RailTel IPO opens for subscription: Should you invest in another PSU firm after IRFC’s weak listing?

With less than two months into 2021, Ministry of Railways has entered stock markets once again for an initial public offering (IPO). After the public issue of IRFC, now RailTel is looking to raise Rs 819 crore from investors through the share sale starting today. Incorporated in 2000, RailTel is an information and communications technology infrastructure provider and one of the largest neutral telecom infrastructure providers in the country. Ahead of the issue, RailTel has raised Rs 243.99 crore from 14 Anchor Investors, allocating 2.59 crore equity shares. IRFC, another Ministry of Railway firm to debut on the bourses this year, currently trades flat over its issue price.

Issue Details

Investors can bid for RailTel’s Rs 819 crore public issue at a price band of Rs 93-94 per share with a face value of Rs 10. Minimum application size for the issue has to be 155 equity shares, translating to a minimum application size of Rs 14,570. Overall, 8.7 crore equity shares are on offer through the IPO. 

RailTel’s issue is purely an offer for sale (OFS) with no fresh issue. Of this, 50% is reserved for Qualified Institutional Buyers (QIB), while 15% is for Non-Institutional Investors (NII) and the remaining 35% is for retail investors. Post issue the promoter shareholding will trim down to 73% while Public shareholding will zoom to 27%. 

About the company

RailTel is a Mini Ratna (Category-1) state-owned firm. This means that the company has recorded profits for the last three consecutive years. RailTel is one of the largest neutral telecom infrastructure providers in India. As of January 31, 2021, the company had the exclusive right of way along 67,415 route kilometre connecting 7,321 railway stations for laying optical fibre cable

“RailTel offers leased line and VPN facilities and also provide IP-1 services. It provides the strategic and critical network infrastructure to the GoI and certain state governments. The company is also an implementing partner for the Bharat Net project to create optical fibre cable-based broadband infrastructure,” said domestic brokerage firm ICICI Direct. The company plays a critical role in the digital transformation of Indian Railways.

IIFL Securities added that the company could benefit from strong government backing. “ We believe that GoI programmes to increase rural broadband connectivity can aid Railtel in maintaining revenue growth momentum,” they said in a note. Apart from bandwidth and ISP related services, the company also provides Telecom Infrastructure Services, Managed Data Center & Hosting Services and undertakes various consultancy and system integration-related projects which diversify revenue streams. 

Risks

What may push RailTel out of favour would be unfavourable government policies and regulations. Analysts at Choice Broking said that lower spending from the central and state governments and a jump in competition from private firms could spoil be some of the future headwinds for the firm. 

Valuations

At Rs 94 per share, the valuation on H1FY21 annualized EPS without adjusting for impairment & non-recurring items is optically high at 33x but the same post adjustment is 20x, said IIFL Securities who has a ‘Subscribe’ rating on the IPO. Choice Broking valued the issue at FY20 P/E multiple of 15.8x at the higher end of the price band. Choice Broking too has a ‘Subscribe’ rating. 

“At the higher end of the price band, RailTel IPO is priced at a PE ratio of ~21.4 times FY20 earnings per share,” said INDMoney, while terming it to be fairly priced. Meanwhile, ICICI Direct without rating the issue said that at Rs 94 per share the stock is available at 21.4x FY20 price/EPS.

(The stock recommendations in this story are by the respective research and brokerage firms. The Outlooker Online does not bear any responsibility for their investment advice. Please consult your investment advisor before investing.)