall grew 33% in FY19, with India private and International direct
growing 28% and 70%, respectively. International total grew 39%. Consequently, the share of India
Private and International Direct in total sales rose to 24% and 19%, up from 22% and 13% in FY18.
Robust International sales came on the back of 27 new customers wins, 6 of which are tier-I.
International business is a better gross margin business but will require investments in sales efforts in
the initial years to establish traction. In FY19, Tejas posted good growth in all international markets
except the US, owing to drop in OEM sales. Management predicts FY20 to be a good year for all markets
including the US on the back of active engagements it has had.

Low-cost operations
Tejas works with a very competitive cost structure. Operating expenses over the last two financial years
averaged at 19% of net sales. R&D and sales & marketing (S&M) are the key expenses within it. In FY19,
R&D (including capitalised expense) and S&M spends were 13% and 10% of sales, respectively. With
Tejas having established a comprehensive competitive product portfolio, expenditure will shift towards
S&M. This will mainly involve direct-selling expenses in overseas markets. Higher expenses should
however be offset by the higher gross margins enjoyed in these regions.

Strong balance sheet

Tejas enjoys a debt-free balance sheet with net cash holdings of Rs. 231 cr as on FY20 Q1. Its balance
sheet strengthening exercise began in mid-2017, when it held its IPO and raised some ₹450 cr. This
allowed it to repay its debt entirely and thus save on interest expenses. Outsourcing manufacturing has
also helped to conserve capital. Tejas has strived to consistently reduce its working capital intensity.
Working capital days fell steadily from 231 days in FY16 to 141 days in FY18. Working capital rose in
FY19, with day sales outstanding (DSO) increasing to 236 days from 185 days at the close of FY18.
Working capital rose to 581 cr from 323 cr. This was primarily due to delay in payment of over ₹200 cr
related to Bharatnet project. Management expects to receive this payment in FY20 and bring receivables
to reasonable levels. Normal DSO levels are targeted at 140 to 150 days.

FY20 Q1 update
Net sales fell sharply (32.5% yoy) to ₹157 cr owing to fall in government business in this quarter.
Government business accounted for only 15% of sales as compared to 55% in FY19. Operating leverage
worked in reverse and PAT declined 87% to ₹5.9 cr. Government business is expected to pick up pace in
H2 of FY20 as its tender wins (Bharatnet–II, defence projects) of ₹300 cr get converted to orders. On the
positive side, India private and International business continue on their growth track, areas which are
much more in Tejas’ control. Tejas won 3 new International customers of which one was a tier-I pan
African operator, with whom a multi-year contract was signed. Tejas made a senior sales hire for their
US market. Tejas’ order backlog stood at Rs. 426 cr, 45% of which Tejas expects to execute this year.

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Working capital got stretched further primarily owing to increased receivables (284 days) and some
inventory buildup (87 days). Management expects this to normalise in the next quarter or two.

Valuation
DCF valuation
Tejas’ intrinsic market capitalization comes to ₹1,760 cr based on DCF valuation, 129% higher than its
current market cap of ₹770 cr. ​The attached valuation model presents detailed calculations.

Attractive valuation multiples

Tejas stock price has seen a sharp correction in the past year and a half, leading to valuation multiples
depressing considerably. High working capital intensity experienced since last year and a sharp decline in
FY20Q1 sales have led to this steep fall. ​EV/EBITDA, EV/Sales and PE multiples stand at 2.7, 0.7 and 7.1​,
respectively. These are much lower than those of its peers. Tejas’ valuation will look even more
attractive when its receivables and sales normalise over the year.

Table: Peer comparison

Market EV/ EV/
Company EV Net Debt Sales EBITDA PAT PE
Cap. Sales Ebitda

Tejas Networks 772 541 -231 802 202 108 0.7 2.7 7.1

Sterlite Tech. 6,508 8,488 1,980 5,642 1,243 583 1.5 6.8 11.2

HFCL 2,415 2,888 473 5,040 557 302 0.6 5.2 8.0

Ciena 40,179 39,104 -1,076 24,962 3,498 1,688 1.6 11.2 23.8

Juniper 58,417 52,568 -5,849 31,773 5,201 3,512 1.7 10.1 16.6

Infinera 6,746 8,563 1,817 7,986 -876 -2,835 1.1 nm nm

ADVA 2,351 2,881 529 4,041 506 78 0.7 5.7 30.2

Source: company filings, marketwatch.com
All financials are represented in ₹ crore and are as per latest published results which is quarter ending June/July 2019. Sales, EBITDA & PAT are TTM figures.
Exchange rate ​used (on Oct 2, 2019): $1 = ₹71.24; €1 = ₹77.86

Case for valuation to expand

Government project business is the main culprit behind Tejas’ stretched working capital cycle and
revenue lumpiness. These ​headwinds are temporary in nature. Government payments are marred by
timing delays but are secure as these are backed by dedicated USOF funds. Recent announcement by
the Finance Minister requiring PSUs to to settle vendor payments by October 15 also bodes well for
Tejas and it can expect its dues paid soon. Government business that Tejas didn’t have in the last
quarter (FY20Q1) is also likely to be recouped in the latter half of the year. Tejas focus to diversify its
revenue sources will further reduce the impact of Government business on financials.
Efforts to expand product portfolio into adjacent applications has seen Tejas’ product offering expand
from having only optical aggregation and metro WDM products to now comprising GPON products

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(FTTH application), multi-terabit OTN & PTN switches (Data centers, Critical infrastructure networks) and
fixed wireless access on LTE technology. This has led to an ​expanded market opportunity​. Addressable
market has doubled to $18 billion in FY20 from only $9 billion in FY16. Networks world-wide have
restarted their capex cycle to build modern 5G-ready networks. This will happen in phases across
multiple operators and geographies and should last between 5 to 10 years, giving well-placed vendors
such as Tejas a ​long runway for growth.
Tejas is in a good position to ​increase market share owing to reduced competitive intensity. ​The US has
blacklisted Chinese vendors, preventing them from tapping the US market. This should aid Tejas to win
tier-II operators and cable companies. Network operators in emerging economies, who hitherto
exclusively engaged with Chinese vendors, are now looking at alternate credible sources to diversify
their vendor base. Another factor reducing competitive intensity for Tejas is industry consolidation.
Almost all its competitors are based in high cost locations and many are not doing well financially,
leading to M&As and thereby reducing the number of competitors competing for the same limited set of
clients.
Tejas has been a founders-run firm since its inception in 2000. These founders are first generation
professional entrepreneurs and have shown to be a thoroughly ​capable management team​. These
founders hold the titles of CEO, CTO and COO. They are well qualified and come with rich industry
experience. These individuals lead or are part of industry forums giving them influence over the
direction and policies related to the networking industry in India and globally. The insights they gain
from such forums also allows them to steer Tejas in the right direction.
Apart from being run by a solid management founding team, Tejas has eminent personalities as its
Directors, such as V. Balakrishnan (ex-Infosys CFO), Gururaj Deshpande (founder of Sycamore) and C.B.
Bhave (ex-Sebi Chairman). This attests to its desire of being run with the ​highest corporate governance
standards. In light of the recent spate of corporate scandals in India, this factor is getting premium.
Tejas is not up for sale but it could make for a good acquisition target ​eventually. An overseas peer
could benefit from Tejas’ sophisticated product suite, diverse clientele, productive manpower and
established India presence.

Risks to investment hypothesis

Credit risk. Tejas’ receivables have been on an increasing trend over the last year. DSO has shot up to
284 days in FY20Q1, more than double what it was at the close of FY18 (135 days). The major cause for
this has been the ₹250cr it is owed by BSNL for Bharatnet project. This payment is however backed by
USOF money and hence there is minimal risk of it not being honoured. High receivables do cause long
working capital cycles and might hint at counterparty risks in other scenarios.
Competitive intensity. ​This business is dotted by a limited number of large customers, whom all vendors
target increasing competitive intensity. Further, consolidation among customers can make the issue
worse. The emergence of new customer segments such as data centers and web-scale firms is helping to
partially offset this impact. Also, sometimes the strategy of offering state-of-the-art technology products
at competitive prices might not always work for Tejas. Much larger competitors might offer long-term
low-cost financing and other attractive offers to snare customers away.
Technology relevance. Technological changes, competition and evolving industry standards and
regulations have the ability to reduce the addressable market of Tejas products or even render them

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obsolete. Tejas’ management has helped guide investments in making world-class products that are
getting recognition by global industry forums and finding acceptance among customers.
Client concentration. Few large customers contribute to significant portion of Tejas’ revenues. Tejas’
aggressive expansion in overseas markets to win new customers should temper this risk somewhat.
Key personnel risk. ​Tejas’ growth has been driven by its three founders. Losing any one of them is a
material risk. These founders have given the last two decades in building Tejas from the ground up. It is
unlikely that they will want to leave it now, when it is entering a key growth phase. Also, as Tejas scales
up and hires more top-level talent this risk should diminish further.
Supply chain risks. ​Tejas relies on a limited number of EMS companies and component suppliers for its
manufacturing needs. Any inability on their part to deliver can significantly impact Tejas’ business. This
was clearly seen in the case of ZTE whose operations were brought to a grinding halt when it was not
able to access its US suppliers. Tejas has tried to mitigate this risk by multi-sourcing its requirements as
much as possible.

Conclusion
The network equipment industry is a not an easy industry to be in. Only the most agile players capable
of developing innovative products and operating at the right cost structures will survive. It is such
players who can survive downturns when clients hold back capex spends. The rest will merge, get
acquired or simply shut down as has been the case over the last two decades.
Despite Tejas being a tiny company in comparison to its international peers, it competes successfully in
the global market and has survived the tumultuous last two decades. This is a pointer to its technical
prowess and ability to pick the right products for the right markets. To continue succeeding it will need
to hire the best talent, invest in R&D and increase penetration in new markets. The gap in sales figures
between Tejas and its peers just goes to highlight the size of opportunity Tejas is staring at.
Investing in Tejas is like buying into a good option. The downside here is pretty much capped at current
share price levels. There can be heavy gains to be made if things go as per plan. Given the opportunity
size and Tejas’ capable team the latter outcome appears more likely. The exponential growth of Huawei
came from its ability to sell technologically sophisticated products at competitive prices and was helped
by supportive Chinese government policy. Tejas possesses these similar attributes. Tejas’ growth path
might not mirror that of Huawei but it still should be quite a promising one.

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