Ortel Communications IPO: Expensive connection

Of the IPO, half or Rs 120 cr (at upper price band) is an offer-for-sale by Mauritius-based private equity investor - New Silk Route

Ortel Communications is an Odisha-based multi system operator (MSO) and broadband service provider. Ninety per cent of its customer base is Odisha and the rest is in spread across West Bengal, Andhra Pradesh and Chhattisgarh.

Ortel provides cable television services (analogue, digital and carriage fees; 73 per cent of revenues), broadband services (19 per cent), fibre infrastructure leasing (two per cent) and signal uplinking services (two per cent). About 87 per cent of Ortel’s cable subscribers (about 0.47 million) are on its ‘last mile’ network. This means it is dependent on local cable operators (LCOs) for a minuscule 13 per cent, which is much lower than other listed MSOs. High ‘last mile’ connectivity ensures lower revenue leakages versus peers. However, Ortel’s total cable subscriber base is a fraction that of peers like Hathway Cable (11.7 million) and Den Networks (13 million) that also have a larger geographical footprint.

Of the initial public offer (IPO), half or Rs 120 crore (at upper price band) is an offer-for-sale by Mauritius-based private equity investor - New Silk Route, which will own seven per cent in Ortel post issue (down from 33.6 per cent prevailing). Ortel plans to deploy the remaining money to expand its network of providing video, data and telephony services and for capital expenditure or capex towards both digital cable and broadband businesses.

  The company has been fairly aggressive in chasing inorganic growth by buying out assets, infrastructure and clients of smaller LCOs, which enables it to add subscribers quickly and ensures last-mile connectivity. Strong brand recognition in the four states it operates in, last-mile connectivity, higher Ebitda (earnings before interest, tax, depreciation and amortisation) margins versus listed peers and strong execution skills are its key strengths. However, higher competition going ahead might limit its ability to increase average revenue per user (ARPU) for digital customers. High geographic concentration and Capex-intensive business are other business risks. Going forward, it plans to penetrate further in existing states and push up broadband revenues to boost growth, besides LCO acquisitions.

The financials, however, are not exciting even though it has turned around (see table). However, given that over 90 per cent of its cable subscriber base falls in phase III of digitisation, Ortel should gain as the same is implemented fully. ARPU of digital subscribers is Rs 190, about Rs 40 higher than that of analogue subscribers. Thus, digitisation will give a significant impetus to Ortel's profitability going forward. Also, the company's focus on niche category B and C towns in the four states it operates in along with plans to ramp up the high-margin broadband business will rub-off favourably.

Valuations though are expensive. At the upper price band, Ortel is valued at 17 times FY14 Enterprise Value/Ebitda versus 19.4 times for its larger peer Hathway and 8.3 times for Den Networks. Though there are some positives, analysts believe given its smaller subscriber base and high geographic concentration Ortel should be priced at a discount to peers.