Nu Tek's primary offer looks attractive

COMPANY: NU TEK INDIA
ISSUE SIZE: Rs 76.5-86.4 CRORE
PRICE: Rs 170-192
ISSUE DATE: JULY 29 - AUGUST 1, ’08

Telecom infrastructure services provider Nu Tek is coming out with an initial public offer (IPO) of 4.5 million shares. The IPO funds will be utilised for capital expenditure, working capital requirements and acquisition purposes. Post-listing, the promoters’ stake in the company will come down to 42.4% from the current 53.2%. The stock seems to be reasonably priced and investors can consider it for subscription.

Business:

The company provides telecom infrastructure services, including execution of turnkey projects, telecom implementation solutions, operation maintenance and resources. It carries out all civil and electrical work, such as installing passive and active infrastructure at the tower site. It also undertakes maintenance of this infrastructure on an ongoing basis.

Nu Tek gets its business from service providers, original equipment manufacturers (OEMs) and third-party telecom infrastructure leasing companies. It has executed projects for various service providers in the country and for major OEMs like Ericsson, Motorola and Nokia, among others.

Financials:

The company has reported robust growth over the past five years. Its net sales have more than tripled in the past three years to Rs 95 crore. It has managed to improve its operating margin significantly from 9% in FY03 to more than 30% in FY08. The reason for this is higher utilisation of human resources. As the company serves more and more customers in the same circle, this utilisation rate will increase further. Its three-year average return on equity is close to 24%, which is higher than that of its peers in the industry.

Growth drivers:

Though India is the secondlargest in terms of total number of subscribers, there is still substantial room for growth, as its tele-density (the number of telecom service users in the total population) is just over 26%. So, going forward, service providers will have to set up more towers and other operating assets to serve the rising subscriber base. The total number of towers in the country is expected to double by ’10.
This augurs well for Nu Tek, given its area of operations. Further, as and when its scale of operations increases on account of more opportunities, the company can provide the same service at a relatively lower price in those regions where it already has its presence.

Valuations:

The company’s net profit recorded a compound annual growth rate (CAGR) of more than 50% in the past three years. Even after assuming a conservative growth rate of 30% for the next two years, its earnings per share (EPS) works out to Rs 15.9 and Rs 20.7 for FY09 and FY10, respectively. This means that at the current offer price, the stock offers a P/E multiple of 12.1 and 9.3 at the upper price band for FY09 and FY10, respectively. This is relatively lower compared to its peers in the telecom industry. Considering these attractive valuations, investors can consider subscribing to this issue.

Risk factor:

The company has high working capital requirements due to the inherent nature of its business, which may have an adverse effect on debt repayment or distribution of cash to its shareholders.
Source : The Economic times dt 28 7 2008