Too small a player; expensive valuations… Ortel Communications -- AVOID. ::ICICI Securities, report link

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Too small a player; expensive valuations… Ortel Communications (OCL) is a regional cable television and a high speed broadband services provider focused on Odisha, Chhattisgarh, Andhra Pradesh and West Bengal. It also offers broadband service and has an estimated home pass of about 808352. Though it owns the last mile and is not dependent on LCOs in cable operations, it has a small subscriber base of 0.5 million. Moreover, the current business model is not scaleable, given the dominance and regional influence of LCOs in India. The topline and EBITDA have grown at a CAGR of 14.6% and 19.1%, respectively, in FY10-14. Though the company has been incurring losses, it recently turned PAT positive in H1FY15 clocking a PAT of | 0.7 crore. However, since 95% of its subscribers fall in the Phase III markets, there may be limited scope for price hikes. In addition, the presence of 80% analog subscribers needs to be digitised and involves a subsidy burden of about | 900 per box given. High capex with limited ARPU growth can hurt return ratios, going ahead. Investment Rationale Triple play with last mile connectivity and hence lower leakages OCL claims to have an ability to provide triple play services (video, data and voice) with last mile connectivity, though it may not launch voice operations. The absence of the LCO channel helps it minimise its revenue losses, control the subscriber churn, cross-sell its products. Network assets spread across 21600 km…. The company offers broadband services in 48 towns and adjacent areas with 21600 km of cables as on December 31, 2014. OCL leverages its network infrastructure by leasing out capacity on its network to corporate. The stream contributed about | 7.8 crore to the revenues in FY14 Concerns • Scalability issues due to absence of LCO support • Aggressive depreciation policy of STB depreciation of 12 years • 95% Phase III subscribers limits the ability to take price hikes • 80% analog subscribers to be digitised, higher subsidy of | 900 per box will impact profitability. Available at 20x FY14 EV/EBITDA; recommend AVOID At a price of | 200, Ortel is valued at 20x FY14 EV/EBITDA, which looks expensive. We have not included the post issue cash of | 120 crore. Including this, the valuation stands at ~18x EV/EBITDA. Secondly, scalability looks a concern, given lack of LCO support. Lastly, relatively smaller size (0.5 million subs vs. ~12 million of players like Den & Hathway) may limit competitive positioning. We recommend AVOID.

LINK
http://content.icicidirect.com/mailimages/IDirect_OrtelComm_IPOReview.pdf