Rating Rationale

Strengths
* Strong market position in niche VSAT industry; well positioned to tap the mobility space
Nelco is one of the leading players in the niche 700cr VSAT industry with about 24% market share. VSAT licenses in India are offered under license from Department of Telecom, Government of India (DoT). Once the VSAT license is obtained, operators require satellite transponder space, which is provided by Antrix Corporation Ltd. ('Antrix'Ă'Â?), a part of ISRO (a Govt. of India Company under Dept. of Space). VSAT scores over terrestrial telecom in applications where connectivity needs to more reliable or where locations are remote.

Nelco provides B2B VSAT services in banking, oil & gas exploration, renewable energy, telemedicine, mining & construction and rural education. It enjoys strong market share especially in the oil & gas and banking (ATM) segments. In December 2018, the government introduced the Inflight & Maritime Communication (IFMC) policy, where voice and internet services could be provided on aircraft while flying over Indian skies and ships while sailing in Indian waters, through VSAT. The air and maritime mobility space is expected to substantially increase the industry size in the medium term. With its partnerships with technology vendors like Panasonic Avionics Corporation, Nelco is well positioned to benefit from growth in mobility.

* High revenue visibility
Nelco has two revenue streams: VSAT hardware sales, which is one-time hardware installation, and bandwidth and service usage, which is largely recurring. About 77% of the revenue is from bandwidth and services usage. Further, these are repeat customers, which inturn provides high revenue visibility. The customer churn rate in bandwidth and services usage is as low as 3-5%. Few major customers are Hitachi, AGS and Tata Communications. The terms with its customers are largely contractual in nature, with contract lengths varying from 1 to 3 years.

Nelco has also entered into 3-5 year non-cancellable lease agreements with oil retailers such as IOCL, BPCL and HPCL, which provides stable lease rentals at attractive IRRs.

* Improving operational and financial profile, though moderately high leverage
The financial profile has been improving, due to the shift in focus on its VSAT services from automation and controls segment. The automation and controls segment, which contributed about 25% revenue in 2014, has been discontinued since 2017.

The operating income of the company has increase from Rs 144 crore in FY2017 to Rs 220 crore in FY2020, largely owing to increase in its penetration in VSAT segment. The number of VSAT installations has increased from about 48,000 in FY2017 to 76,000 in FY2020. Operating margins have also improved from 13% in FY2017 to 21% in FY2020. Since the revenues and costs are largely recurring and contractual in nature, the operating margins are expected to remain stable going forward. Further, due to the recurring nature of business, revenues are expected to be relatively less impacted due to the ongoing Covid-19 pandemic.

While leverage has improved over the past few years, it is still moderately high with TOL/TNW and gearing of 3.2x and 1.7x respectively in FY2020. Nevertheless, the lease rentals from oil retailers largely cover the long term repayments, which provides comfort.

* Financial flexibility enjoyed by being a part of the Tata group
As on March 31, 2020, the Tata group through Tata Power and its subsidiaries, holds 50.09% equity stake in Nelco. The company has board representatives from Tata Power. Mr. Ratan
Tata is Chairman Emeritus in Nelco. As a part of Tata Group, the company will continue to enjoy financial flexibility.

Weaknesses
* Working capital intensive business
Working capital is fairly intensive with gross current assets (GCA) at about 153 days as on March 31, 2020, driven by receivables of 117 days. Clients are mostly billed on quarterly basis.
However, this is partly offset by credit period provided by suppliers (hardware providers) of about 3-4 months.

* Technology and regulatory risk
Nelco is dependent on technologies for VSAT hardware from other third-party global players such as VT iDirect and Gilat Satellite Networks, with proprietary technologies. Nelco is also solely dependent on satellite transponder space from ISRO. Any change in terms with these players poses a risk. Further, the VSAT services are regulated by DoT. Any major change in policy pertaining to VSAT services is a risk factor. Nelco also faces competition from terrestrial telecom providers which are cheaper and which increase their connectivity to remote locations over time.