Another initial public offering opened on February 16, 2021. This time it is the central government-owned RailTel Corporation of India (RailTel). The company provides information communications technology infrastructure service and is one of the largest neutral telecom infrastructure providers in India.

RailTel comes under the supervision of the Ministry of Railways, and was initially incorporated with the purpose of modernizing the existing telecom system for train control, operation and safety and to generate additional revenues by creating nationwide broadband and multimedia networks by laying optical fibre cable by using the right of way along railway tracks.

As of January 31, 2021, RailTel had an optical fibre network of 59,098 kilometres, which covers 5,929 railway stations across various towns and cities in India. The company also operates data centres in Gurugram and Secunderabad to host and co-locate critical applications for its customers and Indian Railways.

The business risks for this company are two-fold: high revenue concentration with its two largest clients, and the accompanying challenge of delayed payments and long tender processes that come with government and PSU customers. 

Issue oversubscribed on first day

The issue opened on February 16, 2021 and was oversubscribed by 2.6 times of the issue size of 8.71 crore shares (worth approximately Rs 819 crore.) Retail investors bid for nearly 5 times their available quota of 3.03 crore shares. The company has already raised Rs 244 crore from 14 anchor investors on February 15, 2021. From the looks of it, this issue should sail through. At 11 AM on day 2 of bidding, the issue  was oversubscribed by 3 times the shares available on offer.

The offer for sale has a price band of Rs 93-94 with a minimum lot size of 155 shares. The government is selling 27.2% stake in the company through the offer for sale. The company does not have a peer in the listed space and is valued at around 21.4 times its earnings as on March 31, 2020.

Telecom services make up majority of revenues

RailTel earns the majority of its revenues from telecom services (nearly 75%). These include telecom network services like national long distance services and internet service provider services, telecom infrastructure services, and managed data centre and hosting services.

The balance revenues come from projects the company undertakes across digital services projects, projects that entail setting up information communication technology hardware, software and service system integration, and other services.

The company has implemented an e-office project for railways, and is implementing long-term projects like Bharat Net (country-wide optical fibre network for Department of Telecommunications), National Knowledge Network to connect all universities, research institutions etc in India, and also many public WiFi projects in 26 universities, among others.

The company is also implementing the Kerala Optical Fibre Network in the southern state and provides network services to connect data centres, disaster recovery centres regional offices, branch offices of the Reserve Bank of India, various PSU banks, and stock exchanges in India.

The most public facing offering of RailTel is RailWire, the public WiFi service at railways stations across India. The company has also partnered with the Indian Railways to provide content on demand streaming services to train passengers, either free on subscription basis. This will be rolled out in 3,003 trains and 2,864 pairs of suburban trains across India.

Steady financials but erratic cash flows

RailTel’s revenues have been growing steadily over the past few years. From FY18 to FY20, its revenues grew at a compounded annual growth rate (CAGR) of 7.5% to Rs 1,128.1 crore, while its net profits grew by a CAGR of 2.6% to Rs 141.1 crore.

Although the company has been generating operating cash flows consistently over the past three completed financial years, its free cash flows have been erratic. This could be because of the large outlay that some of its projects, and services require. Sometimes, some of these projects’ duration do get extended beyond the original tenure. This is normal while dealing with the government and its entities.

Revenues from its two main operating segments—telecom services and project services—have been steady over the past three years. Revenues from project services have risen from just around 30% in FY18 to 33.4% at the end of FY20. But considering the project of one large customer— Employee State Insurance Corporation—got over at the end of FY20, the contribution of project services to revenues will undoubtedly reduce.

Business concentration among govt entities a key risk

The company’s revenue concentration from two of its largest customers—Indian Railways and ESIC has come down to 23.82% in 2019-20 from 42.13% in 2017-18. The ESIC project was completed in FY20, hence there will be no more revenues from this customer.  However, the company still has a high exposure to public sector undertakings (both central and state), and RailTel is nominated to undertake many of Indian Railways’ projects.

The risk of delayed payments, delayed project implementation, long duration of tender processing in case of competitive bidding, among others, are some of the other risks that can impact RailTel’s operating performance.

Keeping this in mind, the company has a long growth path ahead of it. Investors who have a positive long-term view on the telecom infrastructure space, and its growth prospects should look at RailTel. There is a lot of scope for the company to monetise its various projects and services currently under implementation.