Be cautious in Ortel Communications IPO, says VS Fernando

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Of the total offer, at least 90 lakh shares are to be allocated to QIBs, not more than 18 lakh shares are reserved Non-Institutional category and not more than 12 lakh shares are kept for retail investors. On March 2, 2015, the company has allotted 25,57,425 lakh shares @ Rs 181 per share aggregating Rs 46.29 cr to anchor investors namely Axis Mutual Fund (9 lakh) and ICICI Prudential Life Insurance (16.57 lakh). 

IPO Object

Through the fresh issue the company proposes to raise Rs108.50 cr to Rs120 cr which is earmarked for the following: Expansion of network for providing video, data and telephony services (Rs 68 cr); Capital expenditure on development of digital cable services (Rs 17 cr); Capital expenditure on development of broadband services (Rs 11 cr); and the balance for general corporate purposes. However the capital expenditure plans have not been appraised by any external agency.

Grading

The company has not sought any grading of the IPO.

Lineage

The New Delhi-registered 1995-vintage Ortel Communications Ltd, whose corporate office is based in Bhubaneswar, presents Baijayant Panda (51) and his wife Jagi Mangat Panda as promoters.  Whereas Jagi Panda, having Bachelor’s degree in biology and chemistry, was appointed as director in October 1995, Baijayant Panda, B Sc (Scientific and technical communication) from the Michigan Technological University, joined the board four years later, in September 1999.

As a politician, Baijayant Panda, popularly known as Jay Panda, commands a lot of respect.  Nevertheless, his family, despite having been in business for more than five decades has remained far from investor-savvy.   Pandas’ `flagship’ in the listed space, Indian Metals & Ferro Alloys Ltd (IMFA), keeps a very low profile. Their last public venture, India Charge Chrome Ltd (ICCL), was a miserable failure.  ICCL, which tapped the primary market in 1988, became a loan defaulter and was eventually merged with IMFA in 2006.

Business Profile

Incorporated in June 1995 to undertake the business of operating satellite television network, cable television network, telephone, telegraph, cable-ronic mail, tele-newspaper, conferencing, video conferencing, mobile text, mobile videotext, radio paging, etc., Ortel started cable TV in the very first year. The company is claimed to be one of the first in the Indian private sector to obtain ISP licence and start high speed internet services.

Ortel is a regional cable television and high speed broadband services provider focused in the states of Odisha, Chhattisgarh, Andhra Pradesh and West Bengal. The company has built a two-way communication network for ‘Triple Play’ services (video, data and voice capabilities) with control over the ‘last mile’. Ortel reportedly pioneered the primary point cable business model in India by offering digital and analog cable television, broadband and VAS services. The company claims to hold a dominant position in Orissa, with a fast-emerging presence in their three other markets, covering an addressable market of approximately five million homes.

Ortel’s business model is focused on the control over the ‘last mile’ connection. Owning the end connection allows the company direct access to the cable television subscribers thereby helping to capture the entire subscription revenues paid by the cable television subscribers. This also enables the company to provide multiple services to cable television subscribers directly, such as broadband services, which helps to increase the `revenue realised per customer’. As on December 31, 2014, more than 87% of the company’s cable subscriber base was on its own ‘last mile’ network.

At the end of December 2014, Ortel reportedly had 372,979 retail subscribers for analog cable television services, 95,295 retail subscribers for digital cable television services and 58,277 broadband subscribers including 121 corporate customers adding up to a total of 526,551 RGUs (revenue generating units). Ortel has grown both organically and inorganically through sale of services directly to the cable television subscribers and through buyout of network equipments, infrastructure and subscribers of other MSOs (multi-system operators) and LCOs (local cable operators).

Financial Track

In 1999 Ortel received an investment of Rs 8.5 cr from South Asia Regional Fund, managed by a Mauritian subsidiary of Commonwealth Development Corporation, UK. The company received an investment of Rs 60 cr from private equity player New Silk Route (NSR) in 2008.

Even though Ortel has been in operations for nineteen long years, the company is yet to find a credible bottom line. For the time, on the eve of the public issue, the company has posted a profit of Rs 66 lakh for the six month period ended September 2014 against its existing capital base of Rs 24.37 cr.  Whereas bulging share premiums have boosted the company’s reserves (Rs 86 cr) over the years, its accumulated losses (Rs 89 cr) have outgrown the reserves! At the end of last fiscal the company’s net worth amounted to just Rs 5.32 cr.

Valuation & Perception

If the current profitability of the Cable TV/DTH operators is anything to go by, notwithstanding positive cash generation from operations, investors in Ortel cannot think of any dividend return in the foreseeable future.  Currently, in the listed domain, except Den Networks, none the peers has netted profits in recent times. As such, this industry segment is valued more by its revenue generating capacity than profit earning potential.

DTH operator Dish TV commands a market cap of about Rs 8300 cr which discounts its revenue 3.2 times and its net block of assets 4.4 times. Ortel’s immediate peers viz. Hathway Cable and Siti Cable are discounted 4.9 times and 4 times respectively of their revenue. Ortel compares well with Hathway Cable both in terms of Price-Revenue and Price-Net Block ratio. In boom time, Ortel may thus look attractive as compared to its peers. But, will it hold post-boom?  Hathway’s experience may give an answer.

Five years back, Hathway’s IPO was floated at Rs 240 a share. Though it was listed slightly above the offer price, the scrip never closed above the IPO price in the first two and a half years. The price went down to as low as 72 inflicting a capital loss of 70%! After a 5:1 split, this loss making company’s stock is now traded around Rs 57 which yields a return of 19% after 5 years. Incidentally, Ortel’s issue manager Kotak Mahindra Capital was also one of the book running lead managers of Hathway’s IPO in February 2010.

Lead Managers’ Track

Last two years Ortel’s investment banker Kotak Mahindra did not bring out any IPO. In three years between 2010 and 2012, Kotak managed two dozen public issues of which two-thirds are currently quoting above the IPO cost.  While the IPOs like Jubilant Foodworks, Bajaj Corp, Gujarat Pipavav Port, CARE and PC Jeweller fetched attractive returns, Vascon Engineers, Nitesh Estate, Jaypee Infra and Tecpro Systems inflicted huge capital loss of more than 80%!  

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