optiemus infracom ltd. - careratings.com€¦ · mr. r. suryanarayan +91-22-6754 3602...

$: Optiemus Infracom Ltd. - careratings.com€¦ · Mr. R. Suryanarayan +91-22-6754 3602 r.suryanarayan@careratings ... Ghaziabad Uttar Pradesh 6. Parwanoo Himachal Pradesh 20. Lucknow$
FUNDAMENTALS VALUATION

OPTIEMUS INFRACOM LIMITED

August 22, 2012

ANALYTICAL CONTACT

Mr. Amod Khanorkar +91-22-6754 3520 [email protected]

BUSINESS DEVELOPMENT CONTACTS

MUMBAI

Mr. R. Suryanarayan +91-22-6754 3602 [email protected]

KOLKATA

Ms. Priti Agarwal +91-33-40181600 [email protected]

CHENNAI

Mr. V Pradeep Kumar +91-44-2849 7812 [email protected]

AHMEDABAD

Mr. Mehul Pandya +91-79-40265656 [email protected]

NEW DELHI

Ms. Swati Agrawal +91- 11- 2331 8701 [email protected]

BANGALORE

Mr. Dinesh Sharma +91-80-2211 7140 [email protected]

HYDERABAD

Mr. Ashwini Kumar Jani +91-40-40102030 [email protected]

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EQUIGRADE

Financial Information Snapshot

(Rs. Crores) FY11 FY12P FY13E FY14E

Total Revenues 1,212 1,907 2,355 2,925

EBITDA 44 60 103 113

PAT 16 27 39 45

Fully Diluted EPS* (Rs.) 1.8 3.2 4.5 5.3

Dividend Per Share (Rs.) 0.0 0.0 0.0 0.0

P/E (x) 10.5 6.0 4.2 3.6

EV/EBITDA (x) 10.1 7.4 4.3 3.9

* Calculated on Current Face Value of Rs.10/- per share

EQUIGRADE – Analytical Power for Investment Decision

OPTIEMUS INFRACOM LTD Handset Distribution

Good Fundamentals, Considerable Upside Potential CMP: 19/ CIV: 28.31

Sensex: 17,847

CARE Equity Research assigns 3/5 on fundamental grade to

Optiemus Infracom Limited (Optiemus)

CARE Equity Research assigns a fundamental grade of 3/5 to Optiemus.

This indicates ‘Good Fundamentals’. The grade draws reflects sustained

growth in sales achieved by the company which is in line with the growth

of Samsung India Electronics Ltd. (Samsung), a subsidiary of the South

Korean electronics major Samsung Electronics Co. Ltd., in the handset

market in India. The company has established a strong network for

distribution of mobile handsets to modern trade (organized retail chains).

Optiemus has a pan India presence with 27 offices cum warehouses

across India. Though renewal of agreement with Samsung would remain a

concern, the presence of the company in allied businesses would help in

diversifying the revenue stream and mitigating overall risk. CARE Equity

Research believes that the increasing penetration of smart-phones in India

(where Samsung has emerged as one of the leading players) augurs well

for the fortunes of the company.

Valuation

CARE Equity Research values Optiemus using Price-Earnings (P/E)

multiple based methodology. Optiemus is currently trading at a P/E of

4.2x and 3.6x to the FY13 and FY14 diluted EPS estimates of Rs.4.5 per

share and Rs.5.3 per share, respectively. Historically, the company has

traded at one year forward rolling multiple of 6x. Given the continued

healthy outlook on growth going forward, CARE Equity Research

believes that it is fair to value Optiemus at the historical one year forward

P/E multiple of 6x, translating into a Current Intrinsic Value (CIV) of

Rs.28.3 per share. At the Current Market Price (CMP) of Rs.19 per share

the CIV results in a valuation grade of 5/5 indicating the equity shares of

Optiemus have ‘Considerable Upside Potential’

August 22, 2012


www.careratings.com 2

EQUIGRADE

Continued robust growth in mobile subscriber base to aid mobile handset market

India is the second largest and the fastest growing telecom market in the world in terms of number of wireless

connections. From a level of about 34 million in March 2004, the mobile subscribers have reached a level of over

812 million in March, 2011 registering a compounded annual growth rate (CAGR) of 57%.

Growth in wireless subscriber base

Source: Telecom Regulatory Authority of India (TRAI)

Source: Telecom Regulatory Authority of India (TRAI)

As estimated by Telecom Regulatory Authority of India (TRAI) the number of wireless subscribers is expected to be

over 1 billion by March 2014. While wireless penetration is urban areas has increased significantly over the years,

rural and semi-urban areas continue to be under-penetrated. The point is corroborated by the fact that the urban

wireless tele-density stood at around 163% as on March 31, 2012 while the rural wireless tele-density stood at

around 38% as on the same date. Nevertheless, in the last 5 years, subscriber base in rural areas has grown more

rapidly than the urban areas, their respective CAGRs over FY 2007-2011 period being 70% and 42% respectively. In

the pursuit of growth, service providers have rolled out their services in newer rural hinterlands. Also, the lower

tariffs and falling handset prices has increased the affordability of telecom services. CARE Equity Research

estimates that the growth in both urban and rural areas will be slower compared to their historical growth rate,

however rural areas will continue to grow faster than the urban areas.

FUNDAMENTAL GRADE Good Fundamentals 3/5



EQUIGRADE

Growth of Samsung in the Indian mobile handset industry shall benefit Optiemus

In line with the growth in the mobile subscriber base, the Indian mobile handset industry has also grown

significantly during the last decade. In the last one year, the Indian handset market has grown by 15% to reach

Rs.33,171cr in FY11 compared to Rs.28,897cr in FY10. Although, Nokia continued to remain the market leader in

the Indian handset market posting a revenue of Rs12,929cr in FY11, it grew at a negligible y-o-y growth of 0.2%.

Indian Mobile Handset Market in FY10 and FY11

Top Players Revenues in

FY10 (in Rs.cr)

Market share

(%)

Revenues in

FY11 (in Rs.cr)

Market share

(%)

Nokia 12,900 44.6 12,929 39.0

Samsung 4,700 16.3 5,720 17.2

Micromax 1,602 5.5 2,289 6.9

RIM 1,210 4.2 1,950 5.9

LG 1,600 5.5 1,834 5.5

Others 6,885 23.8 8,449 25.5

Total 28,897 100 33,171 100

Source: Industry and CARE Equity Research

In contrast, Samsung showed an impressive growth and its revenues from the handset business in India grew from

Rs.4,700cr in FY10 to Rs.5,720cr in FY11, thereby registering a y-o-y growth of 22%. In FY11, the company

launched 42 handset models in various categories. Samsung did particularly well in the smart-phone segment where

its entry level smart phones such as ‘Wave’ and ‘Galaxy S’ have been hugely successful. The compatibility of

Samsung smart-phones with all major operating systems such as Windows, Android and Bada have been major

reasons for its popularity.



EQUIGRADE

Factors Driving Mobile Handset growth

Source: CARE Equity Research

Optiemus, which derives over 95% of its revenues from the distribution of Samsung handsets, is set to benefit from

the continued growth in mobile handset market coupled with robust growth of Samsung in India. Optiemus exhibited

revenue CAGR of 68% over the period FY09-FY11. As per the provisional results for FY12 Optiemus achieved a

turnover of Rs.1906cr and a PAT of 27.24cr

Turnover and Handset Sales Trends - Optiemus

Source: Company and CARE Equity Research



EQUIGRADE

Experienced promoter

Mr. Ashok Gupta, the chairman of the Optiemus has more than 14 years of experience in the field of

telecommunications and distribution. Under his leadership the company has been involved in the distribution of

Samsung mobile phones since January 2007. Prior to this, the company, since October 2001, was involved in the

distribution of Nokia handsets. Mr. Gupta has also served as the secretary of the ‘Indian Cellular Association’

(ICA), an apex body representing the mobile brands in India.

Low margin business, however higher sales of smart-phones to boost the profit on absolute levels

Samsung has been the global leader in the smart-phone category followed by Apple and then Nokia. Though

currently in India, smart-phones penetration continues to be on the lower side, it has been continuously improving

and is expected to become more popular as 3G data services gather steam. The same point is vindicated by the fact

that while in FY11, Optiemus sold 2.14 lakh smart-phones (9.22% of total), in FY12 it has increased to 9.70 lakh

(33% of total) thereby registering a y-o-y growth of 353%.

With the share of smart-phones increasing in Optiemus’ product portfolio and its price being relatively higher than

that of feature phones, the company in recent times has seen an increasing trend in the average selling price which

has also augmented into higher profits at the absolute level. However the margins continue to be on the lower side

owing to the distribution nature of business.

Trends in average selling price in recent months- Optiemus




EQUIGRADE

Strong distribution infrastructure in place

Optiemus is the national distributor for Samsung mobile handsets to modern trade (retail chains). The company has

as its clients some well known and reputed retailers such as The Mobile Store, Spice Distribution Limited, Planet M

Retail Limited, Reliance Digital Retail and Indus Mobile Distribution. These retail chains give their model-wise and

location-wise projections to Optiemus, who after receipt of the consignment from Samsung, deliver the same to the

retail chains as per their requirement. Optiemus currently has 27 offices cum warehouses across India. The

widespread distribution network enables the company to cater to the needs of the customers/retail chains in a prompt

and timely manner.

Optiemus - Distribution centres

S. No. Distribution

Centre

State S. No. Distribution

Centre

State

1. Guwahati Assam 15. Palam Delhi

2. Patna Bihar 16. Bhubaneswar Orissa

3. Chandigarh Union Territory 17. Zirakpur Punjab

4. Raipur Chhattisgarh 18. Jaipur Rajasthan

5. Ahmedabad Gujarat 19. Ghaziabad Uttar Pradesh

6. Parwanoo Himachal Pradesh 20. Lucknow Uttar Pradesh

7. Ranchi Jharkhand 21. Dehradun Uttarakhand

8. Indore Madhya Pradesh 22. Kolkata West Bengal

9. Gurgaon Haryana 23. Kochi Kerala

10. Mumbai Maharashtra 24. Bangalore Karnataka

11. Navi Mumbai Maharashtra 25. Chennai Tamil Nadu

12. Pune Maharashtra 26. Hyderabad Andhra Pradesh

13. Lajpat Nagar Delhi 27. Jammu Jammu & Kashmir

14. Srinivaspuri Delhi


Focus on diversification affirms the de-risking strategy

On the back of the strength and expertise in the mobile handset industry in general, Optiemus has also established its

presence in allied businesses such as trading of mobile accessories and distribution of telecommunication headsets.

The company sells mobile accessories such as mobile pouches and screen guards under its own brand name

‘MoLife’. For distribution of mobile accessories it has a tie-up with mobile retail outlets such as The Mobile store,

Hot Spot, Reliance Digital, Reliance Infocom, Univercell, E zone and Planet M. The company is also involved in the

distribution of ‘Plantronics’ brand of telecommunication headsets across India. Plantronics Inc., a company

headquartered in California, U.S.A is one of the leading manufacturers of telecommunication headsets in the world.

Though both the above ventures contribute less than 10% to the turnover they nevertheless provide diversification to

the revenue stream and contribute to the profitability with their relatively higher margins.



EQUIGRADE

Further in January 2012, the company has acquired a commercial property at Noida, Uttar Pradesh having a total

land area of 13,620 sq. mt for a total consideration of Rs.120cr. The company has already signed an agreement with

Samsung India Electronics Ltd. to lease out the above property for a period of nine years. The income from

aforementioned property is expected to contribute around 20% to the bottom-line from FY13 onwards.

Renewal of agreement with Samsung would remain a concern

Optiemus has been involved in the distribution of Samsung handsets since January 2007. The distributorship is

guided by an agreement between the two parties, which are valid for a period of two years. On the expiry of the term

a fresh agreement shall be signed between the two parties based on mutual consent. The current agreement would

expire on March 31, 2013. Though the renewability of the same would pose a risk to the business sustenance of the

company, considering the impressive growth achieved by the company specifically in the last three years, it is

expected that the agreement would be renewed.

In compliance with the listing arrangement No.49

The company has six board of directors, with three of them being executive and three being non executive

independent directors. The board has formed three sub-committees which include the audit, share transfer and

investor grievance committee. The audit committee has four members, which includes three non-executive

independent directors and Mr. Ashok Gupta who is also the promoter. The other two sub committees namely the

share transfer and investor grievance committees have two members each. Mr. Ashok Gupta is the member in both

the committees while the other member in each committee includes one non-executive independent director.

Optiemus: Board of Directors

Name Category of Director

Mr. Ashok Gupta Executive and Promoter

Mr. Hardip Singh Executive

Ms.Parul Rai Executive

Mr. Manoj Jain Non Executive and Independent

Mr. Laliet Gupta Non Executive and Independent

Mr. Gautam Kanjilal Non Executive and Independent




EQUIGRADE

CARE Equity Research assigns a valuation grade of 5/5 to the equity shares of Optiemus

According to CARE Equity Research, the Current Intrinsic Value (CIV) of Optiemus is Rs.28.3 per share, which

translates into an Enterprise Value of Rs.524 crore.

Optiemus is currently trading at a P/E of 4.2x and 3.6x to the FY13 and FY14 diluted EPS estimates of Rs.4.5

per share and Rs.5.3 per share, respectively. Historically, the company has traded at an average one year forward

rolling multiple of 6x. Given the continued healthy outlook on growth going forward, CARE Equity Research

believes that it is fair to value the equity shares of Optiemus at the historical one year forward P/E multiple of

6x, translating into a CIV of Rs.28.3 per share.

The CIV of Rs.28.3 is around 49 per cent higher than the CMP of Rs. 19 per share, resulting in a valuation grade

of 5/5 and indicating the shares of Optiemus has ‘Considerable Upside Potential’.

One-year forward rolling P/E multiple One-year forward rolling P/B multiple

Source: CMIE and CARE Equity Research

VALUATION GRADE Considerable Potential Upside 5/5

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EQUIGRADE

“Optiemus Infracom Limited” was originally incorporated in the year 1993 as Akanksha Finvest Limited (AFL)

as a Non-Banking Financial Company (NBFC). In January 2009, Mr. Ashok Gupta, the promoter of Telemart

Communication India Pvt. Ltd (Telemart) which was distributor of Samsung mobile handsets, took over the

management of AFL

Subsequent to the takeover, the name and business of AFL was changed to Akanksha Cellular Limited (ACL)

and telecommunication respectively. Later during March 2009, the Board of Directors of ACL approved a

scheme of merger of seven group companies (including Telemart) with ACL. Out of the seven group companies,

six were into telecommunication while one was into road construction business. The seven merged entities were

as follows:

Name of Entity

Telemart Communication India Pvt. Ltd.

A. Design & Details (Interiors & Infrastructures) Private Limited

Mach Communications Private Limited

Mo-Life Communication (India) Private Limited

Mo-Life Retails Private Limited

Pacific I Net Support Private Limited

Radical Softnet Private Limited

The name of the merged entity was subsequently changed to “Optiemus Infracom Limited” in June 2011.

Optiemus is currently listed with the Bombay, Delhi and Jaipur Stock Exchanges.

Among the entities mentioned above only four entities including Telemart, A. Design & Details (Interiors &

Infrastructures) Private Limited (ADD), Mach Communications Private Limited (Mach) and Mo-Life

Communication (India) Private Limited (Mo Life) had significant business operations at the time of merger.

Currently the company operates in four divisions’ viz. handset distribution (Telemart division), mobile

accessories (Mo Life division), headset distribution (Mach division) and Infrastructural work (ADD division).

The Telemart division accounts for more than 90% turnover of the company. The Mo Life division is engaged in

the trading of mobile accessories such as mobile pouches and screen guards under the brand name “Mo Life”

while the Mach division is engaged in the national distribution of Plantronics telecommunication headsets. The

ADD division initially was engaged in providing consulting work related to interior design but later started

providing subcontracting services for road infrastructure projects. ADD in its capacity as a sub-contractor had in

the past executed two road infrastructure projects for Valecha Engineering. Currently there are no outstanding

orders in this division.

COMPANY BACKGROUND



EQUIGRADE

Mobile Handset Industry Overview

Between 2005 and 2011, the Indian Mobile Handset industry grew at a healthy CAGR of 28%. In comparison, the

number of wireless subscribers grew at a CAGR of 58% over the same period. The market value of India’s mobile

handset industry has increased from Rs. 153.5 billion in FY2005 to Rs. 368.5 billion in FY2011 and is second only to

China.

Comparison of handset volume growth and wireless subscriber growth

Source: Indian cellular Association, TRAI and CARE Research

Though it would be difficult to expect future growth in the wireless subscriber base similar to the historical growth

rates, growth in the mobile handset industry is not expected to be dampened as the same is not only driven by new

subscriber additions but also by replacement demand. Historically from FY05-FY11, the growth rate experienced in

the Indian mobile handset market has far outstripped the growth achieved in the mobile handset space globally.

Global Mobile handset Demand Mobile handset demand in India

Source: Industry & CARE Research Source: Indian Cellular Association & CARE Research

SNAPSHOT OF THE INDUSTRY



EQUIGRADE

Mobile handsets can be broadly divided into two categories, smart-phones and feature-phones (non-smart-phones). In

India, smart-phone penetration among the age group of 15 – 24 years has been low; however the same is expected to

increase as 3G data services’ penetration increases. The number of smart-phones shipped to India witnessed a

dramatic increase from 2.5 million units in 2009 to 6 million units in 2010.It would fair to expect the increasing

smart-phone penetration as a major driver for the mobile handset industry going forward.

Smart-Phone Penetration in Various countries(2010)

Source: Industry and CARE Research



EQUIGRADE

Income Statement

(Rs. Crores) FY10 FY11 FY12# FY13 P FY14 P FY15 P

Operating Income 868 1,212 1,907 2,355 2,925 3,450

EBITDA 30 44 60 103 113 131

Depreciation and amortisation 12 9 7 14 13 12

EBIT 18 35 53 90 100 119

Interest 9 12 16 33 35 37

PBT 13 23 40 57 65 82

Ordinary PAT 8 16 27 39 45 57

PAT 8 16 27 39 45 57

Fully Diluted Earnings Per Share* (Rs.) 1.1 1.8 3.2 4.5 5.3 6.6

Dividend, including tax 0 0 0 0 0 0

* Calculated based on ordinary PAT on Current Face Value of Rs. 10/- per share

Balance Sheet

(Rs. Crores) FY10 FY11 FY12# FY13 P FY14 P FY15 P

Tangible Net worth (incl. Minority Interest) 86 114 140 179 224 280

Debt (incl. Preference Shares) 82 98 319 379 418 426

Deferred Liabilities / (Assets) 2 2

Capital Employed 170 214 459 557 642 706

Net Fixed Assets, (incl. Capital WIP, net of revaluation reserve) 26 19 177 164 151 140

Investments 10 1 5 7 10 12

Loans and Advances 32 62 28 28 32 39

Inventory 27 42 71 105 130 150

Receivables 148 210 255 302 373 423

Cash and Cash Equivalents 36 34 38 38 50 58

Current Assets, Loans and Advances 264 358 432 505 627 725

Less: Current Liabilities and Provisions 130 164 155 119 146 171

Total Assets 170 214 459 557 642 706

Ratios based on Financials

FY11 FY12# FY13 P FY14 P FY15 P

Growth in Operating Income 39.7% 57.3% 23.5% 24.2% 17.9%

Growth in EBITDA

45.0% 37.0% 72.1% 9.3% 15.5%

Growth in PAT

91.4% 74.8% 43.3% 15.7% 25.2%

Growth in EPS 60.8% 74.8% 43.3% 15.7% 25.2%

EBITDA Margin

3.6% 3.1% 4.4% 3.9% 3.8%

PAT Margin

1.3% 1.4% 1.7% 1.5% 1.6%

RoCE

18.6% 16.6% 17.7% 16.8% 17.7%

RoE

15.3% 21.3% 24.5% 22.5% 22.4%

Gross Debt - Equity (times)

0.9 2.3 2.1 1.9 1.5

Net Debt - Equity (times)

0.6 2.0 1.9 1.6 1.3

Interest Coverage (times)

3.6 3.8 3.1 3.2 3.5

Current Ratio (times)

1.4 1.4 1.6 1.6 1.6

Inventory Days

11 11 14 15 15

Receivable Days

54 46 44 42 42

Price / Earnings (P/E) Ratio

10.5 6.0 4.2 3.6 2.9

Price / Book Value(P/BV) Ratio

1.4 1.2 0.9 0.7 0.6

Enterprise Value (EV)/EBITDA

10.1 7.4 4.3 3.9 3.4

Source: Company, CARE Equity Research # Figures for FY12 are Provisional

FINANCIAL ANALYSIS



EQUIGRADE

CARE Equigrade Grid (CEG)

Through CEG, CARE Equity Research addresses two critical factors considered by an investor while investing in

a particular company’s equity shares:

1. Fundamentals: Whether the company is fundamentally sound with respect to its business, its financial

position, its management and its prospects.

2. Valuation: What is the Current Intrinsic Value (CIV) of the stock and how it compares vis-a-vis its Current

Market Price (CMP)

These factors are answered assigning quantitative grades to both these parameters. CEG is the snapshot of

‘Fundamental Grade’ and ‘Valuation Grade’ assigned by CARE Equity Research.

Fundamental Grade

This grade represents how sound the company is fundamentally, vis-à-vis other listed companies in India. This

grade captures:

1. Business Fundamentals and Prospects

2. Financial Soundness

3. Management Quality

4. Corporate Governance Practices

The grade is assigned on a five-point scale as under:

CARE Fundamental Grade Evaluation

5/5 Strong Fundamentals

4/5 Very Good Fundamentals

3/5 Good Fundamentals

2/5 Modest Fundamentals

1/5 Weak Fundamentals

Valuation Grade

This grade represents the potential value in the company’s equity share for the investor over a 1 year period. The

Current Intrinsic Value (CIV) or the price arrived by CARE Equity Research on fundamental basis is compared

with the current market price (CMP) of the stock and the grade is assigned based on the gap between CIV and

CMP of the stock.

The grade is assigned on a five-point scale as under:

CARE Valuation Grade Evaluation

5/5 Considerable Upside Potential (>25% upside from CMP)

4/5 Moderate Upside Potential (10-25% upside from CMP)

3/5 Fairly Priced (+/- 10% from CMP)

2/5 Moderate Downside Potential (10-25% downside from CMP)

1/5 Considerable Downside Potential (>25% downside from CMP)

Grading determination is a matter of experienced and holistic judgment, based on relevant quantitative and

qualitative factors of the company in relation to other listed companies.

EXPLANATION OF GRADES



EQUIGRADE

DISCLOSURES

Each member of the team involved in the preparation of this grading report, hereby affirms that there exists no conflict

of interest that can bias the grading recommendation of the company.

This report has been sponsored by the company.

DISLCLAIMER

This report is prepared by CARE Research, a division of Credit Analysis & REsearch Limited [CARE]. CARE Research has

taken utmost care to ensure accuracy and objectivity while developing this report based on information available in public

domain or from sources considered reliable. However, neither the accuracy nor completeness of information contained in

this report is guaranteed. Opinions expressed herein are our current opinions as on the date of this report.

CARE’s valuation of the security is mainly based on company specific fundamental factors. Equity prices are affected by

both fundamental factors as well as market factors such as – liquidity, sentiment, broad market direction etc. The impact of

market factors can distort the price of the security thereby deviating from the intrinsic value for extended period of time.

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whatsoever. It is also not a comment on the suitability of the investment to the reader. The subscriber / user assumes the

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