RailTel IPO | Should I Subscribe?

Detailed Analysis of RailTel IPO

Introduction

RailTel Corporation of India, the Telecom arm of Indian Railways is raising Rs.819.24 Crore through an IPO. The entire issue is an offer for sale. Here is a 5 point of analysis covering – IPO details, company overview, financial performance, key strengths & risks and lastly the valuation.

RailTel IPO Detailed Analysis

IPO Details

RailTel is a wholly owned subsidiary of the Government of India. The objective of this offer is divestment of the government’s stake. This is in line to help achieve the ambitious disinvestment target of Rs. 2.1 Lakh Crore (Budgeted Estimate) set by the central government. Post IPO government’s stake will contract from 100% to 72.84%.

Company Overview

• RailTel Corporation is information and communications technology (ICT) infrastructure provider and one of the largest neutral telecom infrastructure providers in the country, owning a pan-India optic fiber network on exclusive right of way (ROW) along railway tracks.
• It is a Mini Ratna (Category-I) Central Public Sector Enterprise and wholly-owned (100 percent) by the Government of India under the administrative control of the Ministry of Railways.
• Incorporated in September 2000 to modernize the telecom system for train control, operation and safety and to generate additional revenues by creating nationwide broadband and multimedia network.
• As of January 2021, its optical fiber network covered 59,098 route kilometres and 5,929 railway stations. Center Network Operation Center at New Delhi and 4 NOCs at Mumbai, Kolkata, Delhi and  Secunderabad.
• They offer a diversified range of services i.e. Telecom Network, Telecom Infrastructure, Data Center and Hosting and Projects.
• RailTel Corporation has an exclusive right of way along 67,415 Kms connecting 7,321 railway stations.
• It has 305,746 retail customers and 5,023 Access network providers (ANPs) to deliver the last mile connectivity.

Financial Performance

• RailTel generated revenues of Rs. 1,128 Crore in FY20. However, empirically their growth has been sluggish and 3 year revenue CAGR stands at mere 7.5%. The company has suffered the wrath of the Covid-19 recording revenues of Rs. 537 Crore in H1FY21. We can expect FY21 to be lower than the previous year.
• EBITDA figures are also quite flaccid. RailTel has seen EBITDA shrink from Rs. 337 Crore in FY19 to Rs. 322 Crore in FY20. Similarly, EBITDA margins are slack. H1FY21 margins are at 27.2%.
• Absence of growth is distinctly visible in Profit After Tax (PAT) over the years. RailTel reported PAT of Rs. 141 Crore in FY20, marginally above previous year. PAT margins have been in a down trajectory since FY19 which is not a good sign.  

Key Ratios

• RailTel’s ROE and ROCE are lagging and not up to the mark. They fail to qualify the famous ‘Buffet Indicator’ – i.e. a good company must have return ratios over 15% consistently through the years. 
• It’s commendable that the company’s cash conversion cycle has significantly improved, from 73 days in FY 18 to 41 days in FY20. However, there is still ample scope of advancement.

Key Strengths

• Among the largest neutral telecom infrastructure providers in India with pan-India optic fiber network.
• It offers a diversified portfolio of ICT services and solution.
• Key partner to the Indian Railways in digital transformation.
• It has experience in executing projects of national importance, with a robust pipeline of projects.
• The company has a consistent record of financial performance and growth.
• RailTel is professionally managed, with strong corporate governance and senior management team with significant industry experience.

Key Risks

• High Dependency On PSU Customers
• Regulatory Risks
• Technological Changes
• Internet Security Concerns

Valuation

RailTel’s Price to Earnings (PE) and Price to Book (PB) ratios stand at 21.4 and 2.2 respectively. It won’t be appropriate to conduct direct comparative analysis with the likes of Reliance Jio or Bharati Airtel. The biggest concern is growth and the question lies – will the company able to perform and improve?

Conclusion

Let’s cut to the chase – Are listing gains possible? Yes. RailTel has a price band of Rs. 93-94 and currently there is a grey market premium of Rs. 35-40 (i.e. 40%-45%). If the market environment is conducive on listing day with no sluggishness, then there is a likelihood of decent near term gains. However, we feel long term investors should exercise caution and wait to see how it all plays out for the company in the coming quarters.