Railtel Corporation of India - Good proxy to government digitisation - ICICI Securities

Railtel Corporation (Railtel) is well positioned to benefit from the digital transformation programme initiated by the government of India including Indian Railways, which significantly increases visibility on its earnings growth over the next decade. Company's orderbook is very healthy at Rs44bn, which should help it grow both telecom services and project business. We expect revenues to grow at a CAGR of 11.5%, EBITDA at 11.4% and adjusted PAT of 17.8%. We see FCFE at 17-19% of sales and return ratios of >20% from FY22E onward. We initiate coverage on Railtel with a BUY rating and target price of Rs160, valuing the stock at 20x FY23E EPS. Downside risks: 1) higher concentration on government business, and 2) risk of AGR liability.

- About Railtel. Railtel has exclusive right-of-way on 67,415-Rkm across railway tracks connecting 7,321 stations. It also has two data centres and mobile towers. Indian Railways is its anchor tenant, which makes infra easy to rollout. For last mile, it uses access service providers, which keeps capex under control, and has tie-ups with local operators for its FTTH services under RailWire brand. Company also provides system integration services (projects) wherein it helps implement ICT projects.

- Good play on government digitisation. India government is expected to spend US$7.3bn on IT services during 2021, up 9.4% YoY. Expenditure for data centres and telecom services will grow by 7.8% and 6.3%. Indian Railways, the company's largest customer, has huge plans of spending on modernise railway systems. Post covid, we see government organisations heavily investing in digitisation benefiting Railtel.

- Steady growth in telecom services. Telecom services revenue would benefit from rising demand for data capacity. Though price erosion would restrict growth in NLD services, ISP services should benefit from rising FTTH and other services such as data centre, security, etc. We see revenue growth at a CAGR of 9.5% to Rs10.3bn, and EBITDA growth at CAGR of 9.7% to Rs3.3bn, over FY21-FY23E. We also see upside risk in projects under implementation.

- Project revenues to grow robust. Railtel's orderbook is strong at Rs44bn (12x FY20 revenues) as at Q3FY21, up 10% since Jan'21. Significant portion of the orderbook would be implemented over next 2-3 years, which gives us strong visibility on project revenues. We estimate revenue CAGR of 15% to Rs6.8bn, and EBITDA CAGR of 18.4% to Rs915mn, over FY21-FY23E.

- Higher FCF generation; and return ratios. Railtel's FCF generation would remain strong on the back of: 1) likelihood of capex being lower than depreciation; and 2) reduced size of working capital drag on account of dip in deferred revenues. Our estimates suggest FCFE at 17-19% of revenues, which is very healthy. Railtel's underlying pre-tax RoIC remains robust at >20% for FY22E - and this is on account of disciplined capital allocation. Further, the project business is highly profitable.

Source : Equity Bulls

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