RailTel Corp IPO review (May apply)

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Review By Dilip Davda on February 11, 2021

•    RailTel is ICT infrastructure providers to Indian Railways.
•    The company has posted slow but steady growth for the last three fiscals.
•    RailTel lead the pack of the telecom industry with higher profit margins and ROCE.
•    The issue appears fully priced, but worth considering for long term investment.

ABOUT COMPANY:
RailTel Corporation of India Ltd. (RailTel) is an information and communications technology ('ICT') infrastructure provider and one of the largest neutral telecom infrastructure providers in India (Source: CRISIL Report). It is a Mini Ratna (Category-I) Central Public Sector Enterprise, wholly-owned by the Government of India and under the administrative control of the Ministry of Railways. The company was incorporated on September 26, 2000, 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, RailTel's optical fiber network covers 59,098 route kilometers and covers 5,929 railway stations across towns and cities in India. 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. As of January 31, 2021, under 'Railwire' the company has 305746 customers and 5023 AMPs (Access Network Providers) and is an emerging key partner for Indian Railways.

It operates data centers in Gurugram, Haryana and Secunderabad, Telangana to host and collocate critical applications for customers including the Indian Railways. In addition to strategic and critical network infrastructure services, the company also undertakes various ICT projects for the Indian Railways, central government and state governments, including various train control system projects for Indian Railways. Telecom sector is expected to post CAGR of 11% to 13% till 2025 with rising ARPU.

RailTel has a strategic relationship with the Indian Railways and undertakes a wide variety of projects including the provision of mission-critical connectivity services such as Video Surveillance System ('VSS') at stations and within trains, 'e-Office' services and implementing short-haul connectivity between stations and long haul connectivity to support various organizations within the Indian Railways. It also undertakes various passenger services including Content on Demand ('CoD') services and Wi-Fi across major railway stations in India. With the latest technologies and diversification plans, the company is gearing for steady growth going forward in India and neighbouring countries.

ISSUE DETAILS/CAPITAL HISTORY:
To meet the disinvestment targets and listing benefits, RailTel is coming out with its maiden offer for sale of 87153369 equity shares of Rs. 10 each and has fixed a price band of Rs. 93 - Rs. 94 per share. The company mulls mobilizing Rs. 810.53 cr. - Rs. 819.24 cr. based on lower and upper price bands. The issue opens for subscription on February 16, 2021, and will close on February 18, 2021. Minimum application is to be made for 155 shares and in multiples thereon, thereafter. RailTel has reserved 500000 shares for allotment to eligible employees. It has allocated 50% for QIBs, 15% for HNIs and 35% for Retail investors from the residual portion. The issue constitutes 27.97% of the post issue paid-up capital of the company.

Book Running Lead Managers (BRLMs) to this issue are ICICI Securities Ltd., IDBI Capital Markets & Securities Ltd., SBI Capital Markets Ltd. and KFin Technologies Pvt. Ltd. is the registrar to the issue. Post allotment, shares will be listed on BSE and NSE.

The company has issued entire equity so far at par value. The average cost of acquisition of shares by the promoters is Rs. 10 per share.

This being offer for sale, RailTel's paid-up equity capital remains the same at Rs. 320.94 cr. Based on the upper band price of the IPO, it is looking for a market cap of Rs. 30168.21 cr.

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, RailTel has posted total income/net profits of Rs. 1021.22 cr. / Rs. 134.01 cr. (FY18), Rs. 1038.27 cr. / Rs. 135.36 cr. (FY19) and Rs. 1166.01 cr. / Rs. 141.07 cr. (FY20). For the first half ended on September 30, 2020, it has earned a net profit of Rs. 45.58 cr. on a turnover of Rs. 553.78 cr. With profit margins of 13% and ROCE of 14%, the company leads the pack of telecom companies.

For the last three fiscals, the company has reported an average EPS of Rs. 4.30 and an average RoNW of 10.47%. The issue is priced at a P/BV of 2.16 (at the upper price band) based on its NAV of Rs. 43.45 as on September 30, 2020, as well as its post-IPO NAV. (at the upper price band).

If we attribute annualize latest earnings on fully diluted post issue equity, then asking price is at a P/E of around 33.10. However, on the basis of FY20 earnings, the P/E stands at 21.36. Thus issue appears fully priced. As on September 30, 2020, it's current paid-up equity capital of Rs. 320.94 cr. is supported by Rs. 1073.69 cr. of free reserves.

DIVIDEND POLICY:
In accordance with CPSE Capital Restructuring Guidelines, with effect from Fiscal Year 2016, all central public sector enterprises including RailTel are required to pay a minimal annual dividend of 30% of its profit after tax or 5% of their net worth, whichever is higher, unless an exemption is provided in accordance with the CPSE Capital Restructuring Guidelines. Therefore, subject to the provisions of CPSE Capital Restructuring Guidelines, the Articles of Association and the Companies Act, the declaration and payment of the dividend is recommended by the Board and approved by the Shareholders.

Since FY2018, it has paid regular dividend ranging from 14.40% to 21.20%. For current fiscal, it has already paid a total dividend of 21.20%.

COMPARISION WITH LISTED PEERS:
As per offer documents, RailTel has no listed peers to compare with.

BRLM'S TRACK RECORDS:
The three Book Running Lead Managers associated with the offer have handled 27 public issues in the past three years out of which 12 issues closed below the issue price on listing date.

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