Rise in competition; reduced margin guidance

Railtel Corporation of India’s (Railtel) Q3FY23 EBITDA grew 5% YoY to Rs0.7bn and was impacted by ECL provision of Rs210mn. Telecom services revenue growth has been healthy at 16% YoY; however, company has reduced EBIT margin guidance for telecom services to 20-25% (earlier: 25-28%). Project revenue was disappointing at Rs4bn for 9MFY23 (vs guidance of Rs10bn for FY23), and was impacted by lower chip availability. It expects to book Rs4bn of revenue from projects in Q4FY23. Railtel has seen increased competitive intensity in project business, both from government entities and private companies. Therefore, Railtel has shifted its strategy from chasing margin-based contracts to volume based which can help in growing absolute EBIT in projects business. The company has cut project business EBIT margin guidance to 7- 8%. We have cut our EPS estimates by 14% for FY23 and 5% for FY24 and target price to Rs145 (earlier: Rs160) as we rollover valuations to FY25E, but reduce PE multiples to 15x (from 17x). Maintain BUY.

? EBITDA grew 5% YoY (rose 50% QoQ). Railtel’s revenue rose 8.8% YoY (6% QoQ) to Rs4.5bn. Telecom services revenue grew 16.3% YoY to Rs2.9bn. Project revenue rose 78% YoY to Rs566mn. Employee costs dipped 3.7% YoY (+10% QoQ) to Rs484mn. Other expenses were up 2.3x (+45% QoQ) to Rs317mn due to ECL of Rs210mn in Q3FY23. Access charges have grown 11.5% YoY due to rise in churn in RailWire. Other income was lower by 86% YoY to Rs79mn as base had one-off gains. Net profit declined by 52% YoY to Rs319mn. Interim dividend stood at Rs1.5/share.

? Telecom revenue rose 16.3% YoY to Rs2.9bn. Note: Volatility in unallocated expenses caused volatility in telecom segment EBIT performance vs consolidated EBIT. Within telecom services, RailWire has seen certain headwind from rise in churn rate which has kept subs base flattish. Telecom EBIT rose 78% YoY on a low base, but dipped 30% QoQ to Rs566mn; EBIT margin QoQ dipped 780bps due to ECL provisioning. The company has revised telecom services EBIT margin at 20-25% (from earlier 25-28%). Within telecom services, NLD services was Rs1.4bn, ISP was Rs930mn and IP-1 was Rs480mn.

? Project orderbook at Rs50bn (including taxes). Project revenue has dipped 2% YoY to Rs1.7bn, and has largely come from non-railway customers. Railtel has earlier guided project revenue in FY23 at Rs10bn; however, it has only achieved Rs4bn in 9MFY23. Project revenue has been impacted by slower execution due to chip shortage which has hurt electronic availability, but is now easing. It believes Q4FY23 should add another Rs4bn in revenue as Railways projects are recognised. The company has seen increased competition in project tenders and is now chasing volumes over margins. It has guided margin to reduce to 7-8% in project business.

? Railway infrastructure exclusive access is behind. Railtel enjoyed advantage in Indian Railways due to exclusive access to railway infrastructure such as ROW across tracks of 67k-Rkms, space for setting-up towers etc. Railway has opened infrastructure sharing to private players which should increase competition. However, Railtel believes it is in a strong positon due to existing relationships and lead-time for peers to deploy capex.

To Read Complete Report & Disclaimer Click Here

For More ICICI Securities Disclaimer https://www.icicisecurities.com/AboutUs.aspx?About=7

Above views are of the author and not of the website kindly read disclaimer