April 19, 2018 CMP: ₹332 Time Horizon 12 Months Target: ₹427...Tejas Networks Ltd stands to benefit being one of the bigger and incumbent player to benefit from pent-updemand for

Anand Rathi Research

Time Horizon – 12 Months

April 19, 2018

Mar-18 Dec-17 Sep-17 Jun-17

Promoters 0.0% 0.0% 0.0% 0.0%

Institutions 27.5% 29.9% 30.5% 29.7%

Others 72.5% 70.1% 69.5% 70.3%

Total 100% 100% 100% 100%

Source: Company, Anand Rathi Research, Bloomberg

V

A

L

U

E

P

I

C

k

(In ₹ Mn.) FY-17 FY-18E FY-19E FY-20E

Net Sales 8,782 9,027 12,204 15,133

EBITDA 1,709 2,018 2,728 3,534

EBITDA Margin 19.5% 22.4% 22.4% 23.4%

PAT 632 1,043 1,599 2,170

EV/Sales 3.5 3.4 2.5 2.0

EV/EBITDA 16.7 14.3 10.6 8.2

P/E (x) 48.4 29.3 19.1 14.1

Price Performance CY14 CY15 CY17 YTD

Absolute - - 54% -15%

Relative - - 39% -13%

Analyst: Narendra [email protected]

Relative stock performance (Jun’17=100)

CMP: ₹332

Target: ₹427

Shareholding Pattern (as on Mar’18)

Key Data

Bloomberg Code TEJASNET IN

NSE Code TEJASNET

BSE Code 540595

Sector IT

Industry Technology Hardware & Equip.

Face Value (₹) 10.0

BV per share (₹) 55

Dividend Yield (%) 0.0%

52 Week L/H(₹) 257 / 472

Market Cap. (₹ mn.) 30,152

Tejas Networks Limited (TEJASNET)

75

100

125

150

175

Jun

-17

Jul-

17

Jul-

17

Au

g-1

7

Au

g-1

7

Sep

-17

Sep

-17

Oct

-17

Oct

-17

No

v-1

7

No

v-1

7

Dec

-17

Dec

-17

Jan

-18

Jan

-18

Feb

-18

Feb

-18

Mar

-18

Mar

-18

Ap

r-1

8

Nifty 500 TEJASNET

2 Anand Rathi Research

Tejas Networks Limited (TEJASNET) is an India-based optical and data networking products company founded in 2000 withcustomers in over 60 countries. The company designs, develops and sell high-performance and cost-competitive products totelecommunications service providers, internet service providers, utility companies, defence companies and governmententities (collectively, “Communication Service Providers”) while maintaining itself asset-light through outsourcingmanufacturing.

The company’s current product portfolio targets access networks, metro networks and long-haul networks. It has also setup anin house research & development which has enabled it to develop over 40 carrier-grade equipment, over 300 high-speed PCBand over 250 silicon intellectual properties (“IPs”).

As of Dec-17 it has filed 338 patent applications, with 205 filings in India, 92 filings in the United States and 6 filings in Europe,out of which 56 patents have been granted and have also filed 35 patent applications under the Patent Cooperation Treaty.

During the latest quarterly results, the company has recorded a de-growth of 14% in its revenues at ₹2,299 million in Q3-FY18as against ₹2,673 million in Q3-FY17. Its EBITDA margins stood 22.1% at ₹507 million as against 23.5% at ₹627 million. Thedecline in revenues was mainly due to few projects getting shifted to the next financial year and lower international revenues.

Going ahead, we expect Tejasnet to end FY-18 with marginal growth over FY-17 due to lumpiness and spillover of orderexecution to FY-19. However, the management has confirmed that this spillover of order is over expected growth of early 20%in FY-19. Thus FY-19 growth could well be higher at around 30% plus rate. The company is also in process to grow itsinternational business aggressively in few quarters.

In long term it is well-poised to take advantage of the growth in the communication industry due to its end-to-end portfolio ofproducts coupled with government’s preference for sourcing from domestic suppliers for its projects like Bharat Net.

We expect Tejasnet with its focus on innovation through R&D, expansion ofhigh growth segment product portfolios and assetlight business model to continue to provide traction in business in medium to long term. In medium term, we believe the stockat current price is attractive owing to better business prospects in FY-19E onwards. We thus re-iterate BUY rating on TejasNetworks Limited with a target price of ₹427 per share.

Better prospects for both top line growth and improvement in profitability.



History and key milestone achieved.


Year Key Milestones

2000Tejas Networks incorporatedin Bangalore; Sanjay Nayak, Dr. Kumar N Sivarajan and Arnob Roy joined thecompany

2001 Procured order from TATA Power Company Limited

2004 Procured order from Railtel Corporation of India Limited through Electronics Corporation of India Limited

2005 Named in the ‘Red Herring 100 Asia’ by Red Herring

2006 Received the CSIR Diamond Jubilee Technology Award from the Council for Industrial and Scientific Research

2007 Received Carrier Ethernet certification from Iometrix

Named in the ‘Red Herring 100 Global’ by Red Herring

2008 Tejas receives ISO9001:2008 and TL9000-H certification

2009 Received the NASSCOM Innovation Award from NASSCOM

2010 Signs an OEM contract with an international partner to supply complementary products

2011 Procured order for 3G rollout in multiple circles

2012 Entered into a new OEM contract to supply complementary products

2013Recognized amongst the top five Indian applicants for patents in the field of information technology by the Officeof the Controller General of Patents, Designs, Trademarks and Geographical Indication

2014 Selected as a supplierfor Africa’s West Indian Ocean Cable Company network

2015 Procured order under Optical Fiber Cable Network Development in 1,000 Union Parishad Project

2016 Tejas recognized as a Two Star Export House by Ministry of Commerce

Received Carrier Ethernet 2.0 certification from Iometrix certifying TJ1400, TJ1400P, TJ1600

Procured international order for 100G upgrade on TJ1600 equipment

2017Tejas procured order for installation, commissioning and maintenance of GPON equipment for a national fiberoptic network project

Tejas Networks executes Terabit-Scale Optical Backbone Network in Bangladesh.

2018Tejas Networks successfully completes supply and deployment of over 40,000 GPON equipment for BharatNetPhase-1 project

Tejas Networks wins expansion order of Rs. 336 Cr from BSNL for BharatNetSource: Company, Anand Rathi Research,


Telecom Industry Eco-system and Tejasnet presence


Telecom Industry Network Infrastructure

Passive InfrastructureActive Equipment

Wireless Access

Optical Transmission

Switches & Routers

Tower Operators

Cables & Accessories

System Integrators

Tejas Networks is currently operating out of optical transmission vertical within the telecom industry networkinfrastructure industry. The company’s prospective customers range from telecom operators in both private aswell as Government space along with various internet service providers.

The key competitors for the company within this segment are Ciena, infinera and ALU type of companies.

Source: Company, Anand Rathi Research,


Focus from Access to Metro networks


Long-haul Networks: Networks that interconnect metro networks using high bandwidth transmission) networks.

Metro Networks: Networks that aggregate and distribute traffic collected from access networks within a large city or region.

Access Networks: The outer perimeter of a telecommunications network which connects to the end consumers.Source: Company, Anand Rathi Research,


Offering differentiated products with software defined hardware.


Multi-gen Support2G-3G-4G

Seamless Network Transformation

Incorporates key requirements of

markets

Cost effective lifecycle upgrades

Programmable hardwares with

uniform code base

Advanced hardware-software

integration

Catering to NFW, CPO transport

networks

Advantage to costumers Advantage to Tejas



Enabling it to maintain leadership in high-capacity circuit emulation.



Edge PTN Equipment "emulates" low-speed TDM circuits over high-speed Packet interface

Core PTN Equipment extracts emulated circuits and hands-off over high-speed TDM interfaces

Tejas hardware can be reprogrammed to support a seamless and phased transition


Strong pick-up in optical capex in near future expected as Indian data market is under invested in fiber and data usage


Braodband Subscribers (Mn.)

Source: Company, Anand Rathi Research

Internet Penetration

Ratio of Optical capex to subscribersOptical Capex vs Mobile Broadban Subscribers


Higher fiber connectivity of cell cites drives higher bandwidth needs which further drives capex; benefiting Tejasnet.



Tejas is focusing on high-growth Metro & Access segments with focus on Intra-city networks where there is needfor large investments in both capacity and fiber-reach and Inter-city backbone- investments for upgrade incapacity

Also, the significant investments by government in rural areas for delivering broadband connectivity underBharate Net project also augurs well for companies like Tejasnet as it enhances business proposition.

Metro & Access, 63%

LH/ULH, 32%

Undersea & Bandwidth

Management, 5%

Optical Capex Distributoin


Investments into R&D to pay off as higher patent filings and product innovation could add niche to its offerings




0%

6%

12%

18%

24%

-

4,000

8,000

12,000

16,000

FY-16 FY-17 FY-18E FY-19E FY-20E

Revenues (₹Mn.) EBITDA Margins % (RHS)

Sustained focus on digitisation and increase in data consumption to drive capex leading to higher revenues.


We expect Tejas networks Limited to grow its revenues at a CAGR of around 20% for the next three years to reach

almost around ₹1,500 million by FY-20E. The main drivers for the growth are increased capex in data

infrastructure from telecom industry, BharatNet project, Rail, Electric and Smart City networks.

On profitability front, we expect the company to improve its operating margins gradually going ahead as

operating leverage due to its asset light model kicks in. While at profit after tax levels we expect Tejasnet to post

mid double digits margins by FY-20E.

Sales (₹ Mn.) & EBITDA Estimates


With large investment outlay in rural connectivity

through BharatNet project, higher connectivity

infrastructure spend by telecom industry coupled with

preference for domestic players augurs well for

companies like Tejasnet.

Tejas Networks Ltd stands to benefit being one of the

bigger and incumbent player to benefit from pent-

updemand for data & Government.

At CMP the stock is trading around 19x times FY19E

earnings and 14x times FY20E earnings.

We initiate our coverage on Tejas Networks Limited

with a BUY rating and a target price of ₹427 per share.

Relative stock performance (Jun’17=100)

Valuation and Recommendation:

Source: Bloomberg, Anand Rathi Research


(In ₹ mn) FY-17 FY-18E FY-19E FY-20E

EPS (₹) 7.0 11.5 17.6 23.9

P/E (x) 47.7 28.9 18.9 13.9

P/B (x) 6.0 2.8 2.5 2.1

ROE 12.6% 9.8% 13.1% 15.0%

ROCE 18.5% 13.7% 17.6% 20.2%

EV/EBIDTA (x) 16.7 14.3 10.6 8.2


75

100

125

150

175

Jun

-17

Jul-

17

Jul-

17

Au

g-1

7

Au

g-1

7

Sep

-17

Sep

-17

Oct

-17

Oct

-17

No

v-1

7

No

v-1

7

Dec

-17

Dec

-17

Jan

-18

Jan

-18

Feb

-18

Feb

-18

Mar

-18

Mar

-18

Ap

r-1

8


Margins FY-17 FY-18E FY-19E FY-20E

Sales Growth % 40.0% 2.8% 35.2% 24.0%

Operating Margin % 19.5% 22.4% 22.4% 23.4%

Net Margin % 7.2% 11.6% 13.1% 14.3%

Consolidated Financials:



Liabilities

Equity Share Capital 740 902 902 902

Reserves & Surplus 4,267 9,747 11,347 13,517

Totat Shareholder's Funds 5,007 10,649 12,249 14,419

Minority Interest - - - -

Long-Term Liabilities 20 20 20 20

Other Long-term Liabilities 166 166 166 166

Deferred Tax Liability - - - -

Short-term Liabilities 4,100 3,048 3,613 4,480

Total 9,292 13,884 16,048 19,085

Assets

Net Fixed Assets 1,107 1,367 1,071 913

Long-Term L&A 591 591 591 591

Non Current Investments - - - -

Other Non-Current Assets 1,000 1,000 1,000 1,000

Current Asset 6,594 10,925 13,385 16,580

Total 9,292 13,884 16,048 19,085


Net Sales 8,782 9,027 12,204 15,133

Operating Expense 7,073 7,009 9,477 11,600

EBITDA 1,709 2,018 2,728 3,534

Other Income 120 124 167 207

Depreciation 564 652 705 787

EBIT 1,265 1,489 2,190 2,954

Interest 315 152 139 172

Misc. items (305) - - -

PBT 645 1,337 2,051 2,782

Tax 13 294 451 612

Minority Interest - - - -

PAT 632 1,043 1,599 2,170


NOTE: *FY-16 number are for 9 month period due to accounting year change.


The company’s business is exposed to swift technological changes and any delay by the company in adapting could

affect its business negatively.

Key Risks:



Rating and Target Price history:

Date Rating Target Price (₹) Share Price (₹)

23-Aug-17 BUY 418 325

25-Oct-17 BUY 418 321

19-Apr-18 BUY 427 332

TEJASNET rating detailsTEJASNET rating history & price chart

Source: Bloomberg, Anand Rathi Research Source: Bloomberg, Anand Rathi Research

NOTE: Prices are as on 19th Apr 2018 close.


75

100

125

150

175

Jun

-17

Jul-

17

Jul-

17

Au

g-1

7

Au

g-1

7

Sep

-17

Sep

-17

Oct

-17

Oct

-17

No

v-1

7

No

v-1

7

Dec

-17

Dec

-17

Jan

-18

Jan

-18

Feb

-18

Feb

-18

Mar

-18

Mar

-18

Ap

r-1

8


Disclaimer:

Research Disclaimer and Disclosure inter-alia as required under Securities and Exchange Board of India (Research Analysts) Regulations, 2014

Anand Rathi Share and Stock Brokers Ltd. (hereinafter refer as ARSSBL) (Research Entity, SEBI Regn No. INH000000834, Date of Regn. 29/06/2015) is a subsidiary of the

Anand Rathi Financial Services Ltd. ARSSBL is a corporate trading and clearing member of Bombay Stock Exchange Ltd, National Stock Exchange of India Ltd. (NSEIL),

Multi Stock Exchange of India Ltd (MCX-SX), United stock exchange and also depository participant with National Securities Depository Ltd (NSDL) and Central

Depository Services Ltd. ARSSBL is engaged into the business of Stock Broking, Depository Participant, Mutual Fund distributor.

The research analysts, strategists, or research associates principally responsible for the preparation of Anand Rathi Research have received compensation based upon

various factors, including quality of research, investor client feedback, stock picking, competitive factors, firm revenues.

General Disclaimer: - This Research Report (hereinafter called “Report”) is meant solely for use by the recipient and is not for circulation. This Report does not

constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. The

recommendations, if any, made herein are expression of views and/or opinions and should not be deemed or construed to be neither advice for the purpose of

purchase or sale of any security, derivatives or any other security through ARSSBL nor any solicitation or offering of any investment /trading opportunity on behalf of

the issuer(s) of the respective security (ies) referred to herein. These information / opinions / views are not meant to serve as a professional investment guide for the

readers.No action is solicited based upon the information provided herein. Recipients of this Report should rely on information/data arising out of their own

investigations. Readers are advised to seek independent professional advice and arrive at an informed trading/investment decision before executing any trades or

making any investments. This Report has been prepared on the basis of publicly available information, internally developed data and other sources believed by ARSSBL

to be reliable. ARSSBL or its directors, employees, affiliates or representatives do not assume any responsibility for, or warrant the accuracy, completeness, adequacy

and reliability of such information / opinions / views. While due care has been taken to ensure that the disclosures and opinions given are fair and reasonable, none of

the directors, employees, affiliates or representatives of ARSSBL shall be liable for any direct, indirect, special, incidental, consequential, punitive or exemplary

damages, including lost profits arising in any way whatsoever from the information / opinions / views contained in this Report. The price and value of the investments

referred to in this Report and the income from them may go down as well as up, and investors may realize losses on any investments. Past performance is not a guide

for future performance. ARSSBL does not provide tax advice to its clients, and all investors are strongly advised to consult with their tax advisers regarding taxation

aspects of any potential investment.

Continued…



Disclaimer:

Contd…

Opinions expressed are our current opinions as of the date appearing on this Research only. We do not undertake to advise you as to any change of our views expressed in this Report. Research Report may differ between ARSSBL’s RAs and/ or ARSSBL’s associate companies on account of differences in research methodology, personal judgment and difference in time horizons for which recommendations are made. User should keep this risk in mind and not hold ARSSBL, its employees and associates responsible for any losses, damages of any type whatsoever.

ARSSBL and its associates or employees may; (a) from time to time, have long or short positions in, and buy or sell the investments in/ security of company (ies) mentioned herein or (b) be engaged in any other transaction involving such investments/ securities of company (ies) discussed herein or act as advisor or lender / borrower to such company (ies) these and other activities of ARSSBL and its associates or employees may not be construed as potential conflict of interest with respect to any recommendation and related information and opinions. Without limiting any of the foregoing, in no event shall ARSSBL and its associates or employees or any third party involved in, or related to computing or compiling the information have any liability for any damages of any kind.

Details of Associates of ARSSBL and Brief History of Disciplinary action by regulatory authorities & its associates are available on our website i. e. www.rathi.com

Disclaimers in respect of jurisdiction: This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would subject ARSSBL to any registration or licensing requirement within such jurisdiction(s). No action has been or will be taken by ARSSBL in any jurisdiction (other than India), where any action for such purpose(s) is required. Accordingly, this Report shall not be possessed, circulated and/or distributed in any such country or jurisdiction unless such action is in compliance with all applicable laws and regulations of such country or jurisdiction. ARSSBL requires such recipient to inform himself about and to observe any restrictions at his own expense, without any liability to ARSSBL. Any dispute arising out of this Report shall be subject to the exclusive jurisdiction of the Courts in India.

Copyright: - This report is strictly confidential and is being furnished to you solely for your information. All material presented in this report, unless specifically indicated otherwise, is under copyright to ARSSBL. None of the material, its content, or any copy of such material or content, may be altered in any way, transmitted, copied or reproduced (in whole or in part) or redistributed in any form to any other party, without the prior express written permission of ARSSBL. All trademarks, service marks and logos used in this report are trademarks or service marks or registered trademarks or service marks of ARSSBL or its affiliates, unless specifically mentioned otherwise.

Contd…



Disclaimer:

Contd.

Statements on ownership and material conflicts of interest, compensation - ARSSBL and Associates

Sr. No.

Statement

Answers to the Best of the knowledgeand belief of the ARSSBL/ itsAssociates/ Research Analyst who ispreparing this report

1ARSSBL/its Associates/ Research Analyst/ his Relative have any financial interest in the subject company? Nature of Interest (if applicable), is givenagainst the company’s name?. NO

2

ARSSBL/its Associates/ Research Analyst/ his Relative have actual/beneficial ownership of one per cent or more securities of the subject company, at theend of the month immediately preceding the date of publication of the research report or date of the public appearance?. NO

3ARSSBL/its Associates/ Research Analyst/ his Relative have any other material conflict of interest at the time of publication of the research report or atthe time of public appearance?. NO

4 ARSSBL/its Associates/ Research Analyst/ his Relative have received any compensation from the subject company in the past twelve months. NO

5ARSSBL/its Associates/ Research Analyst/ his Relative have managed or co-managed public offering of securities for the subject company in the pasttwelve months.

NO

6ARSSBL/its Associates/ Research Analyst/ his Relative have received any compensation for investment banking or merchant banking or brokerageservices from the subject company in the past twelve months. NO

7

ARSSBL/its Associates/ Research Analyst/ his Relative have received any compensation for products or services other than investment banking ormerchant banking or brokerage services from the subject company in the past twelve months. NO

8ARSSBL/its Associates/ Research Analyst/ his Relative have received any compensation or other benefits from the subject company or third party inconnection with the research report. NO

9 ARSSBL/its Associates/ Research Analyst/ his Relative have served as an officer, director or employee of the subject company. NO

10 ARSSBL/its Associates/ Research Analyst/ his Relative has been engaged in market making activity for the subject company. NO


Documents

April 19, 2018 CMP: ₹332 Time Horizon 12 Months Target: ₹427...Tejas Networks Ltd stands to benefit being one of the bigger and incumbent player to benefit from pent-updemand for