TEJASNET — earnings call

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Prepared remarks

Moderator · Conference Operator

Ladies and gentlemen, good day and welcome to the Tejas Networks Limited Q1 FY2021

Questions and answers

Moderator · Conference Operator

Thank you very much.

Ladies and gentlemen, we will now begin the question and answer session.

The first question is from the line of Mukul Garg from Haitong Securities.

Please go ahead.

Mukul Garg

Thanks for taking my question.

I missed the initial few comments but the breakout what was the business which we lost due to the lockdown and Q1 and also what portion of Q1 revenue was benefited from the carry over business from Q4 because if I recall you were supposed to execute almost Rs.100 Crores in Q4 on order book and that obviously got eased out a bit so how much of that was received and delivered in Q1?

Sanjay Nayak

From what we had originally planned there are two effects which come in to picture.

Slippage of Q4 business which was supposed to happen in Q1 and new business of Q1 which was supposed to happen in Q1. The two combinations together we anticipate around Rs.45 Crores of revenues slipped out of Q1 as a combination of two.

Some of the orders from Q4 by the way did not get shipped out in Q1 either because some of the critical infrastructure and all of those things which are dependent on factory acceptance tests etc., could not happen in Q1 either so around Rs.45 Crores is what was the order slippage because of those two things together.

Mukul Garg

Just to refer on this when you say that you had a few order in Q4 how much of that was executed in Q4, how much of that was executed in Q1. I am just trying to understand and if there is a delay of two quarters can we delayed for longer?

Sanjay Nayak

It is not exactly broken out that how much of Q4 orders got in here and how much of it has further slipped out to Q2 because it varies from one customer to the other.

For example, there is an international customer that wanted us to ship in March, but then his country is in a lockdown situation for most of the time so he thought he is going to do it in this quarter and looks like they may be opening up and they will do that.

Some customers in India in the critical infrastructure sector too had a similar situation.

Some of the private customers in India are just holding back the orders which they originally thought they wanted to place earlier so I think it is a little bit of a combination.

My sense is coming back to your answers and I do not think it is a two quarter slip that decongestion of the worst time because the lockdowns around the world including India in a full basis are almost over so from henceforth I think except for the last minute situation during end of the quarter we should start to see a normalization of at least the orders that we plan to do in a particular quarter and actually happening unless there is a significant lockdown either at our end or at the customer’s end.

So I do not think there is a two quarter delay that decongestion will start happening from Q2. Tejas Networks Limited July 27, 2020

Mukul Garg

Understood and my second question was on the order book.

Can you break out there was Rs.188 Crores increment this quarter how much of that was on the private side and how much is executable in FY2021?

The second part of that question is you highlighted three international wins of million dollar each, this basically like from Rs.25 Crores from three customers which seems obviously the numbers are quite low so just wanted to understand want wins global customers from giving you for example $20 million single order given the capex expenditure spends happen at tier I operators is there your balance sheet or is there something else at place?

Sanjay Nayak

Two questions you had, the first question was that how much of the order book that we have in hand is executable this year.

I had mentioned that out of the Rs.593 Crores of order book we have when we started the quarter around 35% of that will be for this financial year and the balance will be for next year and the year after so that is point number one.

Second point your point was that why did the international customer not give us even bigger orders that what we got so I would also say that except for the US where we really did not get much traction, US and Mexico did not get much traction, but in other geographies also the customers were under a lockdown for a large part of the quarter so different geographies opened up in a very selective way so for example South Africa opened up for a short while and we got some customers from there, we got orders from Malaysia, we got orders from Middle East, so I think the orders came and continue to come.

As to why we did not get a $20 million order is really that the customers we are working with, they may not be placing $20 million orders on anybody not just on us.

So I think as a part of the orders that they are placing at least with the customers that we are with we seem to be getting good orders.

Some customers where we got selected last year for example there was a pan-African operator where we got selected last year, some of those orders did not materialize because the orders actually from their opcos and not from the main corporate.

I think there are again delays because of being a “new vendor” in that particular opco and the new vendor introduction as I mentioned earlier in any opco or any country is taking a little bit more time than normal.

So I would say that as the year progresses we expect that the international orders will continue to at least come from the geographies where we are seeing good traction.

US, Mexico I think will be a second half play because first half again I believe that there are too many restrictions in these countries.

Mukul Garg

Can you give us a breakup of incremental business from the private sector orders won during Q1?

Sanjay Nayak

If I were to look at Q1 new bookings around 25% came from India Private, around 40% came from India government and the balance came from international, but approximately.

Mukul Garg

Understood.

Thanks and I will get back into the queue.

Tejas Networks Limited July 27, 2020

Moderator · Conference Operator

Thank you.

The next question is from the line of Rajendra Mishra from IDFC Mutual Fund.

Please go ahead.

Rajendra Mishra

Good evening.

Hope you guys are well?

Basically you have highlighted couple of things one is the home broadband you are speaking about and you said that customers and OEMs have realized that the partners have realized that is a good ARPU business and you will be have some technologies like GPON and all which we have demonstrated in BharatNet and which is scalable or maybe get in traction Private so could you just build on that, just to explain a bit more how is ARPU better and so what exactly are we looking there in terms of six months, 12 months, 18 months there?

Sanjay Nayak

To answer the first question, if you see a typical mobile customer in India the ARPU is about Rs.120 to Rs.150 or Rs.200 whereas a typical home broadband connection that anybody takes, starts anywhere from Rs.599 going to Rs.999, Rs.1499 per month depending on which plan people take.

People are willing to pay for higher quality home broadband which gives say 100 MBPS connection with guaranteed speed upside, downside and so on and so forth that is what was my comment that our end customers are seeing a good business case to rollout home broadband services because of the new way of doing things so that is part one.

Coming back to what is the opportunity size and how will it play out for us in the six months, 12 months and 18 months.

I think the way to look out it is the following way.

In India at this point and time depending on whom you talk to there could be anywhere between 2 million to 3 million home broadband which have been powered on a high capacity fiber optic correction on a GPON or stuff like that.

Jio for example talked about a million home broadband subscribes on Jio Fiber, Bharti may have similar.

The addressable market which people are targeting is in the next couple of years is anywhere between 50 million and 100 million homes so I think there should be a significant jump in terms of the home broadband customers.

This will be dependent on how fast people are able to roll things out and as you know which is why I mentioned earlier that any of the housing society that people live and neighborhoods people live there are restrictions for people to come in and wire up new connections and stuff like that so they could be operationally and logistically slow rollout in the near term which should pickup as you know the restrictions and all that reduced so I would say if you take a three-year window we are talking of let us say starting from 5 million rolling it out to say 100 million home broadband subscribers over a three-year period and that is what would be the opportunity size.

Clearly there are three kinds of players in that market.

One is Nokia which is a global leader in fiber to the home or GPON equipment so they are incumbent in some of the large operators in the country.

Now we have also got an opportunity to play into that and there are Chinese vendors also who have a competitive portfolio but some of that market share dynamics may possibly change going forward.

So that is the way to think about the size of the opportunity and how it will play out.

Tejas Networks Limited July 27, 2020

Rajendra Mishra

Just correlated with that, so 4 million, 5 million it should goes to 50 million to 100 million less than three years of four years what will be the opportunity size products, very rough cut?

Sanjay Nayak

For a 100 million to wire up 100 million subscribers let us say you would probably need close to about $2 billion worth of active electronics to be bought if you were to put the numbers or anywhere between $1.5 billion to $2 billion depending on how you look at it, that much amount of equipment will be needed to wire up all the 100 million subscribers in the country.

Rajendra Mishra

Second question is just a technical thing which I need to understand so 5G we all have been talking a lot for quite some time now maybe it is coming in six months, 12 months I do not know but now we are clearly seeing the world getting polarized into two buckets because of geopolitical issues.

So just help me understand if the 5G technology in one which is China driven world of is it a different standard and US will be different standard and whether we are flexible to supply to both and whether once the world polarizes will it be an opportunity for us or it will how it will to impact us, or the standard is still evolving or whether we will be aligned to growth or aligned to one, how is it going to impact the dynamics of this industry that we are operating in?

Sanjay Nayak

I think this is an excellent question.

Let me tell you how will 5G impact us and what happens in the new geopolitical situation.

So first and foremost there is only one 5G standard in the world, which is uniform for everybody else.

It is set up by Independent Standards Body and by the way I mean India also you would have read in the papers in the last few weeks that India had contributed to one such very important 5G standard and I am very happy to say that our CTO, Dr. Kumar Sivarajan, who was the chairman of the telecom standards body of India, along with other members of our technology office initiated a lot of this work during his tenure as Chairman.

So there are three elements of a 5G that we need to think of.

One is the transmission so 5G still does not obviate the need for a very high capacity optical transmission so the technologies that will go into servicing a 5G infrastructure are what we are already doing so if we look at the product chart that I talked about some variant of GPON technology, some variant of packet transport technology and some variant of OTN technology these are all technologies that we are already shipping products will be used for backhauling 5G traffic.

Essentially 5G will have a densification of network which means if you have 100-base stations today to cover a certain locality you will probably need 1000-base stations in the same locality of 5G to cover everything and every one of those 1000-base stations will need some kind of a device to bring the traffic back.

And those are the devices that we do in terms of stuff that goes on optical fibers so that is one part that we are positively able to service.

The second aspect of 5G is the radio part which is the wireless part often referred to as base stations.

So as I Tejas Networks Limited July 27, 2020 mentioned earlier over the last 5-6 years we have invested in building our own 4G base stations with software and certain kind of feature set upgradability can be made 5G compliant.

So the 4G base station that we have can be upgraded to 5G.

So that is another play which we can potentially have.

In 5G for wireless there are two different segments of the market.

One segment is called the fixed wireless access or FWA.

So our current product is already compliant to the FWA market segment and then the second aspect of 5G of course is enhanced mobile broadband and we can upgrade the software features to address that.

So we will be able to address all the optical backhaul part of 5G today with the products we have and with the wireless product that we have with upgradation, the same can be upgraded to 5G.

So any which way the geopolitical situation evolves in the world, the optical transmission part of the 5G network will be fully insulated and the wireless part is an opportunity which may open up depending on how serious the Government of India is for example in building their own equipment and how well Indian ecosystem can potentially step up and build all this stuff.

Rajendra Mishra

Thanks.

Very useful insights.

Thanks Sanjay.

Moderator · Conference Operator

Thank you.

The next question is from the line of Kunal Patel from Equilligence Capital Advisors.

Please go ahead.

Kunal Patel

Thank you for the opportunity.

Sir first question regarding on Atmanirbhar Bharat again, so we have been talking about it for few years now and nothing has moved directionally that we wanted to, so did we have any representation from our side to the government since the announcement or are Indian customers showing any interest to the higher wallet share to local share, it would be great to if you can throw some highlights on that?

Sanjay Nayak

Good question.

There are two parts one is that have we represented?

Of course, I think we are a part of all the voice of industry in terms of whether it is export promotion council team, to be precise to being the Chairman of TEPC in the past, Kumar was the Chairman of India’s telecom standards body and I am currently also the chairman of FICCI R&D council that is we have shared lots of inputs with the government.

Government has done two things in that the most recent one was last week, actually last weekend or last two, three days back where they have come out with a new guidelines where any equipment from countries with whom India shares border cannot be bid in any government tender whether central government, state government or even municipality or any government money so what that basically means is that this has been done by altering what is called the GFR guidelines or the procurement guidelines of the Government of India.

So that is one concrete thing which the government has released late last week.

How is that going to play out we still have to see but that would basically mean that government procurement would potentially favor domestic products and domestic companies so that is point one.

Second point which you Tejas Networks Limited July 27, 2020 mention is that have private operators in India started to look at more Indian equipment?

The answer is yes but that comes more from a point of view of diversifying away their supply chain risks.

Currently because of the ongoing trade war between two major countries, there is a lot of uncertainty whether a particular equipment supplier would even be able to continue to manufacture its equipment, since their chips and even the chip- making machines are from US and will not be made available to them.

Just from a pure supply chain diversity we are seeing more engagement with many of our private customers in areas where we have strengths and they have requirements.

How exactly this will pan out is not clear.

As you rightly said in the past also there was a conversation about Atmanirbhar Bharat and Preference to Make in India.

Will this happen for good this time, we will have to actually wait and watch.

Kunal Patel

Sir second question is regarding again both the telecom operators are in status quo mode again Bharti has already projected, currently if I am wrong but a bigger chunk of Jio business has also gone to our US competitors so where are we lacking in our intensity also if you can just throw some color on Indian Private business where the growth will come say over next two or three some months?

Sanjay Nayak

The good news is as a “startup company” which is always growing which is what we are, we can confidently say today that our GPON products are as good as anybody’s in the world.

We can compete against the best in class and we have started again with a very humble beginning with supplies for BharatNet which we successfully rolled out but the same technology over the last 24 months we have matured and made it state of the art.

In fact as I said not only GPON, we are now also supporting next generation PON which is not even being rolled out in India or even in the US in any significant way.

So technology-wise I think we are almost up there with the best and in fact with the economies of scale that we got out of BharatNet even cost-wise we are very competitive.

So we do have reasons to believe that as more operators in India and around the world start rolling out GPON networks in large numbers we should hopefully get a decent shot at that business.

The first step of that is of course being selected and being integrated in their operational systems and so on and after that it would basically depend on our performance in terms of quality, in terms of what the other things which make a vendor win so I do not see that there is nothing that we are lacking at this stage.

It is just that we now have the products, which is as good as anybody else’s and we are as competitive with anybody else because none of the operators in India or tenders will allow you to win if you are not already that.

Kunal Patel

Thank you.

Moderator · Conference Operator

Thank you.

The next question is from the line of Vikrant Kashyap from Kedia Securities.

Please go ahead.

Tejas Networks Limited July 27, 2020

Vikrant Kashyap

Good evening Sanjay.

I have couple of questions.

First I need a breakup of receivables and are we still facing challenges in recovering money from our customers, I am not talking about BSNL, BBNL because you have mentioned in earlier comments but due to COVID situation are we still facing to receive money from our other private players in India or international clients.

Sanjay Nayak

First question Venkatesh will give the breakup of the receivables I do not have in front of me in terms of India and international but barring BSNL as one of customer in India where we had challenges.

Again I want to just reiterate that our money from BSNL for the BharatNet project is different from the capex of BSNL and we also can confidently say that if we have not received money none of the other vendors too have received money for that project.

And as BSNL gets their sovereign guarantee backed up by the Government of India which they announced a few weeks back we hope as Venkatesh said earlier what we should collect that money.

So BNSL is a challenge area for us and we have been collecting in bits and pieces but we expect that now the big chunk should happen once they get a sovereign guarantee.

As far as other customers are concerned either in India, India Private we do not have any challenges.

We do not have exposure to any operator whose balance sheets are stressed so in that sense we are insulated from that.

For smaller operators in India we have very strong mechanisms of payment either in the form of advance, LCs or whatever else, For other government customers we are now working largely with system integrators with whom we have fixed payment terms so we are again insulated from the vagaries of government guys not paying them for projects.

As far as international is concerned most of the customers we are receiving payments on time, only for a few customers we are seeing delays.

We are not seeing big delays but for example some of the things which were supposed to say come by end of June may come in say middle of July or end of July or may be listed out by a few weeks here and there so we do see few slippages in partly because of the customer own challenges in terms of the banking systems or things not working in full steam.

So I would say a little bit of delay we have seen in certain customer payments internationally but materially if you see even the receivables that we got and that too without anything significant coming from BSNL we collected a decent amount.

If I look at our Q2 receivables we are very confident that by the end of we should see higher amount of cash in the banks or receivables will come down and of course the working capital correspondingly will also come down.

So I would say except some amount of delay of a few weeks here and there we have not seen any material delays from our customers anywhere and definitely no delinquencies so we have not seen a single customer who said I cannot pay or I am stressed because all customers of ours are almost actually in an investment mode for their part of the business which is providing high capacity broadband services to their customers.

Tejas Networks Limited July 27, 2020

Vikrant Kashyap

I will take the breakup of outstanding order receivables but my second question is our order book so how much of this order book will be executable in FY2021, the current year?

Sanjay Nayak

I think as I said earlier around 35% of our order book would be executed for FY2021 so that is around 210 odd Crores we should execute from here till the end of the year from the order book that we have in hand.

That is based on our current estimates.

Some of these are things which of course depend on the customers’ requirements to be a little bit more or little bit less but around Rs.210 Crores is what we think we will execute out of the order book for this year in addition to what we have already done by the way.

Vikrant Kashyap

The breakup of receivables?

Venkatesh Gadiyar

I will answer that question.

I am Venkatesh here in terms of the receivable breakup about 25% of the receivables are outstanding or from international and rest of them are India.

Vikrant Kashyap

So 75% was largely into India Private and if you can give up with the breakup.

Venkatesh Gadiyar

If you take out may be BSNL/BBNL, which was approximately 40% of our receivables, then rest of them are from Critical Infrastructure and India Private.

Some of the receivables are not due and some of them will be paid up after one year warranty period.

So for example we have got 90% for example done, the 10% retention money will come one year after so it may not be due.

So I would say the major overdue payment in India is really BSNL and international is around 25% of the total.

Vikrant Kashyap

Thank you and wish you best of luck.

Moderator · Conference Operator

Thank you.

Ladies and gentlemen, due to time constraints we will be take the next question as a last question from the line of Sangameswar Iyer from Consilium Investments.

Please go ahead.

Sangameswar Iyer

Thanks for taking my question.

Just wanted to understand given that the demand scenario across all geographies for us looks pretty robust, what would lead to the order ticket sizes moving towards beyond the $10 million mark.

Do we have to hunt for new customers in the international market or even in the domestic markets separately to get to that kind of a run rate, I talking about India Private and international here?

Second given the kind of a demand scenario that we are looking when do expect the quarterly run rate on the revenue execution basis to go back to that Rs.150 Crores to Rs.200 Crores run rate per quarter do you see that coming in next couple of quarter’s times could you give some quantitative idea to understand the execution part of the demand scenario and how it gets reflected in numbers?

Tejas Networks Limited July 27, 2020

Sanjay Nayak

Let me answer your first question first.

What does it take for us to get $10 million kind of run rate orders from multiple customers both in India and internationally?

I think we have probably done everything that we could in India because in India we do have, because of the incumbency relationship, etc., etc., So I think as we are getting newer applications in our existing customers, we should once the order flow starts to happen, which I said could take another quarter or so, we should start to see a good run rate of orders getting established in India, not just because of the GPON application that I talked about in addition to actually all the major Indian customers in the private sector there are multiple other engagements and wins that we are lined up for.

I think in India private hopefully sooner than later we should get into a situation where we should establish robust run rate numbers with each of our large Indian private customers.

So that part, I think in terms of application win, provenness of our capabilities, competitiveness, I think those are good achievements that we made in Q1. The results of those achievements will probably get shifted by a quarter and we should start to see revenues in the second half of the year.

Coming back to the same scenario internationally, we will see this year that at least a few.

So first of all, let me talk of the negative part first, winning new customers of large size internationally this year is going to be very challenging because travel restrictions are there, customers are not introducing too many new vendors, etc. So to that place, for the places where we already are there, so for example, in Africa, in South East Asia and certain customers in North America, including Mexico, we should see a larger ticket size order starting to flow in.

We already had some in Q1. Some have already happened in Q2 as we started the quarter.

It is really now starting to become a good run rate I would say as we go along.

However, I must again caution saying that we do have a little bit of start stop because sometimes thing starts to look good and then customer gets into a bit of a pause mode because of the local situation.

So barring those near-term things if I were to visualize the whole year’s situation for larger orders from existing customers internationally at least we will see few geographies where we have good incumbency show better numbers this year.

How much better?

I think we would like to wait.

Coming back to your second question of when will we get to Rs.150 Crores to Rs.

200 Crores kind of run rate by quarter?

Hopefully sooner than later I would not give a specific guidance because again lot of things are not necessarily in our control, and as much as we want to, the only caution which we are applying right now is that rather than building inventory for very large revenues we are taking a very conservative approach to say that let us not block our money in inventory, so whatever inventory we already have, which is quite substantial we want to decongest that and as we see more clarity in orders and as we see more things happening the way we expect we will essentially ramp up with that.

By the way as an industry, the component lead times have increased so there are delays in terms of securing certain long lead components.

Those kinds of things we are doing, but again coming back to your answer, it is a little bit difficult to say how soon we will get there, but hopefully sooner than later.

Tejas Networks Limited July 27, 2020

Sangameswar Iyer

Just as a followup on the same question, when we say that, on the international customer’s end, do they have the potential to give out orders on an average ticket size of $10 million plus or these customers who typically have an order ticket size of few million dollars only.

Sanjay Nayak

That is a good question.

I would say the customers where we are actively engaged, we are talking of customers who are single digit million dollar for us at least.

I am not talking about the total spend.

For us, we are talking of anywhere between a low single digit to may be a high single digit in millions of dollars in terms of order size.

So that is the kind of range that at best, we will get from international customers that we currently have engagements with in this financial year.

It could change next year because as we move from smaller part of the network to larger part of the network, but I would say this year internationally from the customers that we have we think we will still be in a single million digit scenario as of now.

I mean of course we are continuing to see the situation, but that is a way to think of.

We are not still on a situation internationally where we get that $10 million, $25 million order from a single customer.

That stage we have not yet reached internationally.

Sangameswar Iyer

Sir I just missed, have you given the outlook each segment wise in terms of what kind of growth that you are looking at for the year?

Sanjay Nayak

No. We have not.

What I did in my commentary earlier and which is in line with what we have said in April board meeting that we will not really, given all the uncertainties, give a guidance per se right now.

By the way subjectively I have talked about it earlier, but just to quickly re-summarize.

We would see increase in terms of a growth on Indian government just because you had one order and there is a lot of stuff which is happening, which did not happen last year, so that should happen.

India Private could be flat to growth depending on when things happen and international we expect to see growth compared to last year, how much growth is of course a function of how things pan out but that is the broad way I would say where we see things today.

Sangameswar Iyer

India government when you say it is BSNL and critical put together?

Sanjay Nayak

As a total bucket, so critical infrastructure is already doing quite well in terms of orders in hand, orders won, and the whole thing.

BSNL, BBNL is really a function of when they do will not counting much revenues from them except for the state BharatNet which we already won, but barring those, we do not count much from them this year, but the critical infrastructure alone can give us significant growth on an annualized basis because we have already won those orders.

Tejas Networks Limited July 27, 2020

Sangameswar Iyer

International was pretty strong last year as an out setting factor for your BSNL loss, what kind of growth are we talking here, is it like double-digit growth here or is it like, given that, the scenario has become more favorable from out?

Sanjay Nayak

Yes I would say definitely double-digit is a very long range so we should definitely able to do that double-digit growth, which spectrum of the double-digit, I would again qualify that it is a bit early to say except that the signs seem to be positive.

If I want to kind of step back, and say that lot of things have aligned for us so we seem to have a very good product portfolio, the whole geopolitical situation looks good internationally as well as in India, we seem to be getting into the bigger scheme of things in a segment where people are going to invest both India and outside which is home broadband, metro broadband, etc. So lot of the stars are kind of getting nicely aligned for us, but exactly how they will play out, how soon they will play out, is something which we are just being a little bit cautious because it is not very good to predict in an environment that we all live today where there is uncertainty all around but given where we are, what we could do, we are doing and I am confident that at least the efforts are being put by the company to do everything that we can in our control to really increase our application wins which are doing, but the actual revenue results of that will have to see how the year progresses.

Sangameswar Iyer

Great.

Good to hear that.

We have the confidence of double-digit growth at least in the two leading segments that they have both in India Private and international despite all this situation that we have globally.

Sanjay Nayak

Yes.

Sangameswar Iyer

Thank you Sir and stay safe.

Moderator · Conference Operator

Thank you.

Ladies and gentlemen, that was the last question.

I would now like to hand the conference over to the management for closing comments.

Sanjay Nayak

Thank you everybody.

First of all very good questions so I hope even the people who did not get a chance to ask the questions, we were able to address if I had to be little bit broader on those and as I said in my comments a few minutes back, we are doing everything that we can to really make sure that we are well setup to take advantage of the opportunities as and when they are opening up with the new customer wins with a very strong cash position which at least we are confident of we will continue to improve, we seem to have set things up well.

Exactly how that will play out, how soon that will play out, we will basically be closely watching and will continue to communicate with all of you as we make more and more progress.

Thank you again for all your support and again as I said this is the 20th Tejas Networks Limited July 27, 2020 anniversary of the company, we hope that this would be a year where we could actually put all the things together and actually demonstrate a good success.

Thank you.

Moderator · Conference Operator

Thank you very much.

On behalf of Axis Capital Limited that concludes this conference.

Thank you for joining us and you may now disconnect your lines.