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As on: Sep 26, 2020 07:50 PM
Wednesday, January 22, 2020 Click here for Rating Reckoner
ITI
In the incubator
CM RATING38/100
ITI, a public sector company under the Department of Telecommunications (DoT), is a pioneer in the Indian Telecom equipment market with a diversified product portfolio catering to various industry segments like telecommunications, defence, information technology, banks, financial institutions and solar energy. The company enjoys established relationships with customers such as Bharat Sanchar Nigam (BSNL), Bharat Broadband Network (BBNL), Mahanagar Telephone Nigam (MTNL), Indian Army, Defence etc.

The company is transforming itself from a telecommunications equipment manufacturer to telecommunications technology company catering to diverse industry segments. The company's diverse product portfolio includes defence security encryption products; optical and data network products and passive infrastructure products such as gigabit-passive optical network (GPON), Wi-Fi products, and MLLN (manage leased line products); multi-capacity encryption units, electrical products such as smart energy meters, smart cards, solar panels, set-top boxes and mini personal computers and IoT (internet of things) products and other diverse products such as high density polyethylene (HDPE) ducts, 3D printing and sanitary napkin vending machines. The company is engaged in key projects of strategic importance such as Make in India, Digital India, Smart City, BharatNet, ASCON (Army Static Switch Communication Network Project) etc. ITI has established a start-up hub, named VINYAS, at Doorvaninagar, Bangalore facility as part of diversification efforts. Eco friendly infrastructure is created for Start-ups to innovate their ideas into reality, with a 1,000-seater capacity. The company has set up testing labs in association with TEC, which would help the product companies to test their devices for mandatory certification. ITI recently launched its cloud services and solutions platform for central and state government entities, banks, public sector undertakings, small and medium enterprises and start-ups in India.

The memorandum of understanding (MoU) signed with DoT for 2019-20 sets out giving greater thrust towards manufacturing of telecommunication equipment and other emerging technology products in the broadband, IoT (internet of things) etc while achieving the stated turnover & profit under the memorandum. The MoU also focuses on driving the Make in India and Digital India initiatives of Government of India (GoI). ITI has signed MoU with CSIR-CERI for manufacture of Lithium Ion cells. It is the only PSU which has got accreditation from NPCI for Rupay credit/debit contact card personalization. ITI has also received MasterCard certification. During October 2019, ITI entered into MOU with India Electronics & Semiconductor Association (IESA), with special focus on telecom and allied smart electronics domains.

The teaming partners, with whom the company is working together to offer new products and services, include Centre for Development of Telematics for GPON products, Coriant OY for MLLN products, Z-Com, Taiwan, for Wi-Fi products, Inesh for smart energy meters, Shreenath Smart Technologies for Aadhaar authentication services, Centre for Development of Advanced Computing (CDAC) for IoT solutions and Trimax Data Centre Services for data centre services.

The company has five modern manufacturing facilities at Bengaluru (Karnataka), Mankapur (UP), Naini (near Prayagraj in UP), Palakkad (Kerala) and Raebareli (UP). While the company manufactures certain products in house at its five manufacturing facilities it also produces certain products in collaboration with its various technology partners. It also purchases traded products that are installed as part of the projects undertaken by the company. In addition, the company s a wide range of services including operation and maintenance of Base Transceiver Station (BTS), data centre hosting solutions, IT and software services like digital wallet solutions, Aadhaar authentication services, optical fibre cables (OFC) laying services, telecom product testing services, start-up hub services, skill development services and citizen centric services like the national population register (NPR) and socio economic and case census (SECC) and annual maintenance contracts for supplied products.

The company was declared as sick Company in 2004 under the provisions of Sick Industrial Companies Act, 1985 (SICA). The revival plan to restore the financial health of the company was approved by the Board for Industrial and Financial Reconstruction (BIFR) in November 2012, by the Board for Reconstruction of Public Sector Enterprises (BRPSE) in July 2013 and by the Cabinet Committee on Economic Affairs (CCEA) in February 2014. As part of the revival plan, the GoI approved grants in aid to settle part of statutory dues and to meet its operational requirements and grants for capital expenditure. On December 1, 2016, the GoI dissolved the BIFR and the BRPSE, and SICA was repealed and all the proceedings and actions must now be referred to, and taken by, NCLT (National Company Law Tribunal) and the NCLAT (National Company Law Appelate Tribunal) as per provisions of Insolvency and Bankruptcy Code. But the company is not aware of any proceedings or action taken by the NCLT or the NCLAT in respect of the company to-date.

Satcom India (ISL), a JV of the company, where it owns 49.06% stake, was a stressed asset and taken over under the SARFAESI Act. But these loans were repaid by the company pursuant to a onetime settlement scheme pursuant to a Debt Recovery Tribunal order in the amounts of Rs 3.806 crore on March 26, 2019, and Rs 14.666 crore on October 24, 2019. The lenders have issued no dues certificates in respect of these loans.

The objects of the issue

Of the net proceeds from the issue about Rs 642.48 crore will be utilized for funding its working capital requirements and Rs 607.291 crore to repay loans in full or partially taken by the company. The balance is for general corporate purpose.

Strengths

Order book (including advance purchase orders but net of GST) of the company as at December 31, 2019, stood at Rs 11051.121 crore, of which 29.09% comprises large turnkey projects, 57.87% comprises AMCs and 13.05% comprises other product and services orders. In addition to the orders on hand, the company is also selected as the lowest bidder (L-1) by the Ministry of Defence for the prestigious ASCON Phase IV project, which is a project valued approximately Rs 7700 crore and entails establishment of an OFC network for the Indian Army, including supply, installation, and maintenance of OFC networks and related telecom equipment and infrastructure.

CCEA in November 2018 approved continuation of the reservation quota policy for ITI by reserving 30% of the procurement orders placed by BSNL, MTNL and BBNL for the company for the products manufactured by it and for those outsourced items in which there is a minimum 16% value addition in 2019-20 and 20% value addition in 2020-21 and 20% of the orders for the turnkey projects (like GSM network roll-out, Wi-Fi etc. of BSNL & MTNL and BharatNet project network roll-out, etc. of BBNL). In FY19 about 86.41% of revenue came from Government sector (Central/State government agencies/PSUs). As of December 31, 2091, approximately about 97.72% of orders book is from government sector.

CCEA as part of the revival plan approved a financial package of Rs 4156.79 crore as on February 12, 2014, to settle part of statutory dues, meet its operational requirements and grants for capital expenditure. The financial package includes funding support of Rs 1892.79 crore as grant-in-aid (non-plan scheme) for clearing of part of ITI's liabilities and Rs 2264 crore (plan scheme) towards financial assistance for project implementation. The company receives revenue and capex grants from the government of India (through budgetary allocation) under the approved revival package. The company, as on 30 September 2019, has received Rs 2662 crore (Rs 769 crore under the plan scheme and Rs 1893 crore under the non-plan scheme) under the Package. The company has used grants for capital expenditure to modernize manufacturing infrastructure and to develop capabilities to manufacture a diverse range of information and communication products, defence security encryption products and electronic products. During the current year, Rs 300 crore received under the non-plan scheme has been utilized for the redemption of BSNL / MTNL preferential shares. Further, GoI has regularly been issuing letter of comfort in favour of the consortium bankers for the entire working capital facilities enjoyed by the Company and has also extended unsecured loans. On December 31, 2019, the GoI allocated a further Rs 85.40 crore as a grant in aid to the company (funds not yet received) to settle partial statutory dues and to meet the operational requirements.

Weaknesses

The top three customers of the company accounted for about 81.38%, 69.06%, 70.83% and 72.30% of the revenue from operations of the company respectively, in FY2017, FY2018, FY2019 and H1FY20. Moreover the largest customer of the company accounted for 66.93%, 48.89%, 35.93% and 47.25% of revenue from operations respectively in FY2017, FY2018, FY2019 and H1FY20. As at December 31, 2019, approximately 79.67% of the order book was concentrated in four projects from four customers. This higher dependence on few orders/customers increases the revenue visibility risk if any of these four projects run into road blocks which are typically associated with such contracts/projects. Further the order book also includes anticipated revenues from the unexecuted portions of existing contracts (including signed contracts for which all pre-conditions to entry into force have been met and letters of acceptance issued by the customer prior to execution of the final contract) and from advance purchase orders and advance work orders for which the company is yet to receive final purchase orders or work orders. For example the BTS operation & maintenance (O&M) project order which is part of the order backlog of the company includes two advance work orders issued by BSNL, each dated August 29, 2018, for approximately Rs 1783.121 crore and Rs 3838.54 crore (both exclusive of GST) aggregating to an amount of Rs 5621.661 crore (exclusive of GST) for the execution of outsourcing of O&M services for BTS sites. The company is yet to commence work on the project based on the advance work orders, even though the company and its back-end partner on the project have provided corporate and bank guarantee, respectively, for Rs 28.433 crore, in accordance with the terms of the said advance work orders to BSNL. So the order book runs the risk of non conversion of advance work orders to confirmed orders or final executed contracts.

The telecommunications technology market and telecommunications equipment manufacturing market are characterized by rapid technological changes, and the company has to keep abreast of the technological changes and new product introductions. Further, the development and commercialization process of new products are both time consuming and capital intensive. Moreover the ongoing investments in research and development and collaboration with technology partners for new products and processes may result in higher costs without a proportionate increase in revenues. This induces certain level of volatility to the profit margin of the company. This along with significant number of projects in early stage of its execution cycle may hurt the profitability in a year. The dependence of few projects increases the volatility. The company incurred loss at operating level in FY2019 at Rs 100.37 crore but it clocked an operating profit of Rs 80.24 crore for 9m of FY 2020.

The company is not allowed to declare any dividend on its equity and preference share capital until its entire outstanding statutory dues are fully cleared as per clause no. 13(vii) of revival scheme sanctioned by BIFR. And, thereafter, the company must obtain the approval of the BIFR (now NCLT) for declaration of dividend on its equity and preference share capital. In this regard, the company is yet to clear its statutory dues outstanding. Moreover, as the company had issued redeemable cumulative preference shares to BSNL and MTNL, on which it has arrears for payment of dividend amounting Rs 50 crore which would be paid in preference to the equity shareholders of the company.

The company as on September 30, 2019, has outstanding statutory dues amounting to Rs 334.046 crore towards non-payment of provident fund and gratuity dues to the respective trusts. Provident fund dues that have been recovered from the employees of the company and not paid to the provident fund trusts amounted to Rs 29.08 crore as at September 30, 2019 and any legal proceedings on this count may or futures provisions have material adverse effect on the business, results of operations and financial condition of the company.

The majority of the customers of the company operate in the telecommunications industry, which is facing systemic issues, aggressive competition and financial stress. So any reduction in product spending or capex on infrastructure will adversely affect the company's prospects.

The statutory auditor of the company who have reviewed the limited review financial statements for period ended December 2019 have qualified in their review report that the accounting treatment of the write-back of Rs 19.27 crore under the heading 'other income', which represents liability towards the suppliers entered into for back to back agreements with private vendors for the supplies or the services effected to GoI departments and public sector undertaking (PSUs), is not in conformity with the accounting policy consistently followed by the Company in earlier years since the corresponding amount due from such GoI departments and PSUs have not been written off. Accordingly, the statutory auditor reported that in their opinion the `other income' reported in the limited review financial statements has been overstated for the period with the consolidated profit of the company was overstated by Rs 19.270 crore for the quarter and nine months ended December 31, 2019. The statutory auditors have included an `Emphasis of Matter' in their limited review report that the GoI has allocated a further Rs 85.40 crore as grants in aid to the company to settle partial statutory dues and to meet operational requirements. Pending receipt of the grant, the Company has recognized the grant of Rs 85.40 crore as 'Other income'.

The business of the company is working capital intensive as the large-scale contracts and turnkey projects warrants incurring of substantial working capital costs before milestone payments are made to cover these costs. Consolidated borrowings (fund based and non-fund based) outstanding stood at Rs 1913.260 crore as at December 31, 2019.

The company's profits are supported by grants in aid and grants for capital expenditure. Such grants are approved and released by the GOI as per their internal policy and procedure. The company does not have any control over such timely and adequate release of grants and the grants may not be released as per its requirement and any delay or inadequacy in release of grants by the GOI could have a material adverse effect on the company's financial performance. Moreover, as the grants are given at various times, and results of operations will not be comparable on a period to period basis and may not provide a meaningful basis of evaluating the results of operations and financial condition.

The total of contingent liabilities that have not been provided for as at September 30, 2019, March 31, 2019, and March 31, 2018, were Rs 1096 crore, Rs 1600 crore and Rs 1271 crore, respectively.

Valuation

Consolidated revenue for the nine month period ended Dec 2019 was up by 36% to Rs 1408.39 crore and the operating profit margin stood at positive 5.7% compared to negative 17.6% in the corresponding previous period. The operating profit thus was a profit of Rs 80.24 crore against a loss of Rs 182.68 crore in the corresponding previous period. But helped by grant in aid and write backs, the net profit ballooned to 380% to Rs 114.40 crore.

Consolidated revenue of ITI for the fiscal ended March 31, 2019, was up by 12% to Rs 1668.37 crore and operating profit was a loss of Rs 100.37 crore with operating profit margin stand negative 6% compared to positive 5.5% and a operating profit of Rs 81.38 crore in the corresponding previous period. Eventually the net profit was down by 60% to Rs 92.54 crore. The sharp 60% fall in Pat was primarily due to reduction in grant in aid revenue to nil (compared to Rs 79.98 crore in FY 2018), one time sales income of Rs 92.11 crore from BMRCL in FY 2018 (nil in FY 2019), and change in revenue mix with less contribution from manufactured products and increase in contribution from low margin traded goods.

In accordance with the revival package, the company has received Rs 50 crore, Rs 5 crore, Rs 35 crore and Rs 70 crore pursuant to sanctions letters dated December 6, 2018, March 29, 2019, May 8, 2019 and August 29, 2019, respectively, issued by the DoT, in lieu of which the company is required to allot Equity Shares to the President of India. This will further dilute the company's equity capital.

The consolidated EPS for FY 2019 was Rs 0.9. The offer price of Rs 72-77 discounts the FY 2019 EPS on post-IPO equity by 80-86 times. The scrip is already listed and was trading around Rs 100 on 22 January 2020 before announcement of the offer price band. 50-Day, 100-Day and 200-Day average prices for the scrip are Rs 92, Rs 86 and Rs 87, respectively. There is no other comparable listed company

ITI: Issue Highlights

SectorTelecom Equipment
Offer Size (in no. of share)*181800000
Offer Size (in Rs. Crore) 1309-1400
Price band (Rs.) 72-77
Post-issue equity (Rs crore)1078.8
Post-issue promoter (including promoter group) stake (%)74.83
Minimum Bid lot150
Issue Open Date24/01/2020
Issue Close Date28/01/2020
ListingBSE, NSE
Rating 38/100
* including employee component

ITI: Consolidated Results

1912 (9) 1903 (12)1803 (12)1703 (12)1603 (12)
Sales1408.391668.371484.161548.141193.35
OPM (%)5.7-6.05.5-6.8-15.9
OP80.24-100.3781.38-104.63-189.69
Other income171.28336.47327.45540.58596.97
PBIDT251.52236.10408.83435.95407.28
Interest104.72106.47153.41152.62157.16
PBDT146.80129.63255.42283.34250.12
Depreciation32.4037.0924.8616.9512.90
PBT114.4092.54230.56266.39237.22
Tax0.000.000.000.000.00
PAT114.4092.54230.56266.39237.22
Minority Interest0.000.000.000.000.00
Net profit114.4092.54230.56266.39237.22
EPS (Rs)*1.40.92.12.52.2
* on post issue equity of Rs 1078.8 crore. Face Value: Rs 10
EPS is calculated after excluding EO and relevant tax
Figures in Rs crore
Source: Capitaline Corporate database

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