Tejas Networks – Product based IT business in a favored sector?

Q1FY25 Concall Notes:

• Best quarter ever.
• Order book 7091 Cr (6831 Domestic and 260 International)
• 2 business segments : Wireless and Wireline
• Wireless:

1. 4G and 5G RAN installation for the BSNL.
2. Significantly scaled up manufacturing capacity for the RAN equipment.
3. The company has made releases for the additional equipment for the bands which are used globally – band 3(800MHz) , band5(850MHz), band41(2500MHz).
4. Engaging with multiple players for POC.

• Wireline:

1. Won a strategic deal with a tier-2 operator in the US.
2. Got into a deal with a telecom operator in South East Asia for broadband operations.
3. Getting repeat orders from the existing clients.
4. The equipment which were delivered for BSNL order in the last quarter are under installation.

• Previous quarter had PLI incentives (other income) of 156 Cr, compared to the current quarter 76 Cr.

• EBIT for Q1FY25 is 167 Cr compared to 258 Cr in Q4FY25. But in Q4FY24 there was a big impact on other income (PLI, which was total of FY23 & FY24). If we remove that then EBIT for Q4FY24 is 101 Cr and Q1FY25 is 100.

• Inventory and receivables increased due to ramp up in the shipment.

• Borrowings have increased from 1744 Cr to 2844 Cr.

• Generative AI, Data Centers, VR, AR, Gaming, Streaming etc. are key growth drivers for the expansion of the 4G-5G networks & broadband network, which is the area where Tejas operates.

• BSNLs 5G tender for nation-wide build out is expected.

• The upgrade from 4G to 5G for the existing site costs hardly any fraction, it is not a big jump as such. However, setting up a new 5G site costs higher than a 4G site.

• The management avoided answering a question on the cost advantage that it may have over other players like Nokia, Ericsson etc. (which also have RnD and manufacturing centers in India). The similar question was asked by one other participant subsequently to which management said that a lot of the equipment manufactured by them are integrated equipment and hence results in the cost savings for the clients.

• Doesn’t have a direct role in the data centers as such but it’s more of a high speed connectivity required for the data centers – Data Centers Interconnection.

• The switches that the company manufactures find application in campus or buildings – that is enterprise level. It doesn’t have applications in the data center as such.

• Significant opportunities in the US in terms of modernization of the existing networks and also network expansion in the rural areas.

• The current order book of 7091 Cr is expected to be completed in FY25 (No guidance on the EBITDA margins as such).

• The company works on the asset light model where majority of the manufacturing is outsourced to the EMS players and the company mainly focuses on assembly and testing.

• There is no clear visibility of the order post FY25 (though management is saying that there is good demand and is bullish about the future and hence has done significant ramp up).

• The wireline and wireless businesses have similar kinds of margins. The margins over the long term can increase as the contribution from the international business increases.

• The overall tender for the Bharatnet Phase-3 could be somewhere around 4K to 5K Cr.

• The WC intensity is likely to increase because of the execution of BSNL orders and thus the debt to service the WC is also likely to go up.

• The international opportunities won’t be as big as BSNL, but the number of opportunities could be higher.

• The number of sites that may need to be covered for Kavach is around 15K to 20K sites. This is overall size and not specific to Tejas.

• The execution time for the BSNL 4G to 5G upgradation and the BharatNet (whenever it starts) would be around 18 to 24 months.

• The initial size of the orders/opportunities for 5G network would be focused mainly on the metro cities, where the population is ready to pay higher for using that technology, but the orders would be relatively smaller. However, over the longer term the orders would be of bigger magnitude as more and more geography will be covered and also the cost of the equipment would be higher.

• As per the management, there won’t be a big competition from the chinese companies doing JVs with Indian companies.

• The company is putting more sales and marketing focus on the developed economies such as the US, however these are long dated cycles which usually take a lot of time and hence the company is going to focus on the Indian business in the meantime.