IPO Analysis Note - Nu Tek India Ltd.

Price Band: Rs 170 - Rs 192
Issue Size : Rs 765 million – Rs 864 million
Issue opens-closes : 29th July – 1st August 2008
Listing : BSE, NSE

Nu Tek India Ltd, is a Gurgoan based telecom infrastructure services provider that offers infrastructure roll-out solutions to wireless and wire line telecommunications networks. The company offers services to Telecom Equipment manufacturers, Telecom Operators as well as third party infrastructure leasing companies in installing and maintaining Telecom Network equipment and infrastructure and offers all outsourced services related to design, installation, construction, operation and maintenance of telecom networks. NTIL is also registered with Department of Telecommunication as Infrastructure Provider - Category I.

The company set up a subsidiary in Turkey which commenced its operations in Jan 2008 to carry on telecom infrastructure services and has recently entered into a contract with Ericsson AB, Dubai, to provide technical support services to their operations in the West Asia

Major clients of the company include national and international names such as Nokia, Ericsson, Motorola, ZTE Telecom India Private Limited, Tata Teleservices, Reliance Communication, Vodafone and Bharti Airtel to name a few.

The company has entered the capital markets to raise funds for capital expenditure, overseas acquisitions and augmenting its long-term working capital requirements and thus proposes to raise Rs 864 million at the upper price band of the issue, of which the offer for sale amounts to Rs 192 million i.e. over one-fifth of the total capital to be raised.

KEY POSITIVES

• With its experience track record of over 15 years in managing and executing various projects coupled with designing and service skills, NTIL is capable of offering end to end telecom solutions for Wireless networks (GSM & CDMA), Fixed line networks (Switching Equipments), Broadband (Voice & Data) and Transmission Networks. In addition, the company has successfully implemented new technology projects such as WiMax and underground network for Delhi Metro Rail. Thus with its vast expertise and experience relatively newer technologies, the company seems to be well positioned to capitalize on the fast growing opportunity offered by the telecom industry.
  
  
• The Present orders-in-hand of Rs 1366 million and letters of intent worth Rs 385 million take its total to order book Rs 1751 million. Resultantly, the current size of order-book translates into 1.84 times its revenues for FY08 offering significant visibility in terms of sales and profits of the company going forward.
  
  
• On the financial front, company registered a CAGR growth of 45% during the period FY05 to FY08. At the same time, the net profit of the company registered a growth of close to 56%. Operating margins improved from 17% in FY06 to 33% in FY08 and net profit margins improved from 11% in FY06 to close to 22% in FY08. Strong financial performance coupled with improving profitability and a comfortable order book position provides decent growth visibility for future.
  
  
• Though the company claims to have a Pan-India presence it derives major portion (upto 70% in FY08) of its revenues from the Northern India region. The company is therefore aggressively strengthening its presence in the eastern and southern regions and expanding into regions outside of India, such as, Turkey and Gulf to mitigate the risk of geographical concentration.
  
  
• The Indian telecom industry is faced with lower reach even as the overall tele density during the month on June 2008 reached 28.3%. Further, tele-density in the urban areas is over 50 percent and for rural areas it remains below 10%, representing a wide gap and opportunity for higher penetration. Growing tele-density coupled with a wide gap between the urban and rural areas would lead to significant investment into this sector which in turn could lead to higher demand for NTIL’s products and services.
  
  
• Further, with upcoming new technologies such as WIMAX, 3G and mobile number portability there is a need for upgradation of the networks by the telecom operators leading to higher investments and increased demand for experienced infrastructure companies like NTIL. Even though the argument is further supported by higher entry barriers in this space due to requirement of larger spectrum of service and project execution skills coupled with higher working capital management, bigger players are better placed to capitalize on this opportunity.
  

KEY CONCERNS

• Though the company has grown at a robust rate, the working capital position has deteriorated since FY07 due to a 300% increase in the debtors in FY08. Debtors as a percentage of Net sales increased from 18% in FY07 to 50% in FY08. Due to industry practice, a portion of the project value (5-10%), is usually withheld by the client as retention money and released after 12 months of completion of the project putting further pressure on bad debts and increased working capital requirement. Increased working capital requirements could result into an adverse impact on the margins of the company going forward.
  
  
• Negative cash flows from operating activities for four consecutive years starting FY05. Net cash flow from operating activities in FY08 stands close to 106 million due to substantial increase in projects under execution and debtors.
  
  
• The telecom Infrastructure Service market is highly competitive with a few organized players and smaller unorganized players. The company faces competition from well known established players having greater financial and technical resources and expertise which could enable them to provide better service at lower prices as the competition intensifies, thereby resulting into lower margins for the company.
  
  
• Significant client concentration risk as during FY08, top client (ZTE Telecom India Private Limited) contributed 18% of income from operations, with top 5 clients and top 10 clients contributing 58% and 82% respectively.
  
  
• The company has earmarked Rs 210 million towards setting up a new subsidiary in the overseas markets. The management of the company however lacks overseas experience thereby increasing the risk of execution. Further, successful scalability of the overseas business model remains to be tested.
  
  
• In case TRAI allows sharing of infrastructure by telecom operators, it could have an adverse impact on the number of telecom sites being installed across India which, in turn, could have an adverse impact on the company’s business revenues and profitability. However, as these shared sites have higher capital costs involved, it could lead to higher per unit of revenue for telecom infrastructure services providers thereby negating the impact.
  
  
• Fully Priced – At a historical P/E of 16 times FY08 earnings, the company has left little on the table for its investors. Listed peers like GTL currently trade at a PE of 16 times its trailing earnings.

Our Verdict - AVOID.

Though the negatives of the company clearly outweigh the positives, NTIL’s plans to capitalise on the exponential growth in the domestic telecom industry and explore new opportunities arising out of increasing telecom density, geographical expansion and robust order-book position cannot be overlooked. However, over 20% of the IPO comprises an Offer for Sale and thus not benefit the company to that extent.

Investors could skip this issue given the pricing but could consider an entry at lower levels post-listing.

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