Tejas Networks (Tejas) reported weak Q4FY18 with 63.7% y-o-y decline in revenue due to deferment of orders to FY19 and sharp ramp-down in OEM business. FY18 revenue fell by 9.6% versus 5.0% growth guidance in Jan’18 and decline guided in Mar’18. However, in FY19, management expects significant revenue acceleration, though they refrained from giving any guidance due to lumpy nature of business. Although the company has maintained its FY17-20 revenue CAGR guidance of 20%, we are building in 14.4% CAGR due to low visibility and potential demand challenges in overseas business. Accordingly, we cut FY19/20e revenue and earnings by 17.2/14.6% and 20.7/15.7%, respectively. We also lower our target multiple to 20x (from 23x) to factor in volatility in revenue. However, we believe that the company’s business model is well suited to benefit from strong order flow led by increasing fibre investments. Maintain Buy with revised TP of Rs 396.
Overseas business key challenge
Tejas reported 63.7% y-o-y and 56.4% q-o-q drop in revenue to Rs 987 mn, while Ebitda margin slumped to 10.9% from 22.4% q-o-q and 17.4% y-o-y. For FY18, revenue declined by 9.6%, while Ebitda margin expanded 70bps to 20.7%. While FY18 India revenue increased by 4.0% y-o-y, international revenue slipped 58.0%. We believe orders from South-East Asia getting pushed ahead into FY19 and ramp-down in OEM business are the key reasons for this performance. While order pushback is temporary, Tejas is addressing the issue of OEM ramp-down by investing in sales & marketing to enhance traction in international geographies. The company expects revenue growth to accelerate in FY19.
Outlook: Trim estimates
We have cut FY19/20e revenue and earnings to factor in low visibility and traction in overseas business. However, we expect Tejas to improve traction in overseas business by leveraging demand in these areas. We have lowered our target multiple to 20x to factor in high revenue volatility. However, considering 30.5% earnings CAGR over FY18-20e and 19.2% FY20e RoCE, we believe that 20x earnings multiple is fair. At CMP, the stock trades at 17.0x FY20e EPS. We maintain ‘BUY/SO’ with a revised target price of Rs 396 (Rs 530 earlier).