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New Issue Details
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RailTel Corporation of India
Largest neutral telecom infrastructure provider
CM RATING45/100
RailTel Corporation of India, a public sector undertaking under the Ministry of Railways (MoR), Government of India, is an information and communications technology (ICT) infrastructure provider and are one of the largest neutral telecom infrastructure providers in the country.

RailTel, a Mini Ratna (Category-I) Central Public Sector Enterprise and was incorporated with the aim of modernizing the existing telecom system for train control, operation and safety and to generate additional revenues by creating nationwide broadband and multimedia network by laying optical fiber cable by using the right of way along railway tracks.As of January 31, 2021 owns a pan-India optic fiber cable (OFC) network of about 59,098 route kilometers on exclusive Right of Way (RoW) along railway track and connects several towns & cities of the country and several rural areas. Its OFC network connects 5929 railway stations across towns and cities in India.

RailTel offers a diversified portfolio of ICT services and solutions including MPLS based virtual private network (MPLS-VPN), leased lines services, Telepresence Services (TPaaS), e-Office services and data center services, large network hardware system integration, software and digital services to enterprises, public sector banks, defense organisations and educational institutions; operated through data centers located in Gurugram, Haryana, Secunderabad and Telangana to host and collocate critical applications for customers including the Indian Railways. RailTel is also appointed by the Ministry of Railways for implementation of the Hospital Management Information System and also allotted its e-Office Project Phase 3 project to RailTel.

The transport network is built on high capacity dense wavelength division multiplexing (DWDM) technology and an Internet protocol/ multi-protocol label switching (MPLS) network over it to support mission critical communication requirements of Indian Railways and other customers.

This IPO is an offer for sale by the Government of India that will sell up to 87,153,369 equity shares of face value of Rs 10 each. The company will not be directly receiving any proceeds from the offer and all the Offer Proceeds will be received by the Selling Shareholder. The objects of the Offer are to carry out the disinvestment of 87,153,369 Equity Shares held by the Selling Shareholder; and to achieve the benefits of listing the Equity Shares on the Stock Exchanges.

Strength

Extensive network of optic fibre cable (owns 59098 route Kms of OFC) across India on exclusive Right of Way (RoW) along railway track if about 67415 route Kms.

The company has diversified portfolio of services and solutions. Service of the company is diverse largely grouped into telecom network services (NLD & ISP), telecom passive infrastructure (IP-I services), Managed Data Centers & Hosting Services (TC&HS and TPaaS) and projects. Of FY20 operating income the telecom network services contributed about 51.5% [NLD service 36.8%; ISP service 14.7%], telecom passive infrastructure 12%; Managed DC & HS 2.5% [DC&HS 1.2%; TPaas 1.3%] and project 34%.

Key partner to the Indian Railways in digital transformation. The company has MoU with Indian Railway to provide IP based VSS at 6,049 stations with video analytics and facial recognition system and it is in the process of implementing VSS at 200 stations of which work completed at 81 stations. It is also to implement modern train control systems based on ETCS to enhance capacity and safety across its network by IR. The company is also provided solutions such as Hospital Management Information Sytems, Unreserved ticketing and freight operations information systems for IR or its divisions. It offers public WI-FI at railway stations and is also mandated to provide content on demand service across about 8731 trains and all Wi-Fi stations. Awarded mandates by the Indian Railways on a nomination basis has generated an income of Rs 283.14 crore (or 25.1% of operating income) from Railways in FY2020. It also intend to work with the Indian Railways to meet their current and emerging communication infrastructure requirements by implementing the High Speed Mobile Communications Corridor (HSMCC). The proposed HSMCC will cater to current and future voice and data needs of train-ground and train-train communication of rail assets, automatic train operations and on-board passenger services.

Company's Railwire platform (under ISP business) has 305746 retail broadband customers and 5023 Access network providers (ANPs) to deliver the last mile connectivity. Retail broadband service is in addition to the internet leased line service with multiple bandwidth option offered to enterprise customers.

Experience in executing projects of national importance such as Bharat Net (installed at 56611 gram panchayats of which WI-FI operational in 24804), National Knowledge Network, e-offices etc.with a robust pipeline of projects. Railtel appointed to facilitate implementation of campus connection and Wi-Fi facility across 26 universities in India. Setting up such e-offices for large government entities (Central Warehousing Corporation and IRCON). To connect approximately 250,000 gram panchayats and provide high-speed broadband connectivity under BharathNet.

The company has received orders from Mahanadi Coalfields Limited and Ordnance Factory Board for system integration and bandwidth requirements. And this in addition to large projects mandates from IR i.e. VSS, modern train control systems and facility to provide content on demand service across trains and stations has boosted its order book providing healthy revenue visibility going forward for project business of the company.

Certain infrastructure projects undertaken by the company are eligible for certain subsidies (such as 'Universal Service Obligation Fund' of the DoT)and any change or withdrawal of these subsidies by the relevant government entity may affect its results of operations.

Established financial track record - debt free company and consistently dividend paying since 2008.

Optic fiber networks is an important 5G ecosystem pre-requisite and the country with about 30% fiberization compared to 70% in US and China needs to lay another 1.0 million to 1.2 million fiber kilometers in order to be prepared for 5G. Considering RoW issues and absence of standard rules regarding it in the country, leasing of fiber apart from significantly reduce the investments required also shorten the time to be 5G ready for the country. The company given its vast OFC network across the length and breadth of the country and clear RoW on railway track could be a major beneficiary.

Weakness

The telecommunications industry in India is highly competitive as well as highly regulated and changes in laws, regulations or governmental policy could potentially adversely affect the business, prospects, financial condition, cash flows and results of operations.A good example of it is the issue and litigation relating to interpretation of Adjusted Gross Revenue, on which the telecom players pay license fees and spectrum usage charges (at 8% and 3-5%)and the demand by DoT of fee including non-core revenue put the industry players under tremendous stress/strain. However Hon'ble Supreme Court passed an order dated 11.06.2020 wherein it was held that definition of AGR as per the licenses given to the Public Sector Undertaking (PSUs) is different than the definition of AGR as per Universal Access Service License (UASL) given to other network service providers. Consequently in June 2020, the DoT informed the Supreme Court that it had withdrawn 96% of its Rs 4,000 billion demand in AGR from non- UASL license holder PSUs as their core operation was not to provide basic telephony services including cellular mobile covered under the UASL and thus the company has not considered any contingent liability toward AGR charge (about Rs 2916 crore) for FY20 and subsequent thereto. So any change in regulation really hamper the operations and profitability of the company.

The telecommunications industry is characterized by technological changes, including an increasing pace of change in existing mobile systems, industry standards, customer demand, preferences, behavior, and ongoing improvements in the capacity and quality of network. New technology may also make existing systems of the company obsolete. So failure to invest in adoption of new technology may impact the business operations of the company. Moreover failure to complete development, testing and introduction of new services, including managed services, could affect its ability to compete in the industry.

The company may incur higher levels of capital expenditure than currently anticipated in order to maintain and expand its network coverage, including establishing its fiber optic cables both underground and overhead. Its ability to finance its operating and capital expenditures, including for its business expansion, will depend significantly on its ability to generate cash from its operations or obtain alternative financing. It may not be successful in financing such expenditure and such capital expenditure may not result in the growth of its business and the expected positive impact on its results of operations. If the company's capital expenditure requirements increase due to these or other factors, it may have an adverse impact on its business, results of operations, financial condition and prospects. Further, future network expansion will be dependent on future demand for its services. If the company underestimate its future capital needs or overestimate its future cash flows, it may require additional funding to meet its expenditure requirements, including by raising debt.

Steady decline in operating profit margin (OPM) from 35.7% in FY16 to about 25.2% in FY20 and Net profit margin from 17.8% in FY16 to 12.5% in FY20.

It'sregistered and Corporate Office is not owned by the company and are in the process of executing a lease deed for the same. Further all of its regional offices, facilities and premises are leased from third-parties pursuant to lease agreements, which it may be unable to renew on satisfactory terms or at all.

An investigation was initiated against one of the Director by the Central Bureau of Investigation (CBI) pursuant to the orders of the Director Vigilance, Railway Board, MoR. Pursuant to the investigation, CBI lodged a first information report number RC AC1 2019 A0006 dated November 27, 2019 under Section 120-B of the Indian Penal Code, 1860 (IPC) read with Sections 420, 468 and 471 of the IPC and Sections 11, 12 and 13(2) read with Section 13(1)(d) of the Prevention of Corruption Act, 1988 against such Director and others, alleging criminal conspiracy, cheating, forgery, abetment and criminal misconduct. The final investigation report has been submitted to the MoR.Pursuant to order bearing number 2012/E(O)II/40/31 dated September 24, 2020, issued by the Ministry of Railways, Government of India, the Director has been divested of the charge/ duties of the post of Director till further orders and the Director may not attend meetings of our Board of Directors during this period.

Valuation

Revenues of the company for the fiscal ended March 2020 was up by 12% to Rs 537.40 crore. But with operating profit margin contract by modest 50 bps to 29.6%, the growth at operating profit was restricted at 10% to Rs 333.81 crore. The PBT was up by 8% to Rs 234.06 crore hit largely by higher depreciation. After accounting for EO expense of Rs 49.30 crore (against nil in previous year) the PBT after EO was down by 15% to Rs 184.76 crore. After accounting for 47% fall in taxation, the PAT was up by 4% to Rs 141.07 crore.

On annualizing the financials for the period ended Sep 2020, the sales was down by 5% as project revenue and TPaaS revenue take a hit impacted by pandemic. The annualised PAT was down by 35%.

On post issue equity, the EPS for FY2020 stood at Rs 5.6 and the annualized EPS for FY21 was Rs 2.8. The upper price of Rs 94, discounts the FY20 and annualized FY21 EPS by about 16.8 times and 33.6 times respectively. The price to book-value stands at 2.2 times. The company does not have any company that have mirror business profile.But the closest peer were Indus Towers which is into the business of owning passive telecom infrastructure and Tata Communications. Indus Towers, quotes at a PE of 20.3 times of its FY20 EPS. Tata Communications has reported a consolidated net loss for FY20 but its EV/EBITDA was about 13.8 times and in comparison that of Railtel was 5 times.

RailTel Corporation of India: : Issue Highlights
SectorTelecom
Offer for sale (in Rs. Crore)
Upper Price Band819
Lower Price Band811
Price band (Rs.)
Upper94
Lower93
Post-issue equity (Rs crore)320.94
Post-issue promoter (including promoter group) stake (%)72.84
Minimum Bid (in nos.)155
Issue Open Date16-02-2021
Issue Close Date18-02-2021
ListingBSE, NSE
Rating45

 

RailTel Corporation of India: Consolidated Financials 
1803 (12)1903 (12)2003 (12)2009 (6)
Sales976.781003.271128.05537.40
OPM (%)27.030.129.624.2
OP264.12302.16333.81130.05
Other income44.4435.0037.9516.38
PBIDT308.56337.15371.76146.44
Interest3.817.896.802.51
PBDT304.75329.26364.96143.92
Depreciation118.63111.58130.9081.74
PBT186.12217.69234.0662.18
EO Exp26.510.0049.300.00
PBT after EO159.61217.69184.7662.18
Tax25.6182.3343.6916.60
PAT134.01135.36141.0745.58
EPS (Rs)*4.94.25.62.8
* on current (post OFS) equity of Rs 320.94 crore. Face Value: Rs 10
EPS is calculated after excluding EO and relevant tax
# EPS can not be annualised due to seasonality in operations
Figures in Rs crore
Source: Capitaline Corporate database

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