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Rising opportunities from Indian Railways

Railtel’s Q4FY21 EBITDA was below our estimate due to provisioning of Rs330mn and much lower EBIT in the projects business. Company remains confident of growth in FY22 and has guided for revenues of Rs20bn (FY21: Rs13.8bn) and sees revenues scaling up to Rs40bn in next 2-3 years. This ambitious growth expectation founded on strong orderbook of Rs45bn, and likely order wins from Indian Railways, which plans a capex of Rs250bn for deployment of LTE network and implementation of TCAS. Project business growth also boosts telecom revenues for connectivity solutions. We cut our FY22E EPS by 0.5%, but raise the same for FY23E by 4%. Accordingly, our target price increases to Rs167 implying 20x FY23E EPS (earlier Rs160). Maintain BUY.

EBITDA dipped 32% YoY on provisioning for ECL.

Railtel revenues rose 9.5% YoY to Rs4.3bn driven by 27% growth in telecom services to Rs2.6bn. Project revenues dipped 9% YoY to Rs1.7bn due to lower revenues recognised in KOFN (Kerala Optic Fibre Network), content on delivery and railway display network. EBITDA declined 32% YoY to Rs725mn on Rs330mn provisioning for expected credit loss (ECL) in Q4FY21. Company has provisioned for all the receivables due over 3 years. Telecom services EBIT grew 5.5x (as base was low due to impairment loss of Rs0.5bn on North-East projects) to Rs0.7bn (EBIT margin of 26.6%). Project business EBIT fell 78% YoY to Rs67mn (EBIT margin of 3.9%). Railtel’s adjusted net profit fell 55% YoY to Rs272mn. Company has declared a dividend of Rs2.2/share for FY21, which means dividend payout ratio of 50%.

Telecom revenues in FY21 driven by Railwire.

In FY21, telecom revenues rose 18.8% to Rs8.8bn, which was better than expected, mostly driven by strong performance by ISP services (up 55% to Rs2.6bn) and IP-1 services (up 18% to Rs1.9bn), while NLD services rose 4.5% to Rs4.3bn. ISP services benefited from jump in Railwire subs to 0.36mn from just 0.13mn in FY20. Company expects the subs base to reach 0.8mn in FY22 and sees slight reduction in ARPU. IP-1 services grew on back of rising demand from data centres (up 71% in FY21) and video conferencing (up 20% in FY21); the segment continues to see strong demand even in FY22 and beyond. NLD service revenues should grow on the back of recent order wins on VPN implementation in coal and defence sectors, and demand for leased lines from educational institutes.

LTE and TCAS enhance outlook on project revenues.

Railtel’s orderbook stands at Rs45bn, which is likely to be executed over next 3-4 years. Government has allocated 700MHz spectrum to Indian Railways for deployment of private LTE network. There are also plans to implement train collision avoidance system (TCAS) with total capex outlay of Rs250bn. This is a huge opportunity for Railtel as it could get a large share in LTE network implementation including tower rollout. LTE coverage planned is for 35k-Rkm of tracks, which would need rollout of 4,000 towers. If Railtel wins the deal, it may erect the towers on capex of Rs8bn funded by Indian Railways. It is also working on home-grown technology (ATP – automatic train protection) for implementation of TCAS. The earlier collision avoidance project, which was allocated to Railtel on pilot basis, was based on European technology and stands cancelled (it was not part of the orderbook). Conservatively, the company sees project allocation of Rs50bn-100bn from Indian Railways out of its planned capex of Rs250bn.

Other highlights:

1) Provisioning for expected credit loss (ECL) was Rs0.83bn in FY21, (Rs0.7bn higher than in FY20). The incremental ECL was Rs0.6bn in telecom services and Rs0.1bn in projects business;

2) impairment related to North-East (NE) projects was Rs216bn (Rs0.5bn in FY20). Company has seen rising demand from defence and educational institutes for the said fibre. CWIP of Rs1.5bn was towards NE projects;

3) Railwire should continue to perform well and the company is not too worried about rising competitive intensity due to its deeper presence in the market and implementation of Wi-Fi for Railways has extended to 5,000 rural locations, which gives the company the advantage on reach; and

4) COD has minimum guarantee of Rs0.6bn annually, which should come entirely in FY22 (in FY21, it was given a break due to covid); Railway display network (RDS) was also not rolled out aggressively due to lower footfalls. Revenues from these activities should benefit growth in FY22.

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