US administration’s recent decision to restrict Chinese telcos (Huawei, ZTE Corp) access to the US market and suppliers could be a positive read-through for Tejas Networks. It will enable Tejas make inroads into direct sales in US through its products for optical network modernization as well as ultra-converged broadband products.
Increase in revenue share from the US (following decline of OEM revenue share) could help Tejas diversify revenue from India government to international market (as it targets 50% of revenue in medium term from int. market; 21% in FY19 vs. 17% in FY18). This would be value-accretive and also reduce volatility in its financial performance – a key concern. However, we do not see any immediate benefit from such curbs on Chinese OEMs. We factor in 15% revenue CAGR for FY19-21E. Maintain ‘buy’.
The US administration has decided to put Huawei on a trade blacklist, moving to curb its access to the US market and American suppliers. The President’s order is likely to restrict Huawei and ZTE Corp. From selling their equipment in the US. The curbs also restricts Huawei and its affiliates from obtaining US made goods (like Intel chips) as well as software and Android mobile operatingsystem produced by Google. This is likely to hinder company’s efforts to dominate the telecom industry with 5G roll-out, as it will deny it vital US Technology.
Curbs on Chinese telecom players is likely to be positive for Tejas as it tries to focus on international revenue (to reduce revenue volatility) and expects it to be 50% of its revenue in medium term from 21% in FY19. The OEM business for Tejas has shrunk in US and is unlikely to grow; however, we expect direct business to gain in US led by (i) trade barriers for Chinese vendors; (ii) increased sales investment by 21% YoY; (iii) addition of 11 new customers in FY19 including one tier 1; and (iv) total addressable market in US increasing from $4.7 bn to $5.7 bn by 2023.
Curbs on Huawei are likely to be aimed at dominance of 5G network technology, as Huawei is a rapidly expanding in 5G technology.