Indian Railways
RailTel Corporation of India, the information and communications technology (ICT) infrastructure provider, opens its initial public offering of over 8.7 crore equity shares for subscription on February 16.
The state-owned Mini Ratna (Category-I) central public sector enterprise aims to raise Rs 819.24 crore through public issue which will close on February 18. The company will not receive funds from IPO as all the money will go to the Government of India.
All brokerage houses recommended subscribing to the issue given its debt-free balance sheet, consistent payment of dividend, fair valuations, the likely role in digital transformation of Indian Railways, and better margins & return ratios compared to other telecom players.
RailTel Corporation derives 66 percent of its revenues from the telecom segment while the remaining portion is from railways and other projects.
“RailTel, if it performs efficiently can benefit from the 5G growth in India from a fiberisation needs’ perspective. It could also play a key role in digital transformation of the railways,” said Nirali Shah, Head of Equity Research at Samco Securities.
RailTel Corporation of India IPO: 10 things to know before subscribing to the issue
Besides, “COVID-19 has had a minimal impact on the telecom industry and has in fact triggered growth for certain players due to increased data usage and VPN services for people working from home. Since RailTel is a debt-free company and pays consistent dividends it could witness some traction,” she added.
But for long-term investors, there are a few red flags, she feels. “Firstly, the company has delivered single digit revenue and PAT CAGR of 7.5 percent and 2.5 percent, respectively, from FY18 to FY20. There is high dependence on the government entities and concentration risk given that 23.8 percent of its revenues come from top 3 customers. Its presence in a highly regulated industry is another cause for concern,” she explained.
Overall, “the company is fairly priced at its FY20 P/E of 21.3 times. It has been commanding a good grey market premium indicating the offer will sail through but keeping the risks in mind, we recommend investors to subscribe for listing gains only,” Nirali Shah advised.
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RailTel shares traded at a 48 percent premium to the issue price, as per the IPO Central and IPO Guru.
Angel Broking also feels RailTel is going to play a key role in digital transformation of Indian Railways. “The company’s margins & return ratios are better compared to other telecom players in India. There are no listed peers for the company. The issue has been priced at 21.4x PE on a FY20 trailing basis, which is quite reasonable by looking at the strong future growth rates of the company,” said the brokerage which expects a good listing for the company.
“We are positive on the long-term prospects of the industry as well as the company, we recommend subscribing to the RailTel IPO for long term as well as for listing gains,” the brokerage said.
RailTel is one of the largest neutral telecom infrastructure providers in India with pan-India optic fiber network. It has a diversified portfolio of services and solutions, and is a key partner to the Indian Railways in digital transformation. It is professionally managed with strong corporate governance and senior management team with significant industry experience.
In FY20, the company reported the highest net profit margin among key telecom companies and key IT/ICT companies in India, with a net profit margin of 12.50 percent while its net profit margin was 8.48 percent in the six months ended September 2020. The company ranked first in terms of operating profit margin among the key IT/ICT companies in India in FY20.
As of January 2021, the company had exclusive rights for way along 67,415 route kilometers connecting 7,321 railway stations for laying optical fibre cable. The company has 59,098 route kilometers of optical fiber cable network and have connected 5,929 railway stations across towns and cities in India. It has city wide access network that stands at over 18,000 kilometers.
Hem Securities feels the company’s valuation looks fully priced. But the brokerage said looking at the industry dynamics of telecom & telecom data services where broadband market is gaining pace with enterprise data services to register volume-driven growth along with huge potential offer by Indian market as India has lowest fixed broadband subscription per 100 people will give boost to the company’s performance going forward.
“Also, the edge which company holds over its peers in terms of financial performance makes this issue attractive to deploy the funds in. Hence, we recommend investors to subscribe the issue for short & long term,” the brokerage added.
Choice Broking also said, “Considering the futuristic service & growth plans of the IR and RailTel’s ability to monetize its existing assets through subscription plans and co-sharing with private operators, we feel that fundamentals are positive for the company. Thus we assign a subscribe’ rating for the issue.
RailTel has reported a short but stable financial performance over FY18-20. It reported a 7.5 percent CAGR rise in topline. EBITDA margin expanded from 27 percent in FY18 to 29.6 percent in FY20. Adjusted PAT increased by 8.9 percent CAGR over FY18-20.
The company had a positive operating cash flow over FY18-20, which increased by 105.9 percent CAGR in FY20. Average RoIC and RoE stood at 8.6 percent and 10.6 percent, respectively, over FY18-20.
RailTel is profitable since FY07 and paid dividend since FY08. Average dividend payout stood at around 40 percent over FY18-20. Net worth is positive and consistently growing since incorporation. The company is net debt free and is funding its operations through internal accruals since FY13.
For H1 FY21, the company has reported a topline of Rs 537.4 crore with EBITDA and PAT margin of 24.2 percent and 8.5 percent, respectively. “Based on quick estimate, topline is likely to increase by 4 percent CAGR over FY20-23 to be at Rs 1,269.97 crore in FY23. EBITDA and PAT margin are forecasted to expand by 178bps and 26bps, respectively, during the period to stand at 31.4 percent and 17.1 percent in FY23 as compared to respective margins of 29.6 percent and 16.9 percent in FY20,” said Choice Broking.
RailTel is in the process of carrying out a project in Haryana for a state agency, where it is required to supply, install and commission IP-MPLS and MPLS routers at various sites under the state WAN and also supply, install and commission switches, servers and firewalls and undertake facility management services for management of the common IT infrastructure.
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The company has also been awarded a number of projects that it is currently implementing and executing. These include the Kerala Fiber Optic Network project where company is a part of the consortium that involves provision of scalable and resilient optic fiber across Kerala.
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