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RailTel IPO Review and Analysis in Detail

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Basis Structure of the RailTel IPO

After the twelve IPOs that have already been launched, RailTel Corporation of India Ltd is gearing up to join the list.

The State-owned corporation is one of the largest telecom infrastructure service providers. It received approval from SEBI on September 29.

The size of this offering is expected to be in the region of Rs. 700 crores.

The RailTel IPO is going to be of the book-building nature. This means the share prices will be quoted within a range, instead of just a single fixed value.

Through this offering, the government of India intends to offload a part of its stake in the firm.

A total of 8.66 crore shares will be offered in the Offer for Sale segment.

There will not be a Fresh Issue segment in this IPO. The company will not be diluting any stake and raising new equity shares.

This means the proceeds from the sale of shares will be credited directly to the government. The company will not receive any of the profits.

The table below summarizes the details of the offering. Details like RailTel IPO date 2020, RailTel IPO issue date, RailTel IPO last date and RailTel IPO share price have been summarised.

IPO Details

After the RailTel IPO, the shares will be listed on both NSE and BSE.

About the Company

RailTel Corporation of India Ltd was incorporated on September 26, 2000. It was formed with the intention of upgrading and modernizing the telecommunication system in the railway network.

Since then, it has grown to become a telecom network and infrastructure provider to clients from the public sector as well as the private sector.

Currently, RailTel’s optical fibre network is over 55,000 km and included more than 5,600 railway stations over the country.

Products & Services

RailTel’s products and services can be divided into four categories.

1. Telecom Network Services includes long-distance calling and internet services.

2. Telecom Infrastructure Services refers to the storage and security service provisions for housing servers.

3. Managed Data and Housing Services include a range of data and IT related services, along with cybersecurity support.

4. Projects (System Integration Services) encompasses the individual projects that RailTel takes up for separate clients. For instance, they undertake a range of different projects for the Indian Railways.

The table below shows the revenue split-up among the different product verticals. The figures below are all from FY 2020.

Products & Services

Customers

RailTel Corporation of India Ltd functions primarily on a B2B business model.

One of the primary clients for RailTel is the Indian Railways. The company has undertaken a number of projects for Indian Railways and serves as a key telecom network for it.

In FY 2020, the amount earned for services rendered to Indian Railways made up 25.01% of the total revenue from operations for RailTel.

Apart from that, other customers for RailTel include Employees State Insurance Corporation (ESIC), Ministry of Human Resource Development (MRHD), Bharat Net, Network Knowledge Network (NKN), Coal India, and more.

Most of the company’s clients are public sector enterprises.

Management Shareholding Pattern

The table below lists out the details of the major shareholders of the company along with their stake prior to the RailTel IPO.

Shareholding

Financial Overview

The table below summarizes the key financial figures of RailTel Corporation of India Ltd from 2014 to 2020. All the figures given below are in Rs. Crores.

Financial Overview

The total revenue of the company has shown a consistent rise. From 2014 to 2020, it has reported a CAGR of 10.96%.

Revenue

In FY 2018, RailTel surrendered its spectrum license to the Department of Telecommunications. The charges for this were imposed in 2018.

Owing to this reason, the marginal increase in revenue was quite low this year. This is also an explanation for the fall in net profit from 2018 to 2019. The fall in profit is over 30%.

The graph below shows the net profit over the years.

Net Profit

One positive factor to note here is that RailTel does not have any long-term debt. Apart from the few short-term loans and credit advances, RailTel is almost debt-free.

Industry Analysis

The structure of the Indian telecom sector has been changing over the years. Gone are the days of the trusted landline. Mobile phones and the internet have dethroned it. Revenue sources like long-distance calling have been replaced by data usage. 

The graph below shows the growth in revenue over the years.

Bar graph

If you look at the graph above, you will notice that the revenue earned by the telecom sector in India has been falling over the years. This observation is in line with the changing landscape of this particular sector. In just a decade, this market has undergone a complete metamorphosis.

There has also been a change in the market structure of this sector. Earlier, the market resembled a monopolistic competition structure with many players, both big and small.

Currently, however, the market is trending towards an oligopolistic structure. It is dominated by a few large players.

The smaller players have either merged with the bigger companies or have been forced to go out of business.

The graph below shows the rise in data usage over the years.

Data Usage

The change in the per capita data consumption over the years, however, tells a different story.

According to a report published by the Telecom Regulatory Authority of India (TRAI), the internet subscriber base in India is currently in the region of 70 crores. It is expected to increase to 90.1 crores by 2025.

If you combine this with the fact that India has one of the lowest rates of broadband subscription per 100 subscriptions, a considerable opportunity will present itself.

India is teeming with a demography that is ready to come online. If the required infrastructure with regard to fibre network and other facilities can be provided, the number of subscribers has the potential to increase several-fold.

Now let us look at the categories present inside this sector.

The telecom services industry in India can be categorized into three separate verticals.

Infographic

Out of this, RailTel operates in the third category of enterprise services. Barring a few services like IPLC, ILD and VSAT, RailTel offers all the other services.

The graph below shows the growth in the Enterprise Data Services (EDS) segment.

EDS Growth

According to CRISIL estimates, there is huge potential in the Enterprise Data Services (EDS) category. It is expected to grow at 4-5%, and reach a market size of about Rs. 17,500 crores by 2025.

With a large number of sectors shifting to online networks, the data consumption is expected to increase, and so is the demand for EDS. In particular, the demand for VPN (Virtual Private Network) and DLC (Domestic Leased Circuits) are expected to rise significantly.

The graphs below show the growth in the revenue earned from VPN and DLC respectively.

Revenue VPN

Revenue DLC

Among the sectors who are using EDS, the demand is highest in the BFSI (Banking, financial services and insurance) sector, manufacturing, government and IT.

An important point is that TRAI has recently permitted airlines to offer in-flight entertainment services. With this development, the demand for VSAT (Very small aperture terminal) is expected to increase significantly in the next five years.

With the recent developments and the expected changes in the EDS segment of the telecom industry in India, the demand for RailTel’s products should increase in the upcoming years.

We also have to consider the ongoing projects for the Indian Railways. The modernization of the railway network will bring large demand for EDS. This presents a major opportunity for RailTel.

Peer Review

The telecom services industry in India, as mentioned above, is converging towards an oligopolistic structure. It is dominated by large companies like Reliance Jio, which serves a majority market share.

The smaller companies are getting edged out gradually.

When it comes to the provision of enterprise data services, the sub-category that RailTel operates in, the situation is similar.

RailTel has a distinct advantage here, owing to the fact that it is generally the Indian Railways’ choice for telecommunication projects.

The Indian Railways is undertaking numerous projects to introduce digitisation and offer its customers a much better travel experience. Examples include content on-demand which will be available on all premium, express trains.

Apart from that, this sub-category is for growth owing to the fact that more and more companies are shifting to technology-based communication systems.

It is interesting to note that although high volume growth is expected here, the revenue is not expected to grow as much. This is owing to the reduced service charges.

The table below compares the key financial figures of RailTel Corporation of India Ltd with that of its listed peers. This list includes both telecom service providers and communication technology companies, as RailTel’s operations fall into both categories.

Peer Review

As you can see, the telecom sector has not been performing very well. This can be attributed partly to the changing structure of the market and partly to the effects of COVID-19.

Another important point to mention here is the disruptive entrance of Reliance Jio. In the past few years, Jio has polarised the market and has brought affordable internet access to the masses.

In comparison to its peers, RailTel has been performing quite well. The company has maintained a healthy operating margin and provided a noticeable return on equity. This is an indication of the fact that the amount invested in the company by shareholders is being well-utilised.

Strengths of the RailTel IPO

The most important competitive strength that RailTel enjoys is the fact that it gets first dibs on all the Indian Railways contracts.

The Indian Railways is currently undergoing a digital transformation. Over the next few years, public Wi-Fi will be provided at all railway stations, entertainment content will be available for travellers, and several other projects will also be implemented.

This presents a huge potential opportunity for RailTel’s growth and expansion.

Apart from that, RailTel also enjoys a certain proclivity towards government projects. The company is one of the favourites when it comes to infrastructure requirements for Bharat Net, MRHD, ESIC and others.

There is also the fact that RailTel offers enterprise data services to companies. If you consider the increasing demand from companies who are shifting their operations to digital platforms, the growth opportunity for RailTel becomes clear.

Weaknesses of the RailTel IPO

Among weaknesses, there is the fact that RailTel is largely dependent on the Indian Railways, the Government of India and PSUs for the majority of its business. Any change in any of these circumstances will prove a deciding blow to RailTel’s operational revenue.

The industry that RailTel operates in requires significant fixed costs and initial capital outflow. The telecom sector is also subject to frequent technological upgrades and the introduction of new and more advanced technologies.

If that happens, RailTel will struggle to diversify its core operations and may get left behind by other competitors.

A third weakness is the fact that the telecom industry suffers from intense competition. In the last five years, Reliance Jio has all but changed the very face of the market. Numerous firms have been forced out of business by Jio’s aggressive expansion.

RailTel, too, can be adversely impacted by the presence of such competition. Any missteps and the company will be left behind.

Apart from that, the company is involved in legal proceedings which involve an amount of Rs. 32.23 crores.

Valuation of the RailTel IPO

The table below compares the key valuation parameters of the RailTel IPO with that of its listed peers.

Valuation

As you can see above, for most of the mentioned companies, the P/E ratio has not been calculated. This is owing to the fact that these companies are not profitable – their earnings per share has a negative value.

The P/E ratio is a widely accepted method of valuation, however, it only makes sense to calculate it when the value is positive in nature.

It shows how much investors are willing to pay in order to get 1 unit of the company’s earnings. When the earnings per share is negative, the entire idea behind the concept is rendered moot.

In order to check whether a company is overvalued or undervalued, the P/E ratio is compared with the industry average. If the value is lower than the industry average, this means the company is undervalued.

On the other hand, when the value is higher than the industry average, the company is considered to be overvalued.

In this case, the average P/E ratio in the telecom industry is 141.42.

RailTel’s P/E ratio can only be calculated when the pricing band and other details regarding the IPO are released.

Stay tuned for more!

Frequently Asked Questions

1. When RailTel IPO will open?

The dates for the subscription window in the RailTel IPO have not been released yet.

2. What is the lot size of RailTel IPO?

The lot size of the RailTel IPO will be released along with the price band.

3. How to apply for RailTel IPO?

You can apply for the RailTel IPO through your broker or through leading platforms like Zerodha.

4. When is RailTel IPO listing date?

The listing date of the RailTel IPO has not been released yet.

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