RailTel IPO: Will It Stay On Course Or Get deRailed?

By: Tavaga Research

Just a few days after the IPO of Indian Railway Finance Corporation Limited, the Government of India is all set to launch the RailTel Corporation of India Limited’s IPO which is also a subsidiary of the Ministry of Railways. The IPO opens for subscription on February 16, 2021, and will remain open till February 18, 2021, with a price band of INR 93 to INR 94 per share and a lot size of 155 shares per lot.

IPO Snapshot

About RailTel

RailTel Corporation of India Limited is a wholly-owned subsidiary of the Ministry of Railways and was incorporated in the year 2000 to modernize the existing telecom system for train operation, safety, and controls and to generate additional income by creating a PAN India broadband and multimedia network, laying optical fiber cable using the right of way (ROW) along railway tracks.

It is a “Mini Ratna (Category-I)” Central Public Sector Enterprise and as of January 31, 2021, has an exclusive right of way along 67,415 route kilometers connecting 7,321 railway stations for laying optical fiber cable with an existing network of 59,098 route kilometers connecting 5,929 railway stations already.

Revenue Breakup

RailTel’s revenues can be broadly segmented into:

Telecom Services

Telecom Services account for the major chunk of the revenues and can be further broken down into:

• Managed Data Services
• Leased Line
• Virtual Private Network
• Internet Leased Line
• Data Centre
• Tower collocation (managed and maintained 1,085 towers of the Indian Railways as of Jan 31, 2021)
• Rack and space
• NLD for voice carriage (a network connecting different short distance charging areas)

Project Work services

To generate revenue through its expertise in the telecom field, Group has taken the following projects:

• National Optical Fiber Network
• Telecom and IT services related projects
• Enterprise specific IT & ITES Projects

Key projects undertaken include

E-Office

A cloud-enabled software application developed by National Informatics Centre,

hosted at RailTel’s data center at Secunderabad being used to connect all Zonal Railways.

Already implemented e-office at 107 establishments of Indian Railways and would soon be implemented at all balance units not yet covered.

Video Surveillance System (“VSS”)

MoU with the Ministry of Railways to provide IP based VSS with video analytics and a facial recognition system at 6,049 stations of Indian Railways.

256 railway stations have already been covered under VSS by RailTel.

HMIS

HMIS refers to Health Management Information Systems wherein RailTel provides an integrated computerized clinical information system to improve hospital administration and patient care. It will also provide a real-time electronically stored record of the patient.

In October 2020, the Ministry of Railway has assigned RailTel the HMIS implementation task for more than 125 health establishments and 650 polyclinics the Railways.

Others

Other key projects include National Knowledge Network (connecting all higher education and research institutes across a common platform), Campus Wi-Fi in Central Universities, Network Integrator for a Public Sector Bank in India (for 5 years), Data Center Project for an Indian Railways Entity, Project for a Steel Sector Public Sector Undertaking, MPLS VPN Network for Coal Sector Public Sector Undertakings, Network and System Integration Projects in Defense Segment and National Optical Fiber Network (Implementation partner for Bharat Broadband Network Limited to lay the incremental optical fiber cable network connecting the Panchayats) among others.

Telecom Industry

With the majority of revenues coming from Telecom (wireless and wireline broadband, NLD/ILD, video conferencing services, passive infrastructure, domestic leased line, data center, and enterprise services) and a PAN India presence, RailTel faces competition from Telecom companies such as Bharti Airtel Limited, Reliance Jio Infocomm Limited as well as BSNL and MTNL.

The pandemic’s impact on the telecommunication industry is estimated to be minimal as the lower additions in subscribers would mostly offset with the increased dependencies on Telecommunication services working from home (Source: CRISIL report forming part of red herring prospectus)

Based on the above, it’s pretty evident that RailTel ranks pretty well in terms of Margins as compared to the peers in the telecom industry.

Other important factors to consider

Multiple factors must be considered before arriving at a decision:

Positives

• Increased demand for telecom services posts the Pandemic due to increased remote working and learning.
• Increasing Average Revenues per user in the telecom industry.
• Multiple prospective projects for RailTel including Smart Classes for Rural Schools
• Lower costs of 4G enabled mobile handsets
• RailTel has been valued at a trailing PE of 21.4x which seems to be fair given the stable business and future prospects.

Negatives

• Telecom companies under stress (Companies like Bharti Airtel and Vodafone Idea under losses due to price reduction over the past few years)
• Reduction of Tower Rent (Consolidation synergies led to a reduction in towers required for companies like Vodafone Idea Limited)
• Reduced addition of new subscribers and Delay in 5G Auctions due to COVID pandemic.
• Not all PSU’s list at a premium (Indian Railway Finance Corporation Limited which is also a Ministry of Railways’ subsidiary listed at a discount recently)

Disclaimer: The above write-up is meant for informational and educational purposes only. Kindly do not consider this as a recommendation to subscribe to the IPO / to buy or sell the stock.