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Thrust on growth driven by volume

Railtel Corporation of India’s (Railtel) Q4FY23 EBITDA grew 2.0% YoY to Rs1bn; it was
impacted by lower margins across businesses. However, easing supply chain has
helped the company grow project revenue by 2.3x to Rs3.9 (up 57% in FY23). Telecom
revenue has grown at 5.3% (+13% in FY23) to Rs3.1bn. Telecom margins have been
hurt from higher O&M due to aging fibre which requires replacement and lower margin
project execution. The company has guided for 1) telecom services revenue of Rs13-
14bn for FY24 (Rs11.7bn in FY23); 2) projects revenue of Rs15bn for FY24 (vs Rs8bn in
FY23) with EBIT margin of 6-7%; and 3) capex of Rs2bn to augment data centre
capacity where it expects revenue to be 2x in FY24 to Rs1bn, and for other
infrastructure expansion. Projects orderbook remains healthy at Rs45bn, and it has
removed certain high-value projects such as RDN, COD and VSS in coaches. We cut
our EPS estimates by 3-5% over FY24E-FY25E and target price to Rs140 (earlier:
Rs145) with an unchanged FY25E PE multiple of 15x. Maintain BUY.

* EBITDA grew 2% YoY (+32% QoQ). Railtel’s revenue rose 51.1% YoY (54.9% QoQ) to
Rs7bn. Telecom services revenue grew 5.3% YoY to Rs3.1bn. Project revenue rose 2.3x
YoY to Rs3.9bn. Employee costs dipped 17.9% YoY (+5.7% QoQ) to Rs512mn. Other
expenses were down 15% YoY (67.4% QoQ) to Rs103mn due to lower ECL. Access
charges have grown 29.5% YoY due to rise in churn in RailWire and higher fibre repair
cost for routes that are old and the company has not yet replaced them. Other income
was lower by 49.3% YoY to Rs112mn as base had one-off gains. Net profit improved 40%
YoY to Rs760mn helped by exceptional gains from the reversal of earlier created ECLs.

* Telecom revenue rose 5.3% YoY to Rs3.1bn. Note: Volatility in unallocated expenses
caused volatility in telecom segment EBIT performance vs consolidated EBIT. Within
telecom services, RailWire has seen certain headwinds from rise in churn rate which has
kept subs base under pressure. Telecom EBIT dipped 15% YoY to Rs505mn on higher
O&M cost; EBIT margin QoQ dipped 365bps.

* Project orderbook at Rs45bn. Project revenue rose 2.3x YoY to Rs3.9bn, and has
largely come from non-railway orders and VSS implementation for Railway. Raitel has

achieved project revenue of Rs7.9bn for FY23 of which railway was Rs1.55bn (VSS-
Rs850mn), and Rs6.4bn was from non-railway orders. Railtel expects to execute projects

worth Rs15bn in FY24, which may improve to Rs20-25bn. The company had an
aggressive bid for a large project in FY23 with very low margin. Railtel is now adding all
contracts through auction process and expects EBIT margin of 6-7%. VSS’ project scope
is Rs4bn and it has completed work for Rs1.5bn. This is a high-margin project due to
nomination process. VSS for coaches has been held by railway. The company will chase
volumes with reasonable margins henceforth.

* Company plans for capex of Rs2bn. Railtel has upgraded network capacity from 10G to
100G which has added 10x data carrying capacity on its fibre. It has guided for Rs2bn
capex of which a major portion will be spent on the fast growing data centre, network
upgrade, bid data and others. Data centre revenue has scaled to Rs520mn in FY23, and
is expected to grow fast. Railtel is targeting projects only with telecom + IT components.

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