Rationale

 The reaffirmation of Tejas Networks Limited’s (TNL) ratings factors in the strong parentage of Panatone Finvest Limited (PFL), which is a subsidiary of Tata Sons Private Limited (TSPL) (rated [ICRA]AAA(Stable)/[ICRA]A1+) and an investment holding company of the Tata Group for investments in telecommunication. Further, the ratings draw comfort from TNL’s healthy order book, strong track record in the industry and its long-term relationships with some large clients, which have helped it to maintain a healthy market share in the optical networking space in India. Going forward, TNL’s revenue growth will be supported by execution of healthy outstanding order book of over Rs. 8,221 crore (as of March 2024) and likely healthy inflow of orders in wireless as well as wireline products from both domestic and international clients. In FY2024, TNL received order from Tata Consultancy Services Limited (TCS) to supply 4G/5G baseband and radio access network (RAN) equipment for BSNL’s 4G network project to be installed at 1,00,000 sites. The Atmanirbhar Bharat Abhiyan of the Government of India (GoI), which is aimed at limiting import dependence and increasing the demand for indigenous products, provides better growth opportunities for the company. Further, following TNL’s approval under design-led production linked incentive (PLI) scheme for manufacturing telecom and networking products by the Department of Telecom, Government of India, it received Rs. 32.7 crore in FY2024 as incentives for FY2023. Also, TNL is eligible to receive Rs. 123.7-crore PLI for FY2024. The ratings factor in moderate profitability and high working capital intensity of the company. In FY2023 and FY2022, TNL’s profit margin was under pressure on account of a subdued gross margin and high fixed expenses. However, in FY2024 the profitability improved with increase in scale, PLI incentive and better absorption of fixed cost. Going forward, the profitability is likely to improve with economies of scale. Further, TNL’s profitability and cash flows are also exposed to foreign exchange rate fluctuation risks. In FY2024, the working capital intensity increased compared to FY2023 with high inventory and debtor levels. TNL secured the long-lead components for expedited delivery for the BSNL 4G project leading to high inventory levels. Further, high billing in Q4 FY2024 resulted in high debtor levels as of FY2024 end. The large size of the BSNL 4G order and short period of execution, are likely to keep the working capital intensity elevated and consequently increase the working capital debt in the near term. However, with execution of this order, the cash flow position is expected to improve, supported by healthy collections and liquidation of inventory. The improvement in the working capital intensity, thus, remains a key monitorable. The ratings continue to be constrained by stiff competition from global players such as Nokia, Ciena, and Huawei, among others, who have a more diversified product offering and the advantage of economies of scale. TNL needs to continuously  invest in research and development (R&D) to stay competitive in a technologically-intensive industry.TNL’s long-term revenue prospects will be linked to the capital expenditure cycles of its customer base. The Stable outlook on the [ICRA]A+ rating reflects ICRA’s opinion that TNL will continue to benefit from its extensive track record in the industry, financial flexibility as part of the Tata Group along with its healthy capital structure. Further, the outlook underlines ICRA’s expectations that the entity’s incremental capex, aimed at expanding the product portfolio and staying competitive in a technologically-intensive industry, will be funded in a manner that is able to durably maintain its debt protection metrics commensurate with the existing rating.