Tejas Networks

Lets Quiz

1. Can you name an Indian company which spend 20% of its revenue on R & D ?
2. Can you name an Indian company which develops and manufactures high end optical and data networking products which are exported to 75 + countries world wide?
3. Can you name an Indian company which has over 345 patents world wide and 300 silicon IP?

The answer to all the above questions in Tejas Networks

Background

Tejas Networks designs, develops and manufactures high-performance and future-ready optical and data networking products that are sold to telecommunications service providers, web-scale internet companies, utilities, large enterprises, defence and government agencies in more than 75+ countries. The products are 5G-ready, that enable terabit-scale transport and switching of voice, data and video traffic from fixed line, mobile and broadband networks. Tejas products are differentiated by a programmable, software-defined-hardware™ architecture that provides flexibility, multi-generation support and a seamless software enabled network transformation to its customers.

Why am I interested Tejas Network?

Tejas Network to me is very intersting investment opportunity. I am a follower of Guru Peter Lynch and I would categorize Tejas as turnaround story. The rest of article tries to capture point by point pros and cons.

Pros

1. Returned to profitability in FY21. Profit after tax of Rs 37.5 crore, which was a loss in the previous year and the earnings per share was Rs 4.05
2. Revenues grew 35.6% year-on-year to Rs 515 crore
3. Order book is at Rs 679 crore at the end of March 2021. (Decent visibility into future)
4. International business grew by 62% year-on-year basis contributed to 40% of the total revenues, up from 33% last year. (Export growing)
5. New orders from international was 103% growth as compared to FY 20.
6. India business grew 22% year-on-year
7. 86% of our revenues of last year came from existing customers (Stickiness with customers)
8. 364 crore of cash and cash equivalent up from 280 crore last year (Solid Financial status)
9. Zero Debt company (Solid Financial)
10. Working capital reduced from Rs 540 crore to Rs 450 crore
11. Trade receivables reduced from Rs 456 crore to Rs 414 crore
12. R&D expenses as a total of revenues on a fully expensed basis was 20.6% of revenues, which among all the listed companies in India was among the Top 3. (People may count it as con but if tech company has to stay relevant it has to make this investment)
13. Since all our R&D manpower is located in India, we get a significant competitive cost advantage as compared to our global peers
14. On the hardware side, we have the software-defined hardware, which is programmable. So, the same equipment can be programmed to do newer technologies from 4G to 5G (Beautiful : Need to check if competition can do the same)
15. The impending 5G rollouts, and the stabilization of competitive intensity amongst telcos, we expect a robust capex cycle in the years to come (Tailwinds due to 5G roll out). Mobile data traffic from 2020 to 2026 is going to go over five times. The fiber rollout is again going to grow quite significantly. 5G, which is the new technology, which is starting to roll out right now will continue to be rolled out for the next 5-7 ears and that's going to be again, having a very large cycle of growth.On the India side, the home broadband is going to be a significant growth market. India only has
16. India has about 10 to 15 million home broadband connections on fiber and this number is expected to go to around 100 million over the next 3 to 4 years (Tailwinds due to 5G roll out).
17. Increased digital adoption (Tailwind accelerated due to COVID)
18. Highly-favorable geopolitical situation where countries are seeking trusted telecom products (Tailwind China not being trusted - Need to look for alternates)
19. Favorable Indian Government policies and intent (Tailwind, Make in India, Atma Nirbhar Bharat, PLI scheme for Telecom, Preference for make India products and high focus on not buying from china for critical infra)
20. Prime minister has announced the Bharat Net for every village, which is 650,000 villages from 250,000 right now. BSNL, the national operator has plans to roll out of 4G network and that will present an opportunity both for wireless as well as wireline products of the company.
21. Have been selected by all the major telcos for their fiber to the home rollout plans. (Future Visibility)
22. The Preference to Make in India, which basically says that for all government-funded projects, if there's an Indian product available as per the definition of what constitutes an Indian product, they will be given preference to purchase versus any imported products. There are also clauses that say that any countries with which India has a land border, products from that country cannot be used in these projects. All the products that our company manufacturers are covered in the Preference to Make in India list of products (Huge Tailwind, There is no one else in India)
23. Telecom sector has been allotted Rs 12,195 crore and all the products that the company manufacturers are covered under the PLI scheme (Advantage)

Cons

As you can see there are enough pros but lets now look into some of the cons

1. The company has delivered a poor sales growth of -3.44% over past five years.
2. Company has a low return on equity of -1.77% for last 3 years.
3. Company has high debtors of 236.38 days.
4. Tejas international revenue although growing fast is not coming from developed economies like North America or Europe. This means despite having huge R&D spend and patents still they are only able to sell in markets where price matters more than technology leading to belief that they still need to catchup on technology.
5. Difficulty in creating a brand. One of the challenges that Tejas as a company has faced is because of India as a country does not have too many Indian companies that can be considered as a global brand in the high-tech product space
6. Global Chip shortage

Conclusion

If you had patience to read till this point, Congrats. You can become a successful investor. Because Patience is the single most important factor that determines your success.

“The stock market is a device to transfer money from the impatient to the patient.” Warren Buffett

Disclaimer1: This is not investment advice. Any one reading this should do his own market research. I am not a advisor.

Disclaimer 2: I am invested on Tejas so I may be extremely biased. You should form your own biases

Disclaimer 3: I have been proven wrong multiple times but there is no guarantee that I would be wrong this time as well.

Disclaimer 4: I have been proven right multiple times but here is no guarantee that I would be right this time as well.