Listing gains push up valuation of RailTel

RailTel Corporation of India Limited (RailTel) saw a decent listing in the bourses today with the stock currently trading at about 27 per cent premium to the IPO price of ₹94. The issue saw good subscription and was oversubscribed 42.4 times.

However, its current price takes the valuation of the company to a stiff PE of 29-30 times its annualised FY21 EPS (based on EPS for first half of FY21 after adjusting for a one-time exceptional expense). At the IPO price, the valuation was 23 times, which itself was a bit pricey. The bottom line in the last three years has grown only in low single digits for the company.

RailTel’s earnings growth has been flattish over the last 2 years with FY18- FY20 CAGR at 3 per cent. Its revenue CAGR during the same period is 7 per cent. While management commentary is optimistic and implies that the earnings for FY21 would be better than the annualised number, more clarity is required on what level of earnings growth is likely in the mid- to long- term. Impairment expenses from project related issues have impacted profits in FY20 and 21. Whether these are one offs, or recurring needs to be seen.

Also read: RailTel IPO subscribed 42.42 times

Thus, the current valuation would be unsustainable unless company’s earnings growth accelerates, and the government also shows more action (they have shown intent) in unshackling PSUs from government interference. Hence it is better to wait for clarity on these before entering the stock.

RailTel has advantages such as perpetual right of way along the tracks for network connectivity, favourable business opportunities like accelerating trends in digitisation and ability to provide connectivity to rural areas due its availability of its network along railway lines. RailTel is a debt –free company.

But given its relatively smaller size how it can tap the emerging opportunities profitably needs to be seen. It is competing against much larger players in the industry (beyond its exclusivity with Railways) like Reliance Jio. While RailTel has a track record of profitability unlike other telecom players, in general, for PSUs, balancing a profit motive with fulfilling the larger mandate of the government is not easy.