Verdict: Doesn’t get our Green flag
Railtel is launching a Rs. 815 crore IPO between Tue 16th Feb 2021 to Thur 18th Feb, all of which is offer for sale (OFS) by Government of India, in the price band of Rs. 93-94 per share (no retail discount). Issue represents 27% of post-issue capital, with listing on 26th Feb.
PSU under Ministry of Railways
Railtel provides telecom network services, like national long distance and wireline internet services to enterprise customers and telecom infrastructure services for train control, operation and safety to Indian Railways. These account for 75% of revenue, while balance 25% revenue is generated from data centre, system integration, railway projects etc. Company possesses many positive traits seen in other PSUs such as high order book of Rs. 4,000 crore (3x annual revenue), debt free balance sheet (with Rs. 11 surplus cash per share). While dividend yield of 2.4% is in-line, outstanding debtors of over 5.5 months is not comforting.
Despite such large opportunity in the sector, revenue growth rate is low at just 7% CAGR between FY18-20 to Rs.1,128 crore, although PBT margin is healthy at 20%. Financial performance has been marred by many one-offs, which are both large and regular – like expected credit loss provisions worth Rs. 34 crore in H1FY21 and Rs. 13 crore in FY20, North East project impairment of Rs. 15 crore and Rs. 49 crore in H1FY21 and FY20 respectively, Rs. 26 crore on change in govt strategy in FY18. These items approximately aggregate company’s FY20 PAT of Rs. 141 crore, which highlights lack of managerial independence in PSU functioning in the country. H1FY21 revenue stood at Rs. 537 crore, while PBT margin declined to 11% from FY20’s 20%. EPS for H1FY21 stood at Rs. 1.4 against Rs. 4.4 for FY20.
At Rs. 94, company’s market cap will be Rs. 3,020 crore, leading to FY22E PE multiple of 19x, which is quite high for a PSU company, clocking low RoE of 10%, in absolute terms. There are no direct peers as it cannot be compared to Bharti Airtel or Jio or Vodafone Idea, as it does not offer voice or wireless broadband services. If one were to benchmark with other data service players, private sector player Tata Communication is ruling at a PE multiple of 22x, despite a bigger topline of Rs. 9,000 crore. Even telecom infrastructure company Indus Tower is ruling at a PE multiple of 16x, despite 40% PBT margins. Thus, pricing for Railtel appears steep in backdrop of historic growth rates, peer comparison and PSU control. Broadband industry has anyways witnessed sharp pricing pressure due to intense competition.
Conclusion: We do not recommend subscribing to the IPO as PE of 19x for 10% RoE business, coupled with PSU tag make the IPO unattractive.
Grey Market Premium (GMP) of Railtel: Grey Market Premium of Railtel is an unofficial figure, against guidelines of SEBI and we are strongly against it. To know how it operates, read our article ‘grey market premium’.
Disclosure: No Interest.