RailTel IPO opens for subscription today. Should you subscribe?

The three-day initial public offering (IPO) of the state-owned RailTel Corporation of India will open for subscription on Tuesday. The price band has been fixed at Rs 93-94 a share for the initial share-sale. 

The IPO is entirely an offer-for-sale through which the government will offload 87,153,369 equity shares, amounting to 27.16 per cent stake. At the upper end of the price band, the government would raise a little over Rs 819 crore.

Half of the issue is reserved for qualified institutional buyers, 35 per cent for retail investors, and 15 per cent for non-institutional bidders.

Railtel shares were changing hands at a premium of over 30 per cent to its IPO price in the grey market, said people in the know. While the IPO price band is Rs 93-94 per share, grey market operators are offering over Rs 122 per share.  READ MORE

About the company

The mini-ratna PSU is one of the largest neutral telecom infrastructure providers in the country owning an optic fiber network on exclusive Right of Way (RoW) along railway track. The company provides broadband telecom and multimedia networks across the country. As on June 30, 2020, its optic fiber network covered over 55,000 kms and 5,677 railway stations across towns and cities in the country. In FY20, the company had clocked net profit of Rs 140 crore on revenues of Rs 1,128 crore.

Here's what leading brokerages say about the issue.

Angel Broking -- Subscribe

The company is going to play a key role in digital transformation of Indian Railways. Its margins and return ratios are better compared to other telecom players in India. The company also has a strong financial position (debt free) and has been consistently paying dividends since 2008.

RailTel has priced its issue at 21.4x PE on a FY20 trailing basis, which is quite reasonable by looking at the strong future growth rates of the company. We expect a good listing and are positive on the long-term prospects of the industry as well the company. We recommend "SUBSCRIBE" to the RailTel IPO for long-term as well as for listing gains.

Choice Broking -- Subscribe

At the higher price band of Rs 94 per share, RailTel’s share is valued at a FY20 P/E multiple of 15.8x (to its restated EPS of Rs 5.9). Other railway infrastructure companies (IRCON, RITES and RVNL) are trading at an average P/E of 9.5x. However, considering the futuristic service and growth plans of the IR and RailTel’s ability to monetize its existing assets through subscription plans and co-sharing with private operators, we feel that fundamentals are positive for the company. Thus we assign a “SUBSCRIBE” rating for the issue.

CapitalVia Global Research -- Subscribe

Gaurav Garg, head of research at CapitalVia, said, "I see growth potential in RailTel as the government's expansion plan is very aggressive w.r.t. building railway infrastructure over the next 5 years. This push is likely to benefit other railway infra stocks which includes RVNL, RITES, IRCON, IRCTC etc."

"Grey Market Premium (GMP) is Rs 35-40 which is convincing for investors to subscribe to IPO for listing gains. But in my opinion investors should hold this IPO for at least two years as this IPO might turn out to be a wealth creating IPO in railway space. The company showed decent performance in terms of top line as growth of 16 per cent from FY15-16 to FY19-20 with growth of 7 per cent CAGR in gross margin which looks promising to me. From a dividend perspective stock is good to invest as the company had distributed 68 crores of dividend in FY19-20, indicating decent dividend yield," he said.

Geojit Financial Services -- Subscribe

In FY20, RailTel had the highest net profit margin among key telecom companies and key IT/ICT companies in India, with a profit margin of 12.5 per cent. The company expects strong growth in the data center services in the future as the government plans to invest in smart cities, health, e-office projects, and education.

At the upper price band of Rs 94, RailTel is available at a P/E of 21.4x on FY20 basis, which appears fully priced. Considering, increasing data usage, GoI’s digital India initiatives and further diversification plans of RailTel, we assign a Subscribe rating for the issue.

Samco Securities -- Subscribe

RailTel is coming out with an IPO of Rs 819.24 crore, an OFS by the Government of India to divest part of their stake. The company derives 66 per cent of its revenues from the telecom segment while the remaining portion is from railways and other projects. RailTel, if performs efficiently can benefit from the 5G growth in India from a fiberisation needs’ perspective. It could also play a key role in digital transformation of the railways. Besides, Covid-19 has had a minimal impact on the telecom industry and has infact triggered growth for certain players due to increased data usage and VPN services for people working from home.

Since RailTel is a debt-free company and pays consistent dividends it could witness some traction, but for long-term investors there are a few red flags. Firstly, the company has delivered single digit revenue and PAT CAGR of 7.5 per cent and 2.5 per cent respectively from FY18 to FY20. There is high dependence on government entities and concentration risk given that 23.8 per cent of its revenues comes from top three customers. Its presence in a highly regulated industry is another cause of concern. Over all, the company is fairly priced at its FY20 P/E of 21.3 times. It has been commanding a good grey market premium indicating the offer will sail through but keeping the risks in mind, we recommend investors to subscribe for listing gains only.