By Geetanjali Kedia
Ortel Communications is entering the primary market on Tuesday, 3rd March 2015, through a public issue of 1.20 crore equity shares of Rs.10 each, priced in the band of Rs. 181 to Rs. 200 per share. The issue comprises a fresh issue of 60 lakh shares and an equal number of shares on offer for sale, by PE investor New Silk Route (NSR). Representing 39.25% of the post issue paid-up capital, the issue will raise Rs. 217 crore and Rs. 240 crore at the lower and upper price band, respectively, of which, company will receive Rs. 109 crore and Rs. 120 crore respectively, by way of fresh issue. To be listed on NSE and BSE, the issue closes on Thursday 5th March.
Ortel Communication is a regional cable TV and broadband service provider, with ‘last mile’ connectivity, having presence in Odisha, Chattisgarh, Andhra Pradesh and West Bengal, with Odisha alone accounting for 90% of its 5.26 customer base, as of 31st December 2014. For FY14, company clocked revenue of Rs. 135 crore and EBITDA of Rs. 38 crore. Due to the capital intensive nature of the business, similar to industry peers, company is grappling with huge depreciation, of Rs. 20 crore annually, which coupled with high interest burden of Rs. 23 crore, led to a negative bottomline of Rs. 12 crore in FY14.
During first 6 months of FY15, revenue stood at Rs. 72 crore and EBITDA at Rs. 21 crore. For the first time ever, company reported net profit, although only of Rs. 66 lakh for H1FY15, resulting in an EPS of Rs. 0.28 on equity of Rs. 24.37 crore. Due to continuous losses, its net worth has contracted to Rs. 20.25 crore, as of 30th September 2014, indicating BVPS of Rs. 8.31. Infact, net worth for equity shareholders had dropped to Rs. 5.17 crore, as on 31st March 2014, due to outstanding preference shares then.
From the IPO proceeds, company plans to use Rs. 68 crore for expanding network and Rs. 17 crore and Rs. 11 crore for developing digital cable and broadband services respectively, over FY16 and FY17. Current promoter holding of 64.03% will decline to 51.38%, post IPO. As of 30th September 2014, company’s gross debt stood at Rs. 122 crore, while cash is meager at Rs. 4 crore.
Holding 33.58% of the pre-issue equity share capital, PE investor NSR had invested a total of Rs. 82 crore in April and September 2008, at effective cost price of Rs. 100.33 per share. At exit price of Rs. 200 per share, it has earned an IRR of only 10.4% over a 6.5 year investment period! Thus, going by history, company hasn’t rewarded its PE shareholder. While NSR is only making a partial exit, page 98 of the RHP has wrongly disclosed NSR’s post-issue holding as nil - a gross over-sight on part of the company, merchant banker and SEBI! Post issue, NSR will continue to hold 7.19% equity stake.
At Rs. 200, company’s market cap will be at Rs. 607 crore and enterprise value at Rs.725 crore, for approximately 5.26 lakh customers, of which, 11% or 58,277 are broadband customers. Since the company has turned profitable in H1FY15, for the first time, and that too with only marginal earnings, PE multiple based valuation may not be appropriate. Considering an EV per subscriber based valuation, at the upper band of Rs. 200, Ortel’s EV/subscriber works out to Rs. 13,769, while peers Hathway and Siti are currently trading at EV/subscriber of Rs. 8,025 and Rs. 5,850 respectively. Although Hathway and Siti have lower share of broadband subscribers as a percentage to total subscriber base (6.3% and 1.1% respectively) versus 11.1% for Ortel, these peers are much bigger in size with 6 times the revenue (of about Rs.1,000 crore) and 10 times the subscriber base of Ortel.
Hence, if premium is assigned for bigger share of high-ticket broadband subscribers, smaller size and lower revenues call for a discount to valuation. Net-net, a 70% premium to industry leader is not justified for a regional player. Besides, the industry has been struggling with mounting losses and no green shoots appear in the foreseeable future. In addition, there is tremendous competition, both nationally and regionally, in the cable as well as broadband segment, from telecom operators and DTH companies respectively.
Since the IPO is under Regulation 26(2) of ICDR, as company does not meet the net profitability criteria, retail portion of the issue is very low, at just 10%, against the regular 35% portion size (QIB portion is higher at 75%). So, at the upper band, retail portion is only to the tune of Rs. 24 crore, or 1,200 retail applications of Rs 2 lakh each, which should not pose a big challenge.
Limited geographic presence, bleak industry prospects in the foreseeable future, coupled with unjustified valuation in relation to peers, make the IPO pricing aggressive. Hence, one can give the issue a miss.
Disclosure: Not applying in the IPO.