1. Tejas Networks IPO bought 17.57% so far, long term investors should subscribe but watch for risks

Tejas Networks IPO bought 17.57% so far, long term investors should subscribe but watch for risks

Analysts said Tejas Networks IPO could be an attractive bet for long-term investors willing to take a risky bet on the company’s positive fundamentals, a prominent presence in a high-growth industry & strong operating leverage with expert management.

By: | Updated: June 15, 2017 1:55 PM
Tejas Networks Ltd’s IPO, priced in the range of Rs 250–257 per share, will help the Bangalore-based company raise a total of Rs 776.68 crore at the upper end of the price band. (Image: Reuters)

Tejas Networks IPO, which is open for subscription until Friday, 16 June 2017, has been subscribed 17.57 per cent as of 1:40 p.m. on the second day of bidding. Of their respective quota of reserved shares, institutional investors have bid 6.41%, while the retail investors bid an impressive 75.77%. However, non-institutional investors have bid a mere 1.62% of their quota.

In the IPO, Tejas Networks plans to raise up to Rs 450 crore through a fresh issue of equity shares, while the existing stakeholders would get the rest via an offer for sale. Tejas Networks will issue 1.75 crore fresh shares with the proceeds amounting to Rs 450 crore at the top end of the price band going to the company. Existing shareholders will sell another 1.27 crore of their own equity shares through an offer for sale. The total issue size is 43.41% of the total equity capital. The price band for the IPO is set at Rs 250-257, and the lot size is 55 shares.

Here are some brokerage houses’ recommendations:

Angel Broking

Angel Broking has recommended to ‘subscribe’ to the issue due to Tejas Networks’ strong revenue CAGR of 24.2% over FY2013-17; improving RoE to 12.9% in FY2016-17; strong operating leverage with asset-light business; strong professional team with significant industry experience; and its technology leadership with a strong patent portfolio across the world. “The company’s debt-free balance sheet post-IPO coupled with the government’s push for digital India would support the growth momentum,” Angel Broking said in a note.

IDBI Capital

IDBI Capital has rated the issue as ‘subscribe’, but has cited high days receivable, which indicates a poor management of accounts receivable, and expansion plans in Africa as potential risks. “At the price band of Rs250-257, Tejas Networks’ implied PER is 25x on FY17 adjusted EPS of Rs10.2 which we believe is reasonable given the revenue/earnings growth potential over the next 3-5 years,” the brokerage house said in a report.

Choice Capital

Choice Capital has recommended to ‘subscribe’ to the issue, although it has termed valuation slightly expensive. The brokerage house said that based on the positive outlook of the industry and positioning of Tejas Networks in the industry, the forward valuation demand by the company seems to be attractive, provided the momentum in the business in FY17 continues. “At higher price band, the demanded P/E multiple of 24.6x is in-line with the global peer P/E average of 24.9x. On other valuation metric (i.e. P/BVPS, EV/Sales, EV/EBITDA and MCAP/Sales), Tejas is asking a premium valuation. Based on our quick estimate for FY18, we forecast a FY18 earnings of Rs. 13.4 per share, which translates into a FY18 forward P/E multiple of 19.2x (as compared to the one year forward peer average of 17.5x). Thus the issue seems to be slightly expensive,” the brokerage house said in a report.

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SMC Research

SMC Research, which has rated the issue at 2.5 on a scale of 5, suggested that the long-term investors may opt for the issue as Tejas Networks is set to benefit immensely under the government’s Digital India and Make in India campaigns.

“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,” SMC Research said in a note.

Tejas Networks’ end-to-end product portfolio to take advantage of the expected industry growth; its leadership position in the fast-growing Indian optical equipment market; consistent research & development spend with a culture of innovation; and its ability to develop cost-effective and customisable products are among the company’s strengths, SMC Research said.

However, the brokerage lists seasonality; rapid technological changes; highly competitive market; and its reliance on a limited number of third-party suppliers, as among the risks to the company.

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