Suyog Telematics: Worth catching when its young?

Company Name: Suyog Telematics
CMP: Rs. 341
Market Cap: 346 Crores.
P/E: 20.5
P/B: 6.8

The company is engaged primarily in the business of installing and commissioning of poles, towers and optical fibre cable (OFC) systems in India. It is a passive telecommunication infrastructure provider which refers to the telecommunication towers for wireless telecommunication services and OFC is used for the purpose of hosting and assisting in the operation of the active infrastructure used for transmitting telecommunications signals or transport of voice and data traffic. It builds,owns and operates poles, towers (mainly Roof top towers), OFC systems and provides this passive infrastructure on a shared basis to wireless and other communications service providers. It also offers services to telecom operators in installing telecom infrastructure on job work basis.

Segments:

Tower business: Installs roof top towers and provides the same to telecom service providers on a sharing basis. It has a tenancy ratio of 1.8 per tower. These towers are used for technologies like CDMA, 2G, 3G and 4G. The average tenancy ratio for the industry is expected to increase to 2.5 by the year 2020. Tenancy ratio refers to the number of antennae and other infrastructure on a tower. Increase in this ratio is a key driver of growth for a tower company.

Poles Business: This segment mainly provides poles for telecom infrastructure in situations where erecting regular network towere is not possible. It mainly provides poles and infrastructure on lease over several MSRDC flyovers, Bandra-Worli sea link project, MMRDA flyovers and skywalks in and around Mumbai. It has also started working in NHAI projects. It also installs BTS on poles in local areas with severe traffic and congestion like check posts, cinema halls etc. Company has clients in this segment like BSNL, Airtel, Idea cellular, Vodafone, Tata Tele, Reliance Jio, Rcom and Aircel.

Optical fibre network segment:

Company has set up its own optical fibre cable network of about 200 km from Thane Ghodbunder Road to Kalamboli. The OFC network fibre has been laid in ducts intended to provide added protection and it allows to lay more fibre as demand increases.

Sharing of infrastructure and towers is expected to increase among telecom operators amidst falling revenues, pressure on margins and pricing pressures in the industry. This is expected to improve the tenancy ratio of the company’s tower assets. Once a tower is rented out it generates a stable cash flow in the form of tower rentals from occupants. The thrust on 4G by all the major telecom operators will further increase the demand for sharing passive infrastructure. The company is well positioned to benefit from the demand for towers as data growth and voice growth continues rapidly in India.

Drivers of future growth:

Company has extended its operations into NHAI projects. Three upcoming NHAI projects ( Mumbai-Ahmedabad, Mumbai-Goa and Mumbai-Bangalore) are expected to add around 1000 towers to its current portfolio.

Focus on increasing slum site tenancies to 2.3 from the current 1.8

Acquisition of NISA which has its operations in north India ( Ahmedabad and Delhi).

Company entered into a 10 year agreement with MSRDC for erection of 10 meter monopole.

Plans to provide fibre connectivity to all Reliance Jio sites in Mumbai – mainly flyovers, skywalks and FOB sites. This will further strengthen its presence in fibre business.

Promoters hold 49.63% stake in the company while the rest is held by the public.

Financials:

The total turnover of the company increased by 38% to INR 60.54 Crore in 2017 from INR 43.75 Crore in 2016. While its PAT zoomed by close to 50% in the same period.

In the last three years its sales have grown from INR 21.71 Crores in 2015 to INR 60.54 Crores in 2017.

Operating margins have improved from 34% to 53.8%

EPS has ballooned from INR 1.43 in 2014 to 14.25 in 2016.

Sales have grown at a compounded 70% in the past three years and profit at 129%.

Operating cash flows have improved significantly.

ROCE of 58% and ROE of 42%.

In 2016 Suyog Telematics was included in the Forbes Asia ‘Best under a Billion’ list of the top 200 publicly traded companies in the region. An in 2017 it was recognized as one of the ‘top 100 SMEs of India’ by the India SME forum.

Disclosure: Not yet invested. Inviting your views.

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Hi @Sameer_srj

You also need to provide the risks attached to the business for a balanced viewpoint. Also, appreciate the efforts in trying to identify the company but much of your text except the financials are a verbatim reproduction from the company AR

Best
Bheeshma

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Hi @Sameer_srj can you shed some light on the Management of this Company. I can see 36% of the Promoters are pledge. Investment from Sat Pal Khattar give some definite edge to this company undoubtedly but we can not ignore the fact that it already has raised 14 times in 3 years.

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Hello @bheeshma,

Thanks for your suggestion. This is my first post in VP, and yes I did miss mentioning about the risk factor. As per my understanding, below are the risk factors:

  1. Highly competative business.
  2. Company derives most of its revenue from top 3 telecom players. So client concentration can be a risk factor. This might have changed with Jio’s entry but we will have to wait for AR to know more.
  3. Change in regulatory environment.
  4. Another stock specific risk factor is very low trading volume of the stock and high volatility.

Hi @KC1986, I did not find anything negative about the management. Only thing which is a bit assuring is that it was among the 100 best SMEs of India and corporate governance was also a factor in deciding the list.
As far as the pledge is concerned, the shares are pledged in favor of Axis bank from which it has raised long term loan.

Thanks @Sameer_srj ,

But will you please tell something about their business model and competitive moat if any.

Q1 result out.

  1. Revenue from operations up 55.8% YoY and 6.3% QoQ.
  2. EBIT margin at 42.87% vs 42.21 YoY.
  3. Net profit has increased 42.26% YoY to 4.67 cr but has decreased 21% QoQ.
  4. Net profit margin at 24.23% vs 26.54% YoY.

Net profit margin has decreased because of the increase in finance cost.
Company has increased debt from 23.4Cr to 54.25 Cr. The D/E at the end of FY17 increased to 1.04 from 0.66 a year ago.

Waiting for the annual report which would give more clarity on their capital requirement and reason behind doubling the debt.

Suyog Telematics Q1 result.pdf (1.5 MB)

The percentage of pledged promoter share has come down to 24.37% from 34.33%in the term of q2fy18…
But the company seems to be starving on internal accruals , they defaulted on a term loan payment due on 28th dec 17… the following has been mentioned in statement by the company,

" This was on account of delayed realization from one of its customers, whose receivables were used to make the repayment. While STL had sufficient current account balance with another bank, the same was not utilized in servicing the principal payment. However, the company has cleared all dues as on date. "
Although the clarification that the sufficient balance was present in current account, but the whole event was an uncomfortable take from my side…

Disc: not invested, tracking, will wait for correction to enter…

Thanks for the write-up @Sameer_srj

I came across this company in a B-school case competition. The analysis proved that the stock has been grossly undervalued. It is a sin (or an opportunity?) that a company growing at c.>30% is trading at an LTM PE(adjusted) of <15x in the current market.

I want to understand more before allocating any capital.

Below are my key concerns -

  1. Concentrated customer base with high bargaining power that is reflected in their decreasing price margins - I am using COGS/Revenue as a proxy which is on an increasing trend.

  2. 4.92Cr worth of bad loan allowances made in FY2018. Is it just a one-off event or the trend is here to remain?

  3. The falling share price has led to further promoter share pledging, which is at an all-time high. More pains to the share price in the offing?

  4. Also, the company is not under the radar of many brokerage houses. Hence, it’s bit of a challenge to dissect the business, be it competitive landscape, FS projections, etc.,

Could you/anyone who has done more analysis on the company put across their viewpoints?

Regards

Disclosure: Not invested

I just noticed that under related party transactions till 2019 they have given out a cumulative of 16cr, now down to 15.8cr to a non subsidiary and by the looks of it are not even receiving interest on the loan. It has been given out to a company called
https://www.google.co.in/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&cad=rja&uact=8&ved=2ahUKEwjGyt3n_6DpAhUq73MBHRERBYUQFjAAegQIBBAB&url=http%3A%2F%2Fsgfrl.com%2F&usg=AOvVaw00g8rMwkvTWS7XLLwtgDTS. What is the nature of these loans and for the operating profit 16cr is allot of money, this is not even a subsidiary and a privately help company into conduction run by the promoters. Any idea on what this money is being given out for ?

Given that Telecom is the flavor of the season, looked at this company. On the surface, the numbers and growth looked impressive, so decided to look deeper. Here are some of my findings and observations

BUSINESS MODEL
– STL business is to build, own and operate telco Poles, Towers, OFC (optical fiber cable) systems and related assets and to provide these passive infra assets on a shared basis to wireless and other communication providers

– These customers use the space on STL towers to install active communication-related equipment to operate their wireless communication network

– So basically, company sets up what is called as passive infra for telecom operators. They obtain the permissions / licenses for erecting the poles / towers and the rent these out to telecom operator

– Passive infra can be shared across operators. In other words, once the company has setup a tower, it can be leased to multiple operators serving in the area. This is called multi-tenancy. So ideally, higher the tenancy, the more profitable a tower asset will be.

In summary, the company
– Invests in setting up sites (Towers / Poles)
– Manages all the permissions, licenses etc that are required to setup and operate the towers
– Offers it to Telcos on rent
– Maintains the towers on continuous basis
– Ensure agreed level of up-time for telcos
– Telcos pay the company as per agreement
– Multiple operators can mount their equipment on the tower, increasing rental yield

– Once a tower is rented, it generates stable, and predictable cash flow in form of tower rentals from the tenants

Factors that have helped STL Immensely in its growth
– They have sole license to install towers on all MMRDA, MSRDC sites such as Flyovers, Bridges, Sea-link, Sky-walks, Monorail etc
– If one if familiar with Mumbai, MMRDA is the nodal agency responsible for infra development across Greater Mumbai region, so it manages large swathes of key infra properties in Mumbai, such as the 2 large highways serving the Western and Eastern parts of mumbai and all the 50+ flyovers that are laid on these roads.
– This exclusive license allows grants STL exclusive rights to setup telecom towers on properties of these government agencies
– Its extremely critical for any telecom operator has to have towers along these routes in Mumbai
– In addition it has exclusive rights to setup towers on Foot over-bridges and Sky-walks (pedestrian bridges connecting densely crowded areas around sub-urban train stations to main station concourse), once again extremely critical for the operators serving millions of customers
– The exclusive licence from government agencies ensure stable revenue growth and profitability.
– They also specialise in setting up poles / towers in slum areas, which are very low cost, but again serve a large dense population base

Now the risks from this kind of a business setup are pretty obvious

– More than 80% of their sites are in Mumbai region, and by inference, so does the revenue. Though they claim to be present in 7 circles, the business in other locations is minuscule. Of total 1808 sites, 1009 are on MMRDA, MSRDC, BEST property. Another 390 of their sites are slum based sites. So about 1400 of the sites are definitely based in Mumbai region. They have about 409 small cell sites, some of which are likely to be within Mumbai.
The geographical concentration risk is pretty high. In case of any natural disaster, it could have a huge impact on revenue.

– Exclusive contracts / licenses with government agencies can either mean a very high entry barrier for competition, or in case of change in political dispensation, it could mean complete loss of advantage within days.

– As a corollary, it would be interesting to see how well the company business fares when it steps out of Mumbai for any meaningful expansion. Without the exclusivity it enjoys on home turf, will it do as well in sales, margins, profitability? Will it be able to stand up to the cut-throat competition in other geographies? If not, then the growth will be very, very limited.

– In last 5 years, Telecom industry has seen massive consolidation, with several players disappearing from the market due to M&A, bankruptcy or brutal market conditions. From an average of 8 players per telecom circle, the market now only has 3 players with a 4th state-run entity. So effectively, the tenancy options for passive infra companies is reducing. This implies low tenancy rates. In other words, earlier there were potentially 8 operators available for renting a tower, now there are only 3. This can be clearly seen in tenancy rates of STL. at 1.14. Of 1009 government sites, tenancy if 1035, barely over 1. Of 409 small cell sites, tenancy is 409, exactly 1 tenant per site. Only on slum sites it has a slightly better tenancy of 619 on 370 site.

– Tower business is brutally capital intensive and competitive. Most telcos started with their own infra / tower companies, which have been moved to separate entities. Bharti infratel, Indus tower and several others. STL is effectively in competition with some of these large players. Its unique model of low-cost Pole based sites and Slum-based sites has allowed it to create a niche for itself within the tower infra space, but for growing beyond the govt-contract protected territory of Mumbai, it has to step out and compete with larger players. Whether it has the capabilities to do that, is yet to be seen

Besides the business challenges stated above, there are certain other red flags that I noticed during my analysis of the Financials and AR FY19

  1. Related party transactions
    Mr Shivshankar Lature, the MD and Promoter, is also a promoter of another company called Suyog Gurbaxani Ropeway Pvt Ltd. This company has built a Funicular Ropeway system for a temple in Nashik, Maharashtra, which was inaugurated in 2018. The FY AR shows that STL has a small investment in this entity

My knowledge of accounts is quiet limited, so I am not sure why the value of investment in shown to be 1.08 crores as on 31-3-2018, whereas it is shown as 1 lakh on 2019?? Maybe boarders can comment on this.

However, what is more interesting (and as @kkumar3 has also mentioned in his previous post), the company has extended a large loan to this entity and an amount of 15.8 crores is outstanding as of 31-03-2019

What makes the whole transaction even more interesting is the observations of the independent auditor

As seen above, terms & conditions of the loan are unknown, and any interest / principal amount outstanding / overdue cannot be ascertained.

I tried to dig deeper to find more information on the loan, and whether interest is being serviced at 13% as mentioned in auditors remarks

Again, I would like to stress my limited knowledge of accounting, and I may be wrong here, but 1.5 crores interest on a loan outstanding of about 15.8 cr, @13%… it does not add up.

More importantly, considering that STL itself has a debt of 57 crores, there is no point in lending a large sum of 16 cr to a related party. The business is capital intensive… and as per the AR FY19, company is looking to raise more capital (debt / equity) to the tune of max 200 cr!

Then, there is some more stuff, from audit report…which are also red flags, and also just bad hygiene


Please note, these are UNDISPUTED statutory dues which remain un-deposited!!

They have even been accounting for interest due on pending statutory payments

  1. Here is another instance of lousy administration

  2. Another blip…

image

  1. And then this…

While there are no provisions for this year, this entry caught my attention, where they have made an allowance for bad debt in the previous year to the tune of 4.9 cr. It would be interesting to dig deeper in previous years AR and financials to find out the reason for this, but may be that’s for another day.

  1. Finally, the last bit on remunerations. The promoters have taken a hefty pay-rise last year. Though its well withing the allowed limits, and the company fiances appear healthy on books… yet it does say something about management mind-set.

Whole promoter family has taken a significant pay hike.

In summary… like a lot of micro-caps, this too has its share of management issues. The business is no doubt promising, especially in post-covid era of work-from home situations and heavy dependency on 4G mobile broadband, and the impending roll out of 5G services, over next 5 years. But to capitalise of those opportunities, the company has to diversify to other geographies across India and for that it has to compete with biggies as well as niche local players. Whether it has the financial, technical and entrepreneurial wherewithal to do that and be successful, remains to be seen. So till then, my approach will be to keep a watch.

Disclosure: Not invested, but keeping a watch

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I feel that new dimensions have come into play recently -

  • The management has just said that they will be listing the stock on NSE in a month or so.
  • The company has already invested in 5G stem cell sites and the rollout of 5G in FY22 will be very good for the company’s growth.
  • The promoter has reduced his pledge to a low single digits now.
  • Company is almost debt free and will be raising money through fresh IPO soon.
  • A loan they had given to Suyog Gurbaxani will soon be recovered as that company is planning an IPO in the next 6 Months.
  • From valuation stand point, company has said it’ll achieve 200 Crore revenue in 1 year and given a stable 30% NPM, and EPS of 60 looks very comfortable. With a forward PE of 12, a 700-800 levels in stock price is quite likely.
  • If you will see, there is a pattern between Suyog Telematics and ADF foods from Shareholding standpoint. ADF has 5x in last 1 year. Autumn Investments had > 20% of ADF foods.

So High reward , Low risk!

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A large chunk of the company is with Authum Investment and Nariman Investment, both of which look related.

A simple google search of the above company led me to page - Top bidder for Reliance Home Fin wife of once banned investor Sanjay Dangi - BusinessToday

While growth prospects look good, there are a few issues:

NFAT is less than/equal to one. Management doesn’t expect it to improve. Brutal economics.

Large RP loans whose terms and repayments even the auditors cannot ascertain.

Rs 4 crores worth related entity of shares go missing?

Large part of float controlled by market operator related entities.

Excess remuneration drawn.

Disclosure issues?

However, what is more interesting (and as @kkumar3 has also mentioned in his previous post), the company has extended a large loan to this entity and an amount of 15.8 crores is outstanding as of 31-03-2019

Though I do not track this actively, noticed a news report that is relevant, hence sharing… the company to which funds were loaned, launched its IPO. The purpose of the IPO is stated as repayment of loans. Not seen the most recent AR and the current status of the loan, but if the management stays true, Suyog should get the loan amount back now. Should be a monitorable for those who are invested. BTW, as per the report below, the company itself has not made any profits in the past 3 years.

The company is raising 6 crores, while the loans are worth 15 crores.

Read the blog in the previous post. Suyog earlier owned 10 lakh shares of Suyog Gurbaxani worth more than 4.5 crores. But the shares appear to suddenly declined to 10 thousand without any explanation.

Reimbursement of exp - 3cr given to promoters, isnt its huge?

Rent of a small office space in Vikhroli, Mumbai is 60L per Annum? Which is also given to promoters. look at this office
in Map

1.3cr. Advance given for Land Purchase in Financial year 2019-20, what this means?

It seems like almost all of the profit which is generated by company is by some or other way is given to promoters.

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In general there are few question mark on corporate governance

  1. Reimbursement of expenses (whether this will became a regular occurrence or not). In this FY upto sept no such expense has been incurred.

2.Advances to related party always a red flag

  1. Rent amt seems immaterial but the pattern is bit concerning

In the AR21,mgt talked about nse listing and raising equity.

Company over last 2.5 yrs have done massive capex
Asset turnover is around 1


If past trends follow we could see good growth in future(I have no clue as to where they have done these additional capex)

Key risks-

  1. Dependence on Mumbai ( too much dependence)

  2. Working capital intensive industry

  3. Corporate governance

Disc. Tracking position
I have very limited knowledge on telecom sector.

Has anyone attended the concall

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Link to concall

Watch from Min 11 onwards
Mgt was asked about advances to related party

This seems to be a very bad news for Suyog shareholders. Key excerpts from the article

The Maharashtra State Road Development Corporation (MSRDC), which rents out poles on major flyovers in Mumbai to Telecom Service Providers (TSP) or Infrastructure providers (IP) for installation of their base transceiver station (BTS) equipment for telecommunication network, has disabled over 329 equipment over non-payment of rent.

The MSRDC, however, told The Indian Express that the disconnection was done as the period of contract had come to an end and the contractor had not paid the Rs 30 crore rent.

Officials said the BTS equipment has been seized as the company, Suyog Telematics, which had taken the poles on rent, has not paid the rent even after several notices were issued to them.

Suyog Telematics had taken 329 poles on rent in January 2016 and the period of contract ended December.

The MSRDC said they have given a letter of acceptance (LOA) to another company for leasing out the poles. The equipment will be installed as soon as Monday.

If this is true, then this is likely to wipe out suyog’s 20% of 25% of their sites, and the impact on the revenue could be in similar range. Unless they are able to salvage the situation somehow, this could be a big body blow.

Not oddly enough, checked on BSE web-site, there are no disclosures from the company on this matter (at least not between Feb 1 2022 and now), but that’s not surprising at all. What’s surprising though, is that market has still not reacted to the news yet. No insider selling too, so may be they are confident of salvaging this :slight_smile:

Not surprised by this at all. Management has been dropping enough and more clues in the past, some of which has already been captured in posts on this thread.

Read full report at.

Disc: No investments, with this, will stop tracking it now. Certainly not an investment advice.

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