Buy Tejas Networks Ltd For Target Rs. 1,100 - Emkay Global Financial Services
Tejas Networks reported a beat on our revenue and margin estimates, led by BSNL’s 4G project execution. We see Tejas benefits chiefly from: 1) GoI emphasis on domestic manufacturing and the PLI scheme; 2) large spends on BSNL, BharatNet, and the Railways; 3) references from TCom and TCS, thus adding new clients; and 4) global move towards replacing Chinese telecom equipment. We expect FY25E revenue to be 4x FY24 revenue on BSNL and Bharatnet execution. We increase revenue by 6%/7% for FY25E/FY26E on account of the beat on our revenue estimate. We also raise our EBITDA margin by 150-10bps on the margin beat. We revise our TP to Rs1,100/share (21% upside) vs. Rs975 earlier, based on DCF methodology (WACC: 10.5%; Terminal growth rate: 6%). We retain our BUY rating. Tejas Networks: Financial Snapshot (Consol.
Beat on revenue and margin, on BSNL project execution
Reported consolidated revenue at Rs11.7bn (excl. PLI incentive of Rs1.6bn) was up 109% QoQ/291% YoY (at a 46% beat on our est.). EBITDA grew sharply to Rs1,501mn from -Rs75mn in Q3FY24, well above our estimate of Rs606mn, on the back of operating leverage benefit. EBITDA margin expanded by 1,416bps QoQ to 12.8% (528bps above our estimate of 7.5%). Q3FY24 margin was impacted by product-mix change. Cash & Cash Equivalents stood at Rs6.4bn at end-Q4 vs. Rs5.6bn at end-Q3. Inventory increased to Rs37.4bn in Q4 from Rs26.8bn in Q3, due to securing components for expediting delivery.
Multiple growth levers to aid in scale-up; maintain BUY
The company is looking at several high-scale opportunities in both, India as well as internationally. It anticipates an increase in investment in the 4G-saturated networks of Africa and Asia by private telcos for their backhaul expansion of 4G and 5G networks. The entire order backlog pertaining to BSNL (90% remaining, of the total 0.1mn sites) is expected to be executed in FY25, generating revenue of ~Rs77bn over the next 2-3 quarters. The tender for BharatNet Phase III is in process (initial estimate of over USD500mn capex) and is getting finalized. We see Tejas scaling up, based on: i) the GoI’s spending plan for BSNL, BharatNet-3, Railways’ Kavach upgradation, etc which is likely to furnish orders worth ~Rs300bn; ii) international revenue gaining pace, with the US Rip & Replace program granting new opportunities; iii) the PLI scheme benefits for 5 years. Tejas is set to benefit from: a) cost-competitive R&D vs. peers, b) asset-light model with EMS partners, and c) the acquisition of Saankhya Labs for wireless solutions. We think Tejas can generate ~Rs277bn/Rs55bn revenue/EBITDA during FY25-28E. We expect the company to clock ~20% margin, as it scales up operations. We increase our revenue 6%/7% and margin by 150bps/10bps for FY25E/FY26E, on revenue and margin beat. We revise our TP to Rs1,100/share (21% upside) vs. Rs975 earlier, based on DCF method (WACC: 10.5%; Terminal growth rate: 6%). We maintain BUY.
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