Nu Tek India is pinning its hopes on the expansion plans of telecom companies in India and overseas to expand its service footprint.
On the back of infrastructure rollout by telecom service providers, Gurgaon-based Nu Tek India, a telecom infrastructure solutions company, has seen its revenues grow by 46 per cent annually over the last three years.
The company is expected to grow at 35-40 per cent levels as operators and independent tower companies double the telecom tower count to 3.54 lakh by March 2010 from 1.72 lakh in December 2007.
The launch of 3G and other value added services and rollout in the interiors would mean that more cell sites would be needed benefiting infrastructure players such as Nu Tek. The subscriber base, which has been growing at 40 per cent annually, is expected to move from 300 million to about 500 million over the next two years.
Furthermore, growth is expected to be robust on the back of falling tariffs, low entry barriers and discounts offered by service providers. Nu Tek offers solutions to telecom service providers directly as well as through equipment manufacturers (Nokia Siemens, Ericsson) and infrastructure leasing companies (Bharti Infratel, American Tower).
The services offered by the company fall into four categories and these are infrastructure rollout (turnkey services), equipment integration and commissioning, technical support and operations and maintenance.
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Funding growth
The IPO is for 45 lakh shares at a price band of Rs 170 to Rs 190 (face value Rs 10). Of this, the company will be issuing fresh shares equivalent to 35 lakh (Rs 59.5-66.5 crore), which will lead to the promoter’s equity stake declining to 42 per cent from 53 per cent after the IPO. The balance 10 lakh shares is an offer for sale by a strategic investor, hence the proceeds from the same will not accrue to the company.
The roughly Rs 60 crore being raised by the company will be utilised towards its growth plans in the domestic and international markets. Of this, it plans to use up to Rs 21 crore to buy a US-based company.
The company started its overseas operations by setting up a subsidiary in Turkey and also has a service contract with Ericsson for its operations in West Asia.
The company also plans to invest Rs 23 crore in testing and computing equipment. While about Rs 44 crore has been earmarked for augumenting long-term working capital resources, a part of it will be met through internal accruals.
Operations
The company’s net profits have grown 57 per cent over the last three years with net profit margins doubling to 22 per cent in FY08 over those achieved in FY06. Operating margins have also moved from 23 per cent to 34 per cent over this period.
The company’s management says that margin improvement is the result of optimal utilisation of resources. Thanks to the proliferation of cell sites, the company is able to install, operate and maintain a larger number of cell sites with existing workforce than before.
Scale of operations have helped it to cut selling and administration costs by half to just under Rs 3 crore from Rs 5.6 crore in FY04. While there are a few players such as Nu Tek who offer all the services from design, installation to maintenance, the market is highly fragmented as there are a number of players who offer a part of the services that make up the infrastructure value chain.
The company claims that due to the lack of end-to-end players it will be able to maintain its pricing and margins. The company is trying to improve its share of the technical services, which currently constitute 16 per cent of their revenues but command the highest margins among its service offerings at 45 per cent.
Low margin turnkey solutions (OPM of 25 per cent), which are the company’s bread-and-butter contribute 57 per cent of its revenues, down from 70 per cent last year. Since FY07, the company has also added the operations and maintenance services to its offerings and these now contribute 13 per cent of revenues.
Valuations
At the higher and the lower end of the price band, the stock is valued at 12.4 and 11 times its FY08 earnings of Rs 15.4. The company’s net profit has doubled in FY08 as compared to FY07 on the back of higher margin services as well as cost being spread over a large number of customers.
Going forward, the company’s revenues and earnings are expected to be strong as reflected in the order book of Rs 175 crore as on June 15, 2008 and to be executed in the current fiscal.
The challenge for the company would be to maintain its net margins and grow its customer base in India as well overseas and fend off competition from bigger rivals such Acme Tele Power, which is also planning to hit the market with an IPO.
| ROLLOUT GAINS | ||||
| Rs crore | FY06 | FY07 | FY08 | FY09E |
| Net sales | 46.90 | 63.57 | 95.16 | 128.39 |
| Operating profit | 10.81 | 21.05 | 32.56 | 43.65 |
| Net profit | 5.08 | 11.58 | 21.26 | 28.70 |
| EPS (Rs) | 4.50 | 9.61 | 15.45 | 16.63 |
| PE (x) @ Rs 192 | - | - | 12.43 | 11.55 |
| Rs 170 | - | - | 11.00 | 10.22 |
Considering a 35 per cent growth in earnings on expanded equity, the stock would trade at 11.5 and 10 times it’s FY09 estimated earnings of Rs 16.6. While there are no listed competitors, which offer the gamut of services, GTL Limited is the only listed competitor of the company. At Rs 197, GTL, (revenues of Rs 1,771 crore) is available at 13.2 times its FY08 diluted EPS of Rs 14.82.
While the issue price and the premium asked for is on the higher side considering its size and the level of competition, there is little doubt over Nu Tek’s ability to maintain growth rates over the next few years both in revenues and profits.
At the IPO price, there is not much left for investors in the near-to-medium term. But, those with a two-three year horizon and an appetite for risk can hitch a ride on the issue.
Issue opens on July 29, 2008
Issue closes on 1st August, 2008