Ortel Communications IPO: expensive valuation is a big negative

Venkatasubramanian K BL Research Bureau | Updated on January 24, 2018


At 18 times, EV/operating profit is much higher than what larger players command

Investors can avoid the initial public offering of Ortel Communications, a cable service provider in light of expensive valuation and business constraints as well as challenges that the company faces.

Operating mainly in Orissa with very minor presence in a few other States such as Chhattisgarh, Andhra Pradesh and West Bengal, the company mostly provides analog cable services to customers. It also provides Internet services through its network.

Presence in less-lucrative markets, difficulty in increasing the fee charged from customers since it offers mainly analog services, and the uphill task it faces of converting subscribers to digital cable system are major hurdles for the firm.

At the upper end of the price band (₹181-200) the offer seeks an EV/Ebitda (enterprise value to operating profit) multiple of about 18 times FY14 numbers. This is much higher than the 8-13 times that substantially larger players such as Hathway Cable and Den Networks command.

As with most cable operators, Ortel is loss-making, though it did report marginal profits in the first half of FY15, thanks to cost control. In FY14, its revenue from operations were ₹128.5 crore, while Ebitda was at ₹34.1 crore.

Between FY10 and FY14, the company’s revenues grew at a rate of 14.5 per cent, while Ebitda rose 19.1 per cent annually.

Business negatives

Ortel reaches around 8.1 lakh households, and has a cable network subscriber base of about 4.68 lakh. More than 87 per cent of its subscribers are from Orissa, creating concentration risks. It has presence in 48 towns.

Operators such as Den Networks and Hathway Cable have a base of 1.1-1.2 crore subscribers spread over 10-15 States.

Due to limited presence, scalability will remain a key issue for Ortel. This is a serious drawback since a large base is the only way to generate and sustain profits at the net level.

Ortel operates with a model where it acquires infrastructure, equipment and subscribers not just from MSOs (multi system operators), but also LCOs (local cable operators) who provide the last mile connectivity.

This gives it direct access to customers, and also helps prevent any under-reporting of revenues by LCOs. But the process is expensive given that the onus of digitising the last mile would fall on Ortel and it will also have to bear the cost of maintaining the infrastructure.

Next, more than 70 per cent of Ortel’s subscribers use only analog services. Given these challenges, investors can avoid the offer.

The issue

Ortel Communications is hoping to raise up to ₹240 crore by issuing 1.2 crore shares. Half the proceeds will go to a large investor who is selling his stake. The offer closes on Thursday.

Published on March 03, 2015

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