Tejas Networks sees a sharp recovery. Will the multibagger’s dream run continue?

For the Tata Group-backed optical and data networking product manufacturer, which had reported a bottom line of ₹166 crore in the December quarter, the PLI for FY24 has enthused investors. The stock has soared by more than 20% since the announcement on 13 March.

This was a welcome respite for the stock, which had doubled investor wealth in just three months until end-June last year only to wipe out all of the gains in the steep 50% correction seen in the stock since early December 2024.

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Notwithstanding the recent spike-up and subsequent spike-down, the stock has been a multibagger. From the lows of March 2020 until now, an investment of ₹1 lakh in the stock would have exploded to more than ₹20 lakh. That amounts to a massive CAGR of 91%.

In this article, we delve into what makes this multi-bagger tick and try to infer whether the recent recovery is here to stay.

R&D focus helped boost order book, stock performance

The Bangalore-headquartered company was founded in 2000 and has leveraged its strong parentage to emerge as one of the top 10 suppliers in the global optical aggregation and fibre broadband markets. It caters to the wireless, wireline, and network management and monitoring requirements of telecom service providers, internet service providers, critical infrastructure providers, and government entities in more than 75 countries.

It has shown an undeterred focus on R&D, and ranks among the top three listed companies in India when it comes to R&D expenses as percentage of revenues. Around 60% of its current workforce is engaged in R&D, leading to almost 450 patents filed by the company and its subsidiaries. It also acquired Saankhya Labs recently, thereby expanding its R&D footprint in satellite IoT, 5G broadcast, and semiconductor chip design.

The company has focused on fast-growing markets such as 4G/5G RAN and xPON which are slated to grow at as much as 33% CAGR between FY24 and FY28. It has fulfilled key orders in recent years, including broadband equipment supplies for Tamil Nadu state-led BharatNet Phase-1 and Phase-2, Indian Railways’ Public Wifi projects, and BSNL’s 4G expansion and 5G rollout. This has been reflected in exponential growth in its order book and revenues over the last 5 years.

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Its order book expanded from less than ₹600 crore in Q1FY21 to almost ₹2,700 crore as of December 2024. Its revenues, which had been growing at a relatively mellow CAGR of 12.5% in the three years until FY19, accelerated to a whopping 84% CAGR in the five years between FY20 and TTM FY25 (trailing 12-month FY25). Its stock price has moved in tandem, delivering a 90% CAGR appreciation during the period.

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Why cash-conversion continues to weigh on business

In the nine months ended December 2024, Tejas Networks reported revenues of ₹2,642 crore, a whopping 4.7x jump over the same period last year.

It derived 3% of its revenues from domestic government-backed entities, and another 3% from international shipments to the US, Africa, and South Asia. A bulk of its revenues, amounting to 94%, came from domestic private entities. But it is important to note that domestic private sales were dominated by BSNL’s 4G-related shipments to TCS. This is to say that while on paper, the company derives only 3% of its revenues from government-backed entities, most of its revenues come from catering to “pseudo-private” entities such as BSNL and Vodafone.

So, as is typical from catering to government entities, Tejas Networks has been struggling with extended collection periods and piling inventory. This has led to long cash-conversion cycles, heavy working capital needs, and intermittently negative operating cash-flows. The last three years have seen rising days inventory and an extended cash-conversion cycle, leading to increasingly negative operating cash-flows.

This trend has continued into the latest quarter, which saw its trade receivables spike from ₹3,758 crore to ₹4,730 crore sequentially, while its inventory levels soared from ₹1,401 crore to ₹2,683 crore.

Order book shrunk: A long-term trend of fluctuations

In the quarter ended December 2024, the company reported a key order-win from TCS, and secured a 3-year contract from Vodafone for manufacturing equipment for its 4G and 5G mobile backhaul networks. It also bagged the order for supplying broadband equipment for BharatNet’s Last Mile Connectivity (LMC) project. It also reported initial purchase orders for a network modernization project in the US, and mobile backhaul network expansion in Asia.

Still, its order book as of December 2024 was ₹2,681 crore, significantly undershooting the book of ₹4,845 crore reported in the previous quarter. In effect, the order book now provides revenue visibility of only about a quarter. Such limited runway, along with concentration of revenues with a few large government-backed clients and intermittent spikes from recognizing PLI incentives, has historically led to fluctuations in how the generally rising revenues have trickled down to the bottom line for the company.

Even in the latest reported quarter, the company logged a 40% sequential drop in net profit to ₹166 crore in Q3 FY25, against a net loss of ₹44.87 crore in Q3 FY24. The fluctuations in its stock price are reflective of such fluctuations in its fortunes.

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Topline holds potential, but line items could remain volatile

BSNL continues to expand its 4G network and roll out its 5G network, private players have been expanding their 5G applications, BharatNet Phase 3 has ensued, and the utilities sector is expanding its DWDM networks. Tejas Networks is also looking into fibre to the home (FTTH) and network modernization contracts in international markets, and the Kavach system for collision avoidance in Indian Railways. The Tata Group also entered a technology collaboration with the NEC Corp to develop advanced 5G and wireless solutions.

So, the path ahead holds significant potential for Tejas Networks, with expectations of order-wins and continued acceleration in revenue-growth. The recent hiring of ex-Nokia country head to drive sales and operations, along with the expansion of international sales teams and partner networks is expected to further this cause.

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But given its focus on pseudo-private clients, its working capital position and profitability can remain volatile. The recently announced PLI incentive will not help alleviate this concern. This is evident in the fact that the stock price appreciation witnessed in the last few days, has come from speculative interest rather than investor attention as seen in the falling delivery percentages.

That said, the consensus analyst view pegs the stock’s fair value at ₹1,100 apiece, reflecting an upside of more than 35% from current levels. So, fundamental triggers such as order wins can lead to further appreciation in the counter. However, sustained outperformance is contingent on an improvement in fundamentals below the topline.

For more such analyses, read Profit Pulse.

Ananya Roy is the founder of Credibull Capital, a Sebi-registered investment adviser. X: @ananyaroycfa

Disclosure: The author does not hold any shares of the companies discussed. The views expressed are for informational purposes only and should not be considered investment advice. Readers are encouraged to conduct their own research and consult a financial professional before making any investment decisions.