Nu Tek India IPO Review

Incorporated in 1993, Nu Tek India (Nu Tek) was promoted by a first-generation entrepreneur, Inder Sharma, a BE Electronics and Communication Engineer from North Carolina State University, US. Nu Tek is a telecom infrastructure services provider, offering Infrastructure rollout solutions for both mobile and fixed telecommunication networks. The company offers services to telecommunication equipment manufacturers, telecom operators as well as third party infrastructure leasing companies in installing and maintaining telecom network equipment and Infrastructure.

From end-to-end solutions ranging from telecom network installations to full turnkey infrastructure rollout services, Nu Tek also provides technical support services and operation and maintenance to its clients. The company has executed projects in all the 23 telecom circles in India through its workforce of over 1,000 employees across India. It is also registered with the Department of Telecommunications (DoT) as a telecom infrastructure provider (category – 1).

A subsidiary in Turkey will mark Nu Tek’s foray into the overseas markets. The Middle East operations of Ericssion AB, Dubai, will also be serviced by the company. It is in the process of acquiring companies / entities in the US that will compliments its requirements. Work orders of a Rs 4.82-crore Tata Projects relating to the power sector in Rajasthan and Orissa are under execution.

Nu Tek’s initial public offer (IPO) of Rs 76.50 – Rs 86.40 crore comprises 45 lakh shares in the price band of Rs 170 – Rs 192 per share. This includes fresh issue of 35 lakh shares and offer for sale of 10 lakh shares. The net proceeds of the issue (Rs 59.5 – 67.2 crore) and internal accruals are to be used for capital expenditures including various testing equipments, laptops and transport vehicles (Rs 23.58 crore) to fund overseas acquisitions (Rs 21 crore), to augment long-term working capital requirements (Rs 44 crore) and for general corporate purposes.

Strengths

* Had an order book of Rs 175 crore on 15 June 2008 to be executed in the year ending March 2009 (FY 2009). This is 1.8 times FY 2008 net revenue. Orders are from Aircel/Dishnet Wireless, Huawei Telecommunications, Ericssion, ATC Tower Company of India and Shyam Telelink.

* Has worked for all the major telecom operators like Bharti Airtel, Reliance Communications, Tata Teleservices, Aircel, and Shyam, and telecom equipment manufacturers like Nokia, Ericsson, Motorola, and Huwaei, and third party infrastructure leasing companies like Quipo, ATC Tower Company, and Xcel Telecom.

* Operating in high-growth telecom infrastructure services sector, seeing a massive expansion plans by all telecom services providers, especially in small towns and rural areas, offering good business opportunities in the coming years. With mobile number portability to be implemented soon, existing telecom operators will be forced to improve the on-road and in-building coverage by improving/sustaining their network infrastructure to retain existing subscribers. The imminent arrival of third generation (3G) technology would lead to an increased demand for towers/telecom sites.

* Changing its business mix towards operation and maintenance (O&M) services to ensure a sustainable business model to offset matured markets. Revenue from O&M activities increased to 13% in FY 2008 against nil in FY 2006. Seven per cent of the current order book comprises O&M service contracts. Also undertakes O&M for sites developed by other infrastructure providers (about 60% of business from such sites). Expects to win O&M contracts from MTNL for sites in Delhi and the National Capital Region (NCR).

Weaknesses

Most of the infrastructure rollout experience is concentrated in north India (about 70% of revenue), while exposure to other regions is limited to smaller projects. There is huge amount of capex lined up by all the telecom operators for the rollout of infrastructure across India, of which sizable spending is expected in the under-penetrated eastern part of the country. Is working on strengthening its presence in the eastern and southern regions to address opportunities arising out of regional growth. This can be seen from the current order book, which includes just 46% of the orders from the northern region as against about 70% of revenue earlier.

* There has been an increasing trend of passive infrastructure sharing among operators, resulting in lower capex on network infrastructure. Further active infrastructure sharing and intra-circle roaming arrangements have also been allowed by the Telecom Regularity Authority of India (Trai), which will cap the capex by operators on network infrastructure while launching services in new circles, leading to lower opportunities.

* The market for telecom infrastructure services providers is highly competitive. The relatively small size of operations may impact competitiveness and prove to be a deterrent in bidding for larger projects. Lack of pricing power against large telecom operators, telecom equipment producers and tower leasing companies may put pressure on margin.

* The working capital cycle is high due to longer projects. Had negative operating cash flows in each of the last three fiscal years. At 113 days, debtors’ days are also on the higher side (181days on closing debtors basis).







Valuation

Over the three-year period ended March 2008, revenue grew at a CAGR of 46% and net profit at CAGR of 57%. Operating profit margin has stabilised at 32% against 18.7% in FY 2005. Improvement in margin is on higher employee utilisation and drop in selling, general and administration (SG&A) expenses in absolute terms. This may not be sustainable going forward. The EPS on post-issue equity capital of Rs 17.26 crore has improved by more than four times to Rs 12.3 in FY 2008 from 2.9 in FY 2006.

On the FY 2008 EPS of Rs 12.3 on post-issue equity capital of Rs 17.26 crore, the P/E works out to 13.8 – 15.6 in the price band of Rs 170 – Rs 192. The trailing 12-month (TTM) P/E of GTL (a much bigger player providing broadly similar services) is 13.