Tejas Networks IPO opens; here's what analysts say

Key Highlights: 

1. Tejas Network IPO has a price band of Rs 250 - Rs 270 per share

2. The company wants to raise Rs 777 crore from the issue

3. IPO closes on June 16, 2017

Data networking products maker Tejas Networks is set to launch its initial public offering (IPO) on June 14, 2017, and will close on June 16, 2017.

Tejas Network will offer nearly 1.80 crore equity shares valuing up to Rs 777 crore at a price band of Rs 250 per share to Rs 257 per share.

75% shares will be sold to qualified institutional buyers, while 15% is held for non-institutional investors and remaining 10% for retail individual investors.

Objective of the issue is to financing capital expenditure towards payment of salaries and wages of R&D team approximately Rs 45.3 crore and remaining for working capital requirement and general corporate purposes.

ALSO READ: Tejas Networks fixes price band of Rs 250-257 for IPO

Should you subscribe to this IPO?

Madhu Babu, analyst, Prabhudas Lilladher said, “Our view is that company would have benefited from government initiatives to expand Broadband connectivity to villages. Business is also working capital heavy with net working capital cycle at 166 days as on FY17. We have also observed volatile operating and free cash flow trajectory over the past five years.”

Babu added, “We believe strong growth might not be accompanied by free cash flow generation. At Rs 250‐257/sh, the IPO is priced at 24x FY17 Adjusted EPS on post issue diluted equity capital. While growth might remain strong over next two years, we believe cyclical volatility and high dependence on PSU’s is a concern. IPO appears to be priced at 15.5x FY19E. We recommend “Avoid” the issue."

For FY17, the company generated Rs 31.5 crore of free cash flow – implying a FCF yield of 1.3%.

On the other hand Alpesh Thacker and Siddhartha Khemka, research analysts, Centrum Wealth Research said, “Tejas would be the first listed player in optical networking equipment space and there are no listed comparable peers. At the higher end of the price band of Rs 257, the issue is valued at 14.1x EV/EBITDA and 24.7x P/E on FY17 (post dilution) basis."

The duo added, “Although not directly comparable, companies in the optical fibre space like Sterlite Technologies are trading at 11.4x EV/EBITDA & 30.5x P/E on FY17 basis. Given the differentiated business model of the company and relatively short track record of improving financials (last two years only) it is difficult to take a call on the valuation.”

While mentioning risks in Tejas Networks financial performance, Pankaj Pandey, analyst, ICICI Securities said, “At the IPO price band of Rs 250-257, the stock is available at a multiple of 35.6-36.4x FY17 EPS.”

As per Pandey, the risks are - 58% of Tejas' revenue is generated from top five customers who exercise substantial negotiating leverage. The loss of one or more of significant clients could have an adverse effect on the business . While company has a sticky clientele base and generated 88% of the FY17 revenues from repeat business.

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