Video summary:
Origin & Tata’s Takeover
Tejas Networks was founded in 2000 by Mr. Sanjay Nayak with its HQ in Bengaluru. They are India’s largest telecom equipment company, which is into designing & manufacturing of wireless & wireline products like 4G/5G RAN, FTTX, Switches, etc., which are used across telecom service providers, internet service providers, data centres, utility sites, etc.
Tejas product portfolio & customer profile:
Clientele:
*Source: Tejas Networks Presentation Dec 2023
Things were going well for the initial decade. However, the first big blow for the company came in 2009 when Canadian telecom equipment maker Nortel (the then-largest customer of Tejas) went bankrupt. Their revenues dipped from 600 Cr to 200 Cr. A few years later, they were hit again by the 2G scam when the entire telecom sector became conservative and put their expansion plans on the back burner. During this time, Tejas was doing okay, but nothing extraordinarily great. They somehow couldn’t scale their products and make it big.
Around the same time, approximately 1000 km from Bangalore, somewhere in Bombay House, the Tatas understood that they were losing the telecom game. NTT Docomo was exiting India, and the pie was too big to ignore. They wanted to come back, but this time through a pick-axe and shovel route. Not exactly sure when, but sometime during 2020-21, these two visions met, and the Tatas invested 1850 Cr in Tejas Networks in different tranches and picked up a 37% stake in the company (which later went up to 55.5%).
The Green Shoots in the Telecom Sector
The entire telecom sector was in distress due to the price war in the last few years, thanks to Reliance Jio. Competitors like Vodafone Idea were bleeding with debt, to the extent that the parent company, Vodafone UK, had written off its investments in Vodafone Idea to zero on its books.
To keep VI afloat, the Birlas infused 2075 Cr in Vodafone Idea and also did an FPO of 18,000 Cr in April 2024. On the other hand, Airtel has been struggling to increase its ARPU for the past few years. They were divesting their non-core assets (Bharti Infratel, Bharti Hexacom). However, things changed for the sector with one single move – again, thanks to Reliance Jio. One price hike from Jio turned the tables for the sector.
Airtel increased its prices without any delay. Vodafone UK, which had written off its investment, is looking to infuse 2000 Cr in Vodafone Idea.
BSNL may not thrive, but it will survive. For Tejas, that’s enough.
In Budget 2024, around ₹83,000 crore was allocated to BSNL for technology upgrades and restructuring. The government’s intention is clear: they want to stay in the telecom game (even at the expense of taxpayers’ money, but that is a story for another day). And this is good news for Tejas.
In August 2023, Tejas won a ₹7,500 crore order from BSNL (via TCS). This is huge, and also a key order win post their turnaround. Tejas has to finish the delivery of this particular order in FY25. The company expects to secure more orders from BSNL.
Acquisition of Saankhya Labs: Another step in the right direction
In March 2022, Tejas Networks bought a 64.4% stake in Saankhya Labs for around ₹284 crore (later increased to 100%). Saankhya focuses on three main areas: developing new technology for 5G networks to improve device compatibility, using 5G to broadcast TV signals in partnership with a major US TV company, and creating satellite communication tools for the military and critical infrastructure.
The acquisition of Saankhya aims to increase technological expertise in 5G. They have domain expertise and intellectual property rights (IPR) in wireless communication (5G, broadcast, satellite). They are also involved in chip design. Saankhya has developed its own chip, which is used for satellite and wireless equipment. This chip design capability presents a potential opportunity for investors.
The Growth in Numbers
The 3-year revenue CAGR is at 65%. EBITDA turned profitable in FY24, with margins at 15%, and the management is confident of increasing them further. They currently have cash of ₹640 crore. The order book stands at ₹7091 crore as of Q1FY24, giving us visibility for FY25 (please note that most of the orders should be dispatched in this financial year).
Assuming 6000 Cr revenue for FY25 (considering some spillovers in the revenues), we are looking at a PAT of around 300 Cr; the company is already trading at 70 times one year forward PE.
What next after the BSNL order? We will discuss that, but before moving away from the financials, I want to discuss one thing: stretched working capital.
At first glance, the working capital looks high; however, most of it is in preparation for or execution of the BSNL order (procurement of components). This is a temporary phenomenon. As the order gets delivered over the next couple of quarters, the overall working capital cycle will come down.
FY26 & beyond
FY25 is sorted for Tejas with a ₹7,000 Cr order book. However, the main question to ask is, what about FY26 and beyond? We have a couple of triggers:
BharatNet Phase 3 (Expecting ₹3-4k Cr Order)
The BharatNet Phase 3 project involves an investment of ₹65k Cr (which is part of the overall BharatNet project value of ₹1.4 lakh Cr). The main goal is to upgrade existing infrastructure across 1.6 lakh gram panchayats and connect an additional 47k gram panchayats that currently lack fiber connectivity. Tejas is expecting the order value to be around ₹3-4k Cr and it is expected to finalize towards the end of FY25.
Kavach (approx 2-3k Cr order)
Kavach (Train Collision Avoidance System) is a long-term project by Indian Railways to prevent train accidents. The focus is to build Kavach across 70,000 km with a total investment of around 35,000 Cr over the next five years.
How does Kavach work?
*Source: Kernex Feb 2024 presentation
Indian Railways has yet to tender for the installation of communication systems in around 15,000 sites. While we are not sure if the tender will be given to a single party or divided among players, Tejas is indeed a main contender, which can bring them around 2k to 3k Cr of the overall order.
International Orders
Around 10% of overall revenues in FY24 came from exports, and Tejas is looking to focus on exports. As per the management, they are discussing a few deals with Tier 1 operators in the Middle East and South Asia. They also won a deal with a Tier 2 operator in the U.S. for their network modernization project (more details of the deal are yet to be announced).
The Risks
The biggest risk here is that everything is still in the pipeline. Nothing has materialized yet. Tejas Networks still has to bid on and win the orders. More importantly, since we are dealing with the government (BharatNet and Kavach), any delays in the tendering process and finalization will impact FY26 revenue growth.
In summary:
- Tejas Networks’ turnaround has been successful, and it is now in a position to not worry about growth capital.
- FY25 growth is already priced in. The market is looking for something more (beyond FY26).
- The next big triggers will be BharatNet Phase 3, and Kavach order wins, which we may expect towards the end of FY25. On the lower end, we are looking for an overall order of around 6-7k Cr and going up to 10k Cr in a best-case scenario.
- Saankhya Labs looks promising and is an optionality for investors.
- Given their expertise in communication networks and backing from the Tatas, we believe Tejas will be a significant player in the 5G communication ecosystem.
Disclosure: I, Krishna Appala, Research Analyst, author, and the name subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific view(s) in this report.
Research Analyst or his/her relative or Capitalmind Research LLP does not have any financial interest in the subject company. Also, the Research Analyst, his relative, Capitalmind Research LLP, or its Associate may have beneficial ownership of 1% or more in the subject company at the end of the month immediately preceding the date of publication of the Research Report. Further Research Analyst or his relative or Capitalmind Research LLP or its associate does not have any material conflict of interest at the time of publication of this research report.
Also, Tejas Networks is a part of our Capitalmind Premium Portfolios. This article is intended solely for informational purposes and should not be considered as an investment recommendation.
Capitalmind Research LLP is a SEBI Registered Research Analyst having registration no. INH000014003.
Additional Reads:
