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RailTel Corporation IPO: All You Need to Know

Editor, TRANSFIN.
Mar 2, 2021 5:56 PM 5 min read
Editorial

RailTel Corporation of India listed at a premium on the bourses today.

At market close, RailTel’s stock traded 29.1% higher at ₹121.35 ($1.67) apiece on the BSE vis-a-vis its issue price band of ₹93-94 ($1.29) per share, defying the selloff that plagued the larger market.

The state-owned enterprise’s ₹819cr ($113m) IPO was an offer for sale for 87,153,369 equity shares and was subscribed 42 times as of Friday.

What is RailTel Corporation?

It is an Information and Communication Technology (ICT) infrastructure-providing PSU. Incorporated in 2000, it provides telecom infrastructure along the country’s railway lines and at railway stations.

FYI: Before 2000, the Railways’ communication needs were largely met by BSNL, ergo the Department of Telecom. Over time, to increase efficiency, the Ministry of Railways began building its own networks. These endeavours culminated in the founding of RailTel as the sole telecom corporation responsible for building a nationwide broadband multimedia telecommunication network.

  • The Mini Ratna i.e. Category I Central Public Sector Enterprise has exclusive rights over 67,415 route kilometers, connecting 7,321 railway stations, for laying optical fiber cable.
  • The company offers a high-capacity bandwidth of up to 800G at 87 locations in India.
  • In addition to leased line and VPN facilities, it also provides strategic and critical network infrastructure to the Government, both at the Centre and the States.
  • It also possesses a retail broadband network through the “RailWire” platform.
  • 64% of its revenue is derived from its Income from telecom services (64%) while the rest includes income from projects.

 

Fast Stats

Coming to RailTel’s IPO (link to RHP), it is the seventh issue this year, and the second from a Government-owned entity. Indian Railway Finance Corporation (IRFC), the market borrowing arm of the Indian Railways, opened its public issue valued at ₹4,633cr ($633.3m) a month ago. Previous Railway IPOs include IRCTC, IRCON, RVNL and RITES.

  • The issue was open for subscription between February 16th and February 18th at a face value of ₹10 ($0.14) per equity share.
  • Qualified institutional buyers (QIBs) subscribed 65.14 times the quota limit, non-institutional investors bade 73.25 times, and retail individual investors bade 16.78 times the quota limit.
  • At the upper price band of ₹94, it is available at a P/E of 21.4x (FY20 basis) or closer to 27.6x by the end of the day. Wireline heavy Tata Communications and Airtel trade at 40x+ on a year out projected earnings with Vodafone-Idea P/E somewhat meaningless at this time. 
  • The pre-issue shareholding of the promoter (President of India) was 100%; post-issue, this fell to 72.84%.

Going forward, RailTel plans to expand its telecom services and diversify into services and solutions.

 

Opportunities

RailTel is one of the largest telecom infrastructure providers in India. It has 305,746 retail customers and 5,023 Access network providers (ANPs) And its pan-India optic fiber network covers all important towns and cities, both urban and rural, reaching 70% of the population.

In terms of financials, its numbers are attractive. It has been profitable since FY07, is debt-free, and has consistently paid dividends since FY08.

During FY18-20:

  • RailTel’s revenue grew at a compounded annual rate of 7.5% to ₹1,128cr ($155.7m)
  • EBITDA grew at a CAGR of 12.4% to ₹334cr ($46.1m)
  • Net profit climbed at 2.6% CAGR to ₹141cr ($19.5m)
  • The operating margin was more than 28% while the dividend payout ratio was 46-49%

 

Risks

Every coin has two sides, and investing in RailTel - despite its colossal clout, discounted valuation vs peers, and impressive market debut - comes with risks attached.

  • As a PSU, it is highly dependent on Government entities and susceptible to Government policies, which may be aimed more at what is in the public interest rather than what is financially feasible.
  • It has a concentration risk in that nearly 24% of its revenue is derived from only three customers - Indian Railways, the National Informatics Centre Services and the Employees’ State Insurance Corporation of India. (Although, this number has dropped in recent fiscals - it was 42.13% in FY18.)
  • The telecom industry is one that is in a constant state of flux and relentless upgradation. Newer technologies may be costly and if RailTel is unable to foot the bill, it will not be very competitive. Particularly so considering that its competitors include the likes of Reliance Jio and Bharti Airtel. (Although, RailTel still enjoys exclusive rights over vast swathes of the country - for now at least.)
  • The 5G era is upon us. While its onset in India could be delayed due to high spectrum prices, private telcos are unlikely to miss boarding the 5G train ASAP. RailTel, whose pockets are not as deep, might see its technologies become less competitive or obsolete unless they are upgraded.

 

Dare to Disinvest

Considering that (1) it is a PSU wholly owned by the Government and (2) its IPO was an offer for sale for existing shareholders, the proceeds of RailTel’s IPO would add to the Government’s disinvestment proceeds.

FYI: An initial public offering (IPO) is when an unlisted company sells its shares to the general public in order to raise capital. A follow-on public offering (FPO) is when an already listed company issues new shares to investors or shareholders in order to raise fresh capital. An offer for sale (OFS) is when a company’s promoters cut their holdings by selling their stakes in the market. When done by a state-owned firm, an OFS becomes a form of disinvestment since the promoter is the Government. You can read about the kinds of disinvestment here.

Thus, RailTel IPO’s proceeds - valued at ₹819cr ($113m) - will be added to the Government’s disinvestment kitty. Considering that Budget 2021 has a lofty ₹1.75Lcr ($24.15bn) disinvestment target for the upcoming fiscal, every rupee counts.

Especially so if you factor in the less-than-enthusiastic investment climate, the less-than ideal macroeconomic realities, and the less-than-impressive historic record of the Government meeting its disinvestment targets.

PS: Click to read our pieces of some previous high-profile IPOs: IRFC, Burger King India, Brookfield REIT, Gland Pharma, Ant Financial (and why it was abruptly suspended), Happiest Minds Technologies, CAMS and UTI AMC.

PPS: Better yet - how about a Quiz on IPOs?!

FIN.

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