Company watch: Classic Tech posts revenue of Rs 875 million in the fiscal year 2021/22

In the fiercely competitive retail internet business, the Internet Service Provider Classic Tech has posted a revenue of Rs 875 million in the fiscal year 2021/22, an increase of 5% from the previous fiscal year, says the press release by CARE Ratings Nepal Limited (CRNL) while assessing credit risk for Classic Tech’s long-term and short-term bank facilities.

Established as Zero Point Remit Pvt. Ltd. in 2009, Classic Tech transformed into an Internet Service Provider (IPS) in 2010 and a network service provider/distributor in 2014. After its complete metamorphosis, it presently offers Fiber Optical Internet using FTTH. Services have expanded across 74 districts in Nepal through 103 outlets. Revenue growth and customer acquisition is modest too.

In the FY 2019/20, Classic Tech made a gross revenue of Rs 687 million. Surprisingly, the COVID hit of 2020 boosted internet demand which helped Classic Tech achieve Rs 837 million in revenue, an increment of around Rs 160 million from the previous FY.

The company where 90% of its turnover comes from the retail internet segment is now eying to capture the corporate segment as well.

Credit risk assessment along with strength and weakness analysis
In the recent credit rating, CRNL has rated Classic Tech’s long-term bank facilities ( Rs 789.90 million) with ‘CARE-NP BB’ and its short-term facilities with ‘CARE-NP A4’ (Rs 510.08 million).

Instruments with CARE-NP BB are considered to have moderate risk of default regarding timely servicing of financial obligations while instruments with CARE-NP A4 are considered to have minimal degree of safety regarding timely payment of financial obligations, carry high credit risk and susceptibility to default.

A credit rating is a credit risk assessment of a prospective debtor (an individual, a business, company or a government) which predicts their repayment capabilities and probability of defaulting.

According to CRPN, the ratings given to CTPL's bank facilities are limited by its highly leveraged capital structure and moderate scale of operations, as well as the risk of revenue concentration in the fiercely competitive retail internet business. 

Additionally, the ratings reflect the company's operating cycle being elongated due to the working capital intensive nature of its operations, presence in a fragmented market with intense capital and technology requirements, exposure to volatile interest rates, technological risks associated with internet broadband business, and the impact of government policies on Internet Service Providers (ISPs).

During FY22, the company's total debt increased by Rs 100 million, primarily due to the long-term loans taken for funding its ongoing capital expenditures. On the other hand, there was only a Rs 9 million increase in its net worth. As a result, the company's gearing levels deteriorated sequentially. 

Also, the company's operation depends on a significant requirement for working capital, given the need to invest substantial amounts in network devices, customer premises equipment, and other related accessories. 

In FY22, CTPL experienced an inventory turnover of 136 days and an average collection period of 47 days. The high level of inventory holding during this period was largely attributable to the replacement of 2G routers with 5G routers, as 2G routers remained in stock at various branches.

Additionally, building a whole fibre network in a new area will suck huge capital. A large capital expense is definitely expected, which may be covered through bank debt financing but at high interest rates based on the current interest rate scenario. 

The key rating sensitivity for the company lies in its ability to withstand the intensifying competitive landscape in the internet business and to improve its leverage profile, even in the face of significant future capital expenditures.

ISP has become a highly competitive market lately. Post-COVID, interned demand has topped the roof. Total internet subscribers as per mid-July 2022 were around 2.23 million. However, the number of IPS operators has skyrocketed and reached to 60 licensed operators in this fragmented market. Furthermore, the present market fragmentation has led to replication, and in order to satisfy the customers' demands for affordable internet access, prices have decreased, thereby adversely affecting the margins.

The base rates of Nepalese banks and financial institutions (BFIs) are prone to significant fluctuations as they are influenced by the liquidity available in the system, which in turn results in changes in interest rates. The present liquidity stress in the economy has led to a noticeable increase in interest rate volatility, with significant upward pressure on rates over the past few quarters.

Tech companies like Classic Tech are especially susceptible to the risk of obsolescence, and the revenue of such companies can be significantly affected by end users migrating to newer technologies. Failure to promptly adopt the latest technologies can exacerbate this risk for the organisation particularly in the context of fixed broadband providers’ investment in new technology to provide speedier broadband services.

The ratings, however, derive strengths from Classic Tech’s long established track record of operations with widespread reach, reasonable market share in the internet service industry and experienced promoter and management team in the related field, says CARE Nepal.

Post-Covid surge
Presently, Classic Tech is the fourth largest ISP when it comes to total number of subscribers. As of July 16, 2022, CTPL's active customer base was around 0.23 million, representing a market share of roughly 10.30% in the country's internet service industry.

During the two phases of COVID lockdown, there had been an unprecedented surge in the demand for internet connections. This surge was primarily due to the shift of activities such as social media usage, online meetings for schools and businesses, and streaming movies to online platforms. 

In April 2020, after the first lockdown was implemented, internet consumption increased by 25%, rising from 400 to 500 gigabytes per second. Subsequently, with the implementation of new restrictive measures in mid-August 2020, internet usage increased by another 25%, reaching 625 gigabytes per second. The period can be attributed as a blessing in disguise for ISPs including Classic Tech.

A brief history of ISPs in Nepal
The professional history of the internet in Nepal began when Mercantile Communication introduced internet services, along with email services, in 1994 (2051 BS). World Link started providing internet services in the Kathmandu valley, which led to increased competition and subsequent growth of the internet industry. 

Nepal Telecom also began offering internet services in 2001 (2058 BS). Since then, various corporations have entered the space. As of mid-July 2022, there were 60 licensed ISPs operating in Nepal with a total internet subscriber base of around 2.23 million. Other commonly heard interned companies are Vianet, Classic Tech, Subisu, Dish home, Fiber net, etc.

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This brief is prepared on the basis of press release by CARE Ratings Nepal, a credit rating agency licensed by the Securities Board of Nepal (SEBON).

Currently, there are three credit rating agencies operating in Nepal. The other two are ICRA Nepal and Infometrics Credit Rating Nepal. All of the three rating agencies are subsidiaries of India-based rating agencies.