Nu Tek India IPO Analysis

An investment can be considered in the initial public offering of Nu Tek India, given the reasonable asking price and the potential for this business. The company enables telecom companies to expand their tower infrastructure, by providing end-to-end services. Nu Tek delivers telecom infrastructure rollout services, including civil and electrical works, for wireless communication providers.

At Rs 192 (upper end of the price band), the offer values the business at 15 times its 2007-08 earnings on a fully diluted post-offer equity base. This is the same valuation that the larger GTL demands. But Nu Tek is moving up the value chain by becoming a turnkey infrastructure rollout services provider and creating a sustainable revenue visibility.

The company’s revenues have, over the past three years, grown at a compounded annual rate of 46 per cent to Rs 96.7 crore, while the net profits have increased at a rate of 57 per cent to Rs 21.2 crore. The valuation is, therefore, not too demanding.

The growth momentum in mobile subscriber additions, a stiff spectrum allocation regime that necessitates more towers and impending regulatory measures present opportunities for Nu Tek.
Business drivers

From being a provider of civil and mechanical works, the company has evolved into an end-to-end player in the passive infrastructure services segment. Being in the services space alone has made it vendor and technology agnostic. Nu Tek also has the expertise in optic fibre rollout, thus catering to landline providers as well.

Being a turnkey player has its advantages, with initial revenues received upon completion of infrastructure commissioning as well as future annual maintenance revenues for active and passive components, thus creating a sustainable revenue stream.

Turnkey solutions now account for 57 per cent of its revenues, while maintenance revenues have grown from nothing in 2005 to 13 per cent of revenues in 2007-08. Technical support and telecom implementation contribute the rest.

Nu Tek’s client base spans telecom service providers, equipment manufacturers as well as third-party tower infrastructure players. This makes it well-positioned to tap into several opportunities for tower rollouts. The company counts several blue-chip names in each of these categories as its clients. Players in all these categories also sub-contract implementation services to Nu Tek. With mobile subscribers still being added at 6-7 million per month and the entry of new pan-India players, there will continue to be big potential for new tower rollouts.

On the policy front, a stiff subscriber-linked allocation of spectrum norms also means that operators will be looking to increase number of cell sites (towers).

But the caveat is that as tower-sharing among Indian mobile players improves from the current (1.2-1.5) levels, the demand for newer cell-sites would eventually come down. But annual maintenance revenues would continue to flow in, more so in case of higher tenancy towers offering business opportunities for players such as Nu Tek.

Announcement of a 3G policy and mobile number portability would require scaling up of both the active and passive infrastructure of mobile operators. Nu Tek, with its existing working relationship with many of these players, appears well-placed to tap a portion of this incremental market.

Another potential opportunity in this segment may come from the Defence sector, which is expected to vacate spectrum to be allocated to mobile players.

The DoT has proposed an optic fibre network to enable and provide alternate mode of communication for the defence, in this case. Nu Tek is already working on another project for the Defence that was sub-contracted to it by Bharat Electronics.

As and when the vacation of spectrum is formalised, Nu Tek may be able to cash in on the new opportunity. The company’s foray into Turkey, a rapidly expanding telecom market, and Dubai may be watched for growth prospects.
Risks

Competition from strong turnkey players such as GTL and other third-party infrastructure providers such as American Towers and Quipo Telecom, may pose pricing pressures. The execution of Nu Tek has not been on a grand all-India scale, but in smaller clusters over several circles and scaling up to pan-India levels may not happen quickly.

The average receivable days has gone up steadily to 113 currently, thus increasing working-capital requirements. In a high interest rate scenario, this may escalate interest costs.
Offer details

Nu Tek plans to raise Rs.86.4 crore, including an offer for sale of one million shares by an existing shareholder at a price band of Rs.170-Rs.192.

The company is looking to deploy the proceeds towards capital expenditure, overseas acquisitions and augmenting working capital.

The offer is open from July 29 to August 1. IIFL and SPA Merchant Bankers are the book-running lead managers to the issue.