RailTel IPO analysis

About RailTel Corp

• RailTel Corporation is a Mini Ratna (Category-I) Central Public Sector Enterprise, wholly owned by the Government of India and under the administrative control of the Ministry of Railways. Railtel is an information and communications technology (ICT) infrastructure provider and is one of the largest neutral telecom infrastructure providers in India.
• RailTel's optical fiber network covers 59,098 route kms and 5,929 railway stations across towns and cities in India (as of Jan 31st, 2021). The company operates data centers in Gurugram, Haryana and Secunderabad, Telangana to host and collocate critical applications for customers.
• The IPO is part of the government's disinvestment programme for FY21. Hence, the proceeds of the IPO will go to the government, and the company will not receive any funds.

Peers

• According to its DRHP, the company does not have any listed peers. However, given that it is in the telecom space, Railtel faces competition from Bharti Airtel, Reliance Jio Infocomm Ltd. 
• Among Information and Communication Technology providers, the company faces competition from Sify Technologies, HCL Infosystems and Tata Communications.
• The table below shows comparison of RailTel's metrics with its competitors on important metrics. 
• RailTel has better return ratios (RoCE) and margins (Net Profit margin, Operating margin) as compared to other competitors in the ICT space.

• With respect to its telecom peers too, RailTel ranks better in terms of margins and debt ratios. In FY20, RailTel reported the highest net profit margin of 13%, owing to a zero debt. Reliance Jio  and Tata Comm had reported Operating margins at 10% and 4%, respectively. in Fiscal 2020. 
• RailTel's operating profit margin was 30% in FY20, whereas Vodafone Idea Ltd. and Reliance Jio Infocomm Ltd. was 33% and 40%. It also had the highest RoCE.

Financials

• The company has seen a steady growth in topline over the last 3 years, with revenue from operations increasing from Rs 977 cr in FY18 to ~Rs 1128 cr in FY20, at a CAGR of 7.47%. The Profit has grown at a CAGR of 2.6% in the same period. 
• PAT margins have remained in the range of 12-14%.  
• RailTel has been profitable since FY07 and has paid dividends consistently since FY08. Since FY2018, it has paid regular dividend ranging from 19% to 21.20%. 
• The company is net debt free and is funding its operations through internal accruals since FY13.
• RailTel Corporation derives 66% of its revenues from the telecom segment while the remaining portion is from railways and other projects.

Concerns

• The company's topline and bottomline have grown by single digits in the last three years. 
• RailTel operates in a highly regulated environment, and is also susceptible to concentration risk (nearly 24% revenues come from top 3 customers).

About the issue

Issue open: 16th Feb - 18th Feb 2021

Price band: Rs 93 - Rs 94 per share

Issue Size: Rs 811-819 crore

Issue Size: The issue size includes a reservation of 5 lakh shares for its employees. 

Reservation for QIB - 50% , Retail - 35%, Non institutional Investors -15%. 

Bid lot: 155 shares, and in multiples of 155 shares

Post issue market cap Rs 2,985- 3,017 crore

INDmoney Recommendation

At the higher end of the price band, RailTel IPO is priced at a PE ratio of ~21.4 times FY20 earnings per share. This seems to be fairly priced. The company ranks better in terms of margins & return ratios as compared to competitors in the Information and Communication Tech space, as well as the telecom space. Further, it is debt-free and has paid dividends consistently. The management is also confident about steady growth in the coming years.

Given steady margins and return ratios, debt-free status, consistent dividends, reasonable valuations, and limited concerns we remain positive on the prospects of the issue.