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OVERVIEW: Industry: The three pillars or in other words, the 3Ds for growth of telecommunication which are very much depicted by the Indian market and conditions include Demography, Demand and Data. There is no second thought that we are looking at a total digital transformation wave and digital evolution that is going to grip India. This will remain the crux of a major opportunity for growth over various platforms in urban as well as rural India. On a broader scale, some of the most frequently used applications of internet or allied systems for communication which in turn require high speed network include voice and video communication / video conferencing, video on demand, audio on demand, TV over IP service (MPEG2), smart grids, e-health, e-governance services, virtual classrooms, online entertainment, file sharing, increasing adoption of smart phones, web conferencing cloud applications, ever growing virtualization and software-based solutions. Thus, it aptly supports the fact that the market for fiber optics is expected to grow at a CAGR of 5.1% between the period of 2014-19 to reach a value of approximately USD3bn. Optical fiber is nothing but a hair-thin strand of glass which is designed in such a manner that it easily traps and transmits light pulses. Thus, the fibers can carry high bandwidth signals in both the directions simultaneously inorder to upload as well as download data over long distances. The exponential growth is not just restricted to one nation, but will be witnessed in a number of upcoming projects in the US, China, India, Brazil and other Western and Eastern European countries. In the past, the demand was propelled by Asia-Pacific, North America and Europe and will continue to do so in the near term as well. According to Allied research team, fiber optic connector in telecom is expected to grow at a CAGR of 8.3% over the forecast period 2014-2020. On a global level, the top five countries in internet speed are South Korea, Sweden, Norway, Japan and Netherlands. China ranks 91st in the list of internet usage, while the broadband speed in South Korea was reported at around 26.7 Mbps, while India had the lowest at 2.8 Mbps in Asia pacific region. This clearly indicates India’s speed to be the lowest in Asia. Fiber to the Home (FTTH) is expected to grow at a very healthy CAGR in years to come. FTTH supports various applications like online entertainment, video conferencing, various social applications, art and media related applications, security, storage and many more applications. Overall, the market for video conferencing endpoints and infrastructure is poised to grow at a CAGR of 5.5% to reach around USD2.9bn during the period from 2015-2020. According to a report by Persistence Market Research, the global VoIP market which was valued at USD85.9bn in 2015 is poised to grow at a CAGR of 9.5% over the period 2016–2024, to reach nearly USD194.5bn by 2024. Across the globe, region of Asia- Pacific (APAC) is expected to fetch the highest market value share in the global VoIP services while Latin America (LATAM) is expected to be the fastest growing market. With Europe been the second in the race, the VoIP services market is expected to increase at a CAGR rate of 8.4%. A Content Delivery Network (CDN) may be defined as a system of interconnected computers which are used to deliver web content to a very large number of users via internet. CDN is extremely useful for audio/ video streaming and applications in IPTV. The market for CDN solutions is directly related to broadband network, smart phones and other related applications. Going forward, the concept of 4G/ LTE, live streaming, content streaming and cloud based applications will be a major growth driver. Certain research reports are forecasting the CDN market to grow at a CAGR rate of 25% which has a potential of nearly USD15bn over the period 2014-2019.

June 13, 2016 PICK OF THE MONTH VOL-2, NO-10

Aksh Optifibre Limited. BUY

CMP: Rs. 15 TARGET PRICE: Rs. 24 TIME : 12 months

SNAPSHOT

52 week H / L Mcap (INR mn)

22.2 /12.1 2,477

Face value: 5

BSE Code NSE CODE

532351 AKSHOPTFBR

Annual Performance

(Rs mn) FY14 FY15 FY16 FY17E

Sales (Net) 2201 3483 4348 5563

EBITDA 336 524 701 946

EBITDA (%) 15 15 16 17

Other Income 74 58 35 58

Interest 71 103 104 139

Depreciation 150 163 187 173

PBT 189 317 445 692

PAT 260 321 335 553

Equity 743 758 813 813

EPS (INR) 1.8 2.1 2.1 3.4

Ratio Analysis

Parameters (Rs mn) FY14 FY15 FY16 FY17E

EV/EBITDA (x) 10.5 6.6 3.3 2.4

EV/Net Sales (x) 1.6 1.0 0.6 0.5

M Cap/Sales (x) 1.1 0.7 0.4 0.4

M Cap/EBITDA (x) 7.4 4.7 2.6 1.8

Debt/Equity (x) 0.3 0.3 0.2 0.2

ROCE (%) 3.58 6.33 11.50 15.23

Price/Book Value (x) 0.6 0.6 0.5 0.5

P/E (x) 8.7 7.2 7.4 4.5

Share Holding Pattern as on 31st March 2016

Parameters No of Shares %

Promoters 47837815 29.4

Institutions - -

Public 114827255 70.6

TOTAL 162665070 100

Quarterly Performance

Parameters (Rs mn) Jun–15 Sept-15 Dec-15 Mar-16

Sales (Net) 932.8 1,136.2 1,043.1 1,235.6

EBITDA 174.9 154.6 175.9 195.6

EBITDA ( %) 18.7 13.6 16.9 15.8

Other Income 5.8 8.3 9.7 11.8

Interest 22.8 25.4 26.8 29.1

Depreciation 46.7 46.6 47.2 46.8

PAT 111.0 90.2 112.0 22.0

Equity ( Rs mn) 758 786 813 813

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Note: All the data is as per closing on 10th June 2016.

Source: Annual Report

OVERVIEW: Industry:(contd.)

The evolution of smart phone or the urge to upgrade to a better phone has added a cherry to the topping for internet service providers. Where people are expecting an exponential growth in the regions of Africa and Middle East to grow at the fastest rate, the sale of smart phones is expected to grow at a CAGR of nearly 15% from the period of 2015 to 2020. Currently, poor internet connectivity causes broken viewing experience for the user which is expected to be rectified to seamless streaming experience via4G- LTE services. Moreover, the mobile payments and mobile wallets are slowly gaining grip among the young demography. The app owners are bound to provide innovative ideas to lure customers. As more and more users are added to the basket of smart phones, the concept of mobile wallets too is bound to grow. This segment can grow at a CAGR rate of more than 80% in next 5 years. The avenue for Cloud based IT Service management (ITSM) will also be opened with an astounding CAGR rate of nearly 14.8% to reach around USD8.7bn as per PR Newswire Europe and the same should gain traction in the next 5 years or so. Thus, telecom and IT segment is expected to grow at the highest rate during this forecast period. OVERVIEW: Company:

Established in 1986, Aksh Optifibre Limited (Aksh) is almost a three-decade old company which is involved in manufacturing of Optical Fibre and Optical Fibre Cables (OFC). The company is promoted by Dr. Kailash Choudhari. Aksh is one of largest manufacturer of optical fibre and optical fibre cables in India with an annual capacity of over 3million km of fibre and 3 million km of OFC. Apart from this, the company is one of largest producers of FRP rods with an annual capacity of 3 million km of FRP. The Company manufactures a wide array of Optical Fiber Cables which include single mode and multimode cables, duct cables, armoured FTTH (for aerial installations and fibre to home) cables, indoor and outdoor cables and special application cables (which are hybrid in nature, all purpose and ceramic armoured cables). It has two manufacturing plants located at Bhiwadi, Rajasthan which focus on fibre and optical fibre cables and one plant at Reengus, Rajasthan which focuses on FRP rods.




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Source: Cisco VNI, 2016

Source: Annual Report Source: Annual Report


OVERVIEW: Company:(contd.) Aksh was the first in India to launch Internet Protocol television (IPTV) and FTTH (iControl) Services in collaboration with state owned telecom companies. The company has two ISO certified plants for manufacturing optical fibre, OFC and FRP rods in Rajasthan in India and one plant in Dubai. It is reputed as the world’s integrated manufacturer of optical fibre, optical fibre cables and fibre reinforced plastic rods. Aksh has two subsidiaries namely APAKSH Broadband Limited and AOL-FZE, which in turn has a step down subsidiary- AOL Projects DMCC. The work force comprises of nearly 600 employees.

INVESTMENT RATIONALE (A) Business Aksh- the vision: Aksh has always been innovative with its cable designs and manufacturing and is one of the largest manufacturers of optical fibre and optical fibre cables in India. The key raw materials used in optical fibre and FRP rod are manufactured in-house, hence the company can save upto 70% of cost of optical fibre cables thus making Aksh one of the most cost effective optical fibre cable manufacturers. Moreover, as an element of backward integration, Aksh acquired Telecords (I) Pvt Ltd for the manufacturing of Fibre Reinforced Plastic (FRP) rods. The company offers cost effective solutions for fibre to the home (FTTH) applications which is in line with GOI vision of digital India and smart cities.

The company employs world class infrastructure with 5 fibre draw towers from Nextrom, Optech and SG. It has state of art machinery for OFC from Rosendahl- Austria, Nokia- Finland etc. The company has testing and quality assurance equipment’s from GN-Nettest-USA and Anritsu Corporation-Japan. Aksh has testing facilities as per global test standards for e.g. ITU-T, IEC, Bellcore & BS. The company has awell-equipped design and development department with capabilities of in-house industrial and engineering design, optical and mechanical testing and environmental test laboratories for conducting all kinds of fibre reliability & environmental tests. It has the capability of adapting and providing solutions to the changing needs of customers and growing volumes. It also provides customized solutions by offering abrasion resistant light weight cables, anti-UV radiation jacket cables, high di-electric jacket cables, intrusion proof cables etc.

Aksh has a strong customer base including private companies, state owned corporations like BSNL, MTNL, NTPC, PGCIL, ONGC, GAIL and some other telecom operators and sectors like railways, defense, oil, gas and pipeline, power & energy etc. It is the largest service provider in e-governance and banking kiosk services. Aksh has successfully executed some international turnkey tenders in Bhutan and Mauritius. The company holds a strong reputation in the international market and exports to more than 50 countries worldwide.

Recently the company has planned to diversify its product portfolio to manufacture ophthalmic lenses. Moreover, it is contemplating on a capacity enhancement in optical fibre (OF) by 100%, optical fibre cable (OFC) by 50% and Fibre Reinforced Plastic (FRP) by 200%. It is in line with its mission of opening 10,000 Kiosk and had completed nearly 8,600 by March 2016.




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Source: Company’s presentation

INVESTMENT RATIONALE (contd.) (B) Strong networking: The demand for more intense and robust bandwidth, requirement for more mature network convergence, change in the tastes for media device interaction and overall requirement for upgrading the broadband network has led to the emergence of Fiber to the X (FTTX) technology. FTTX has a number of applications related to traditional internet, security, IPTV, VOIP and many requirements of the smart grid or smart home. On the basis of the network destinations, FTTX can be divided into FTTH, FTTN, FTTC, FTTB, FTTP. Aksh has always been a key player in this domain for FTTX and FTTN. Moreover, the company has also been involved in the concept of IPTV and VOIP.




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Source: en.wikipedia.org/wiki/Fiber_to_the_x Source: Annual Report


INVESTMENT RATIONALE (contd.) (C) Opportunity through the projects by the GOI With its decent goals, Digital India (DI) is a blend of three ongoing projects namely, the National Optical Fibre Network (NOFN), the National Knowledge Network and the e-governance initiative.Now, despite being connected by Broadband with a speed of nearly 512 kbps, the urge to meet international standards with a speed ranging from 10 to 50 mbps, requires a national network (pipe) which should be potent enough of carrying large quantities of bits at a very fast speed; hence the NOFN was conceptualized. National Optical Fibre Network (NOFN) project, which aims to connect 2.5 lakh Gram Panchayats (GPs) was initiated in 2011 and funded by Universal Service Obligation Fund (USOF). As on May 7, 2016, Optical Fibre Cable (OFC) has been laid in 1,12,883 Kms and 50,465 GPs have been connected with OFC in the country. This provides a vision for the demand for fibre optic cable in near future.The successful completion of this project will help the Centre provide e-services and e-applications at each GP with a minimum of 100 Mbps bandwidth and thus plug the rural connectivity gap. No doubt there are still many challenges that lie ahead, but the GOI seems to be confident of meeting the target of connecting 1 lakh GPs by December 31, 2016 which definitely provides a vision of increase in demand and thus revenue augment. The BharatNet is a project which aims at providing reasonably priced broadband connectivity of nearly 2 Mbps to 20 Mbps to rural households and institutions across India. The project has an ambitious vision of establishing a scalable network by 2017. Due to the sluggishness of NOFN, a modified project called BharatNet was commissioned. In the revised format, fibre length which was three times that of the original, capex which was twice (almost Rs7,30,000mn) and a mix of infra technologies was initiated. The content provisioning would be via an auction route, which will also enable reduced Opex and it is estimated nearly 75% of the cost will be recovered through auction revenue. It is right to say BharatNet has evolved from the NOFN project of providing 100 Mbps to all Gram Panchayats (GPs). The potential economic benefits to the country are estimated at around Rs6,64,650mn. (D) 1 STOP AKSH: 1 Stop Aksh is the e-governance services arm of Aksh Optifibre. It is a public private partnership (PPP) model between the Rajasthan government and Aksh Optifibre Limited. The sole objective of the same is to provide complete e-Governance solutions including Government 2 Citizen (G2C) and Business 2 Citizen (B2C) services in rural as well as urban areas. The idea is to provide efficient and fast services to the citizens within the comfort zone of their localities. Further extending its wings of 1 Stop Aksh and e-Mitra, a leading government initiative in Rajasthan for connecting villages through IT infrastructure, the company has launched its e-Health service at its kiosks where a citizen can ask a doctor about his or her health issues. The services are being provided to a fully owned Government of Rajasthan company- RajCOMP Info Services Limited (RISL) in partnership with Ebix, Inc. (NASDAQ: EBIX), which is a leading international supplier of on demand software & e-commerce services to the insurance, finance and healthcare industries. The 1 Stop Aksh kiosks provide various solutions including:




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Services Solutions

e-Health service Connects to doctors; solutions to health issues.

e-Mitra Provide various services to the Government and Private Sectors

RKCL -Rajasthan Knowledge Corporation Limited To develop a new educational framework aided by IT skills

TSSC -Telecom Sector Skill Council A Non-Profit Organization providing services to telecom needs

NDLM -National Digital Literacy Mission Making one person in every family digitally literate

DELP -Domestic Efficiency Lighting Programme Promote energy efficiency services

Aadhar Solution provided for Unique Identification number (UID) and Aadhar card

Apnakhata This Web Site provides Records of Rights (NAKAL) of land records of Rajasthan State

APNA CSC- Common Services Center Front end delivery outlets for delivery of Government and Private Sector services

SSDG State Service Delivery Gateway Providing easy and convenient access to the services through Common Service Centres (CSCs) and enables the State Portal

Pan card service Solutions for Pan card and other services

Vodafone Services Quick vodafone services provided


Financials: The overhang of the FCCB issue is diminishing as it is getting converted into equity shares. This makes a sharp reduction in the debt profile of the company. The performance in the last financial year would have been better but for the foreign exchange loss booked by the company to the tune of Rs73mn all booked in the fourth quarter ending March 2016. The tax provisions have also been accounted for in the fourth quarter; thus this quarter appears to be very subdued at Net level. The interest burden appears to be high, but we need to keep in mind that the working capital needs of the company will grow with growth in turnover in near term. This could get ratified over period of time with higher cash generation.

Risks and concerns: Delay in implementation of projects by GOI can be a big cause of worry.

Outlook and valuations: At CMP of Rs 15 valuations appear to be attractive given the strong revenue visibility and better operating margins which could get reflected in the bottom line. We recommend a BUY on the stock with a target price of Rs 24 from a 12-month perspective.




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