BS Transcomm IPO Analysis

BS Transcomm, promoted by Sunil Agarwal, Mukesh Agarwal and Rakesh Agarwal, is enaged in the business of manufacturing towers and turnkey services for telecom and power transmission sector.



The company originally started as a trader in steel in 2004 and has moved up the value chain to tower manufacturing for telecom and power transmission and then to turnkey solutions and managed services comprising operating & maintenance of passive infrastructure/telcom tower sites.

Subsequent to its acquisition of SAPL during the fiscal ended March 2010, it has also started to provide solutions such as remote site monitoring solution (intelligent data device) for the telecommunication sector. The remote site monitoring solution provided at certain client's telecommunication sites across India is intended to provide operational efficiencies in the management of the telecommunication infrastructure.

The range of services offered to telecom tower companies includes manufacture and supply of telecom towers, turnkey services, engineering, procurement and construction (EPC), operations up-gradation of towers and managed services including operation & maintenance (O&M) of telecom tower sites. As a managed services provider to the telecommunication sector, it undertakes complete site maintenance and reporting including activities such as fuel management, security management, estate management, trouble-shooting and fault management, and preventive and corrective maintenance.

In the power segment, the company is engaged in both manufacture and supply of power transmission towers, substation structures, solar PV structures etc as well as turnkey project contractor for transmission line and substations. Its services in the power sector include survey, design and setting up of transmission lines for power evacuation on turnkey basis and design and setting up of sub-stations. As a turnkey service provider (TSP) to the power transmission sector, it executes power transmission and sub-station projects on a turnkey basis including supply of materials, installation, erection, testing and commissioning.

The product portfolio for both telecom and power sector includes designing, building and manufacturing of towers. Apart from that, its product basket for power sector includes sub-station structures and equipments, insulators, transformers and conductors. Its tower manufacturing activities include designing and fabrication of telecommunication and power transmission towers.

The company has supplied towers to companies such as Reliance Infratel, Wireless-TT Info Services, Indus Towers, Quippo Telecom Infrastructrue and other telecom companies. Some of the customers to whom it has provided turnkey solutions are Wireless-TT Info Services and Indus Towers. For the latter it has also provided technology services in the telecommunication sector. It is also providing pilots for technology-based products and services to Wireless-TT Info Services, Global Towers and Reliance Infratel. On the power sector, it caters to Power Grid Corporation India (PGCIL), Transmission Corporation of Andhra Pradesh (APTransco), Rajasthan Rajya Vidyut Prasaran Nigam (RRVPNL), Sterling Projects and Engineering, and Tata BP Solar India.

Currently the company has a tower fabrication capacity of 120000 MTPA with a backward integrated structural steel plant (with a capacity of 90000 MTPA) and galvanizing plant supporting the raw material required for tower manufacturing. The company is currently planning to double the fabrication plant capacity to 240000 MTPA and expanding the galvanizing plant capacity from 36000 MTPA to 120000 MTPA.

In addition to tower manufacturing, EPC jobs in telecom & power and managed services of telecom, the company is further moving up the value chain and has signed an MoU with Beijing Beikai of China for Gas Insulated Switchgears up to 245 KV and Agreement of Intent (AoI) with Boading Tianwei of China for transformer manufacturing, testing, repairs and maintenance of transformers up to 756 KV in India. The Chinese tie-up will enable the company to pre-qualify for large ticket T&D orders. This along with acquisition of SAPL, which provided entry of the company into remote site monitoring and IDDs etc as well as foray into offering hybrid renewable energy solution for telecom infrastructure companies etc, will open up additional opportunity to tap going forward.

The company proposes to use the issue proceeds to part fund the balance work of expansion of galvanising unit under phase I to 120000 MTPA and phase II expansion of tower manufacturing capacity to 240000 MTPA as well as repayment of certain long-term and short-term loans.

Strengths

Order book end July 31, 2010, was Rs 531.69 crore, out of which the share of EPC and tower manufacturing for the power sector was Rs 472.57 crore (or 88.9%) and that for turnkey service projects and managed services for the telecommunications sector was Rs 33.29 crore (or 6.2%). The balance is for pure manufacturing and supply contract of telecom towers, which is typically for a period of 2 months, worth about Rs 25.82 crore (or 4.9%). The total order book of its subsidiary company, SAPL was Rs 22.77 crore as on July 31, 2010, which included an order from Applied Solar Technologies (India). In addition SAPL has received a Letter of Intent valued at Rs 200.00 crore for 500 sites for a 10-year period. Of the power sector order backlog, about Rs 280-crore orders are from Power Grid Corporation of India for two transmission projects.

Given its backward integration into steel mill and galvanizing plant as well as value added technology services, the company enjoys a higher operating margin compared to a normal transmission line EPC players. The EBITDA margin for the company is around 18.3% for the quarter ended June 2010 compared to EBITDA margin of around 11-12% for a typical pure transmission line EPC player. The EBITDA margin of the company for FY 2010 and earlier years has been suppressed by greater share of trading revenue to the top line, which has been discontinued during FY 2010.

Weaknesses

High gearing level (debt-equity ratio of 2.27 times) and significant debt repayment obligation in the medium term is a cause of concern. The debt end of June 30, 2010 was 219.19 crore, up from Rs 83.15 crore end of FY 2009. The company has in the past have instances of delay in servicing its debt obligations and devolvement of letter of credits. In FY 2010, there have been 20 instances of delay ranging between 1 and 22 days in servicing the working capital loans, five instances of delay ranging between 3 and 25 days in servicing the term loans and 40 instances of devolvement of letter of credits, the delay ranging between 1 and 19 days. Additionally, the short-term loan availed from Punjab National Bank was repaid in full after a delay of 47 days. Moreover, some of the property and 48.79% of equity share capital held by the promoters are pledged in favor of the lenders as security for the loans availed by the company. If the company defaults under the loan agreements, the lenders may enforce the security. On May 11, 2010, ICRA downgraded the credit rating on the company's Rs. 50.78-crore term loan and Rs. 140 crore fund-based limit from LBBB- (pronounced as L triple B minus) to LB (pronounced as L B). LB indicates risk-prone-credit-quality rating implying that the rated instrument carries very high credit risk. Additionally, ICRA also downgraded the credit rating on the company's Rs. 361 crore non- fund-based limits from A3 (pronounced as A three) to A5 (pronounced as A five). A5 indicates lowest-credit-quality rating assigned by ICRA to short-term debt instruments implying that the instruments rated in this category have very low prospect of recovery.

The company is a new entrant in the power transmission EPC segment, especially to PowerGrid, which is the largest customer in the segment. Similarly, SAPL is in the initial phase of growth and its products are currently in testing phase.

The company's expanded tower manufacturing capacity (from 36000 MTPA to 120000 MTPA) become operational only from March 2010 and the company end of July 2010 had a tower (volume) order of 56974 MT and ramp-up in capacity utilsation largely depend on the ability of the company to get sufficient orders. Otherwise the company will continue to operate at lower utilization, which in turn will impact the profitability given fixed overheads.

The revenue of SAPL is currently dependent on the performance and business of Indus Towers (Indus). For the year ended March 31, 2010 94.63% of SAPL's revenue was from Indus.

With consolidation happening in the telecom tower business and increased shift towards sharing of passive infrastructure the demand for telecom towers will largely depend on geographical expansion/penetration of telecom services and up-gradation.

Valuations

Consolidated sales for the fiscal ended March 2010 was higher by 53% to Rs 516.69 crore and that of net profit more than doubled to Rs 25 crore. However, there was Rs 32.42 crore cash outflow from operating activities compared to cash inflow of Rs 27.04 crore in the previous year. The EPS for FY 2010 works out to Rs 11.1 (on post-IPO equity). The PE at the offer price band of Rs 257-266 works out to 23.2-24 times its FY 2010 consolidated earnings. Though there is no strictly comparable player, the players in power transmission EPC space such as KEC International, Kalpataru Power Transmission and Jyoti Structures quote at a PE of 13.4 times, 16.7 times and 13.7 times their FY 2010 consolidated earnings.