Frog Cellsat -- Time to turn into Prince?

Frog Cellsat is an SME company listed in Oct 22
Promoter is Konark Trivedi - BTech from AMU in Electronics / PG in Mobile & Satellite Comm from Westminister Uni London / ex HCL Comnet (part of HCL Tech) worked for satellite services division / founded Frog in 2004.

Supplying electronics equipment / accessories to three industries:
Telecom sector
Defense sector (relatively new 3 Cr business in FY23)
Public/private Infra (new vertical - increasing demand for Telco infra in buildings like Airport / Malls / Tunnels / Metro stations / Offices etc for improving mobile coverage)

3-4 Years topline - should achieve 500 Cr

Ebitda margins to improve with scale - current range for FY24 16%-18%

FY24 Growth guidance 45-50% - nearly all of this growth expected to come from new clients orders.

Zero debt.

Capex of 1.6 lakhs sq ft - 1 lakh sq ft manufacturing facility coming online by Q1FY24 - remaining 60K sq ft by end of Q3FY24. Major part of capex will be covered by IPO proceeds, small part from internal accruals.

Jio was onboarded as client in Dec - small order received & bigger order is under review.

Contract from BSNL/Tejas - not much booked in FY23, actual realization starts from FY24.

PLI benefits: For the forecast revenues and min eligibility, they should get 60+ Cr in 5 years - first tranche is 2.14 Cr for FY23, should come during Q2.

A solid opportunity and would alike to invite views


Frog Cellsat Q4FY23 Concall Highlights
Frog Cellsat | CMP: INR 221 | Mcap: INR 3,990mn

Revenue mix for FY23 – Network Accessories (35%), IBS Accessories (35%), Antenna (10%), Optical DAS (10%), Digital Repeaters (10%)

Focused on top-line target of 45-50% growth for FY24.

Projections for FY24 - Digital Repeaters & Antenna can increase their revenue share from 10% to 15%. Whereas decrease of share for other 3 products.

EBITDA and Margins
Margins improved from ~15% to 16.5% in FY23 due to effective inventory cost management and lower raw material costs.

The company is expected to maintain its EBITDA margins of 16%-18% for the next 3 years.

Order book
The company has an order book of INR 650mn which gives good growth visibility.

Orders valuing to 30mn in the past 18 months from the defence sector and various small orders.

As of now, no big orders from the defence sector are still waiting for approvals for the sample orders and once approved, they might get big orders.

In the domestic market, one big opportunity for the company is the BSNL 4G project which might generate business of 1,000mn in the next 3 years

Capacity expansion
Phase 1 of a new plant in Noida covers 1 lakh sq. feet and should be completed by Q1FY24. And utilizing the additional space for new product development.

Phase 2 of the project is underway and is expected to be completed by Q3FY24. Adding an additional 60,000 sq. feet to support the expanding operations.

The expansion is done from internal approvals and 100% IPO money, no debt is taken for the expansion.

The new plant is important for value generation as all the processes can be conducted under one roof and decrease the flow time.

With the help of this Capex company has a goal of 5bn Revenue in 3-4 yrs. No more capex is required after this expansion for 3-4 yrs.

Future orders
Defence orders: As the government is restricting the imports of defence tech which creates a great opportunity for the company. The company has done a sample order of INR 30mn from the defence department, once the products are approved the company can expect much higher orders from the same. New product for defence i.e., AVD (Avalanche Victim Detector) a device for every soldier that can be attached to his/her vest which helps to track them after an avalanche.

Airtel 5G: The company works for the in-building(indoor) process of the 5G band. As Airtel is yet to start its indoor process, which gives the company a huge opportunity soon.

Jio: In FY23 the company received a small order from Jio as an evaluation process and expects to get a green signal from Jio for the same. This will give the company a big client for the future.

INR 600mn of revenue is expected to be generated from the PLI scheme in the next 5 yrs.

Received incentive of INR 20mn under PLI Scheme some more incentives are in the pipeline and expected to be received by Q2FY24.

Other highlights
One of the key drivers of the company is R&D and the company heavily invests in innovation.

A strategic partnership with an Israeli company has helped in diversifying the product portfolio, formed an alliance to gain insights and create a synergy that will drive growth.

The company’s first offerings stand at 20+ products currently.

Outlook: Frog Cellsat is expected to grow double-digit rate along with margin improvement backed by order book and upcoming opportunities from defence and telecom. The capex would lead to incremental revenue going forward. We have a positive outlook on the stock.

*Arihant Capital Markets Ltd