Why did I invest in Tejas Networks

Summary- Why I am investing in Tejas Networks

Tejas Networks has the current cash position ~ Rs. 200 crore

+ It has ready to ship inventory of Rs 250 cr

+ BSNL cash receivables of 300 cr

Total Liquid Assets = 750 cr

Its liabilities (including contingent liabilities & provisions) is 270 cr

So Liquid Cash Assets- All liabilities = 480 cr

Additionally, it has confirmed order book of Rs 483 crore .. (which could amount to ~ 50 crore cash flows)

So total foreseeable cash inflows = 530 crore

Key Risks-

  1. Low to non-profitable sales over next 1-2 years

Its major costs are human resources which includes-

  1. Employee Cost = 110 crore
  2. R&D = 100 crore
  3. Other SG&A = 90 cr

300 crore it has to spend + 50% of Sales (as COGS)

so , it needs approx. 600 crore annual sales to sustain as no loss

Assuming worse results in line with what transpired in 2020, ie annual sales of 400 crore, it will burn close to 100 crore each year

If this situation lasts (due to Covid 19 uncertainity), the above liquid position will reduce to 330 crore.

This could lead to a potential loss of 36% of capital in two years. If the business shuts down due to non-foreseeable future in 2 years, 36% capital would be lost

  • Technology Obsolescence

There is the threat of satellites — disruptive technology that could render optical fibres obsolete. That is still in the longer term (5-10 years) . To counter this, I wont forecast the future of business of more than 10 years. Hence CFs must not be forecasted beyond 10 years with a good margin of safety.

Major Customers (FY 19 Baseline)

  • India Government
  • BSNL – 313 cr
  • Critical Infrastructure- 165 cr
  • India Private (Vodafone Idea, Bharti Airtel) – 200 cr
  • International – 165 cr

With increasing reliance of BJP government on divestment, the future is bleak for BSNL to upgrade its technology, hence I wont assume any future orders from BSNL. Very conservative estimate, but upside is a bonus

In the government sector, it will continue to earn orders in critical infra structure ~ Rs 150 crore on sustainable basis. These include utilities (Railways, Metros, Power and Oil & Gas), smart cities and video surveillance projects

Similarly, no growth Revenue potential from India Private = 200 crore due to Strong incumbent factor

No growth international sector = 150 cr [Focus countries: Africa, S. East Asia and America]

Net sustainable revenues = 600 crore (sustainable)….. historical 5 yr. avg. revenue has been around 700 crore

Margins (12%) = 72 crore

Valuation

FCF  

202120222023- 2030 
-100-10072 

Valuation = 173 crore (from cash flow) + current cash (530 crore)

Total = 703 crore

CMP = 520 crore

Margin of safety = 26% (on conservative valuation) @ 9% Expected Returns

Positives-

  1. High Barriers to Entry …. Significant R&D and past exposure (Tejas has 349 patents)
  • Upside is huge… due to rapid growth of data

Summary

I will investing in Tejas Networks an amount of Rs. 75,000 (max. limit) by understanding the following-

  1. that I can lose up to 36% (i.e. Rs 27,000) if business doesn’t recover, in the worst case scenario .  At current prices, I would invest no more than 50,000 Rs and if the price falls further (> 15% ie below 47 Rs, I will further invest more money). My downside is protected
  • In a normal case scenario (moderate probability) the conservative valuation is providing me a 26% margin of safety….
  • In a growth scenario, upside exists due to ability to grow –
  • Revenues beyond 600 crore every year
  • Reduce 100 crore losses in the next 2 years
  • Sustain competitive advantage for more than 10 years
  • Favorable market dynamics of Make in India 5G and IOT and Broadband equipment, after similar steps taken by US , Britain on Chinese companies, for security reasons

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