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One-off hits telecom margins

Railtel Corporation of India’s (Railtel) Q3FY22 EBITDA was down 43% YoY to Rs708mn. It was impacted by one-off revenue reversal of Rs320mn in telecom segment, and high base in projects. It remains confident of maintaining 25-26% EBITDA margin. Projects orderbook remains strong at Rs54bn, and execution has been challenging due to chip shortage. It expects growth to accelerate in FY23 on normalisation of project execution, and revenue booking from COD and RDN projects, which should yield Rs600mn and Rs1bn additional revenue p.a. Railway modernisation project should help Railtel add larger projects. We have cut our EPS estimates by 2-4% for FY23/FY24, and reduced target price to Rs130 (from Rs162) as we cut PE multiple to 15x (from 20x), but rollover to FY24. Maintain BUY.

* EBITDA dipped 43% YoY on high base and one-offs.

Railtel revenue rose 1.7% YoY (16.5% QoQ) to Rs4.2bn, and was lower by Rs320mn due to reversal of revenue on account completed project (NKN) SLA. Adjusted for reversal, telecom revenue grew 24.1% YoY to Rs2.8bn (reported +9.9% at Rs2.5bn). Project revenue dipped 10.4% YoY to Rs1.7bn, and was hurt from chip shortage, which may have a lingering impact even in Q4FY22. SG&A cost had benefit of ECL provisioning reversal of Rs153mn (on account of recoveries), while employee had similar one-off cost. Adjusted for one-off, EBITDA dipped 17% YoY as base had higher project margins. The company has booked one-off gains in other income related to SLA. Net profit declined 5.2% YoY to Rs660mn.

* Telecom EBIT hit from one-off reversal.

Telecom revenue included NLD revenue of Rs3.3bn, ISP of Rs2.6bn and IP-1 of Rs1.5bn for 9MFY22. It expects revenue to grow slower vs projects, and orderbook has annuity revenue of Rs15-20bn which will flow in telecom revenue. These revenues will be booked over the next 4-6 years. Railwire subs base has grown to >460k in Q3FY22 and had stable ARPU of Rs500. Telecom segment EBIT dipped 43% YoY to Rs322mn, and EBIT margin was 13% (down 13.6pps QoQ) from one-off revenue reversal. Adjusted for reversal, EBIT rose 13.5% YoY and EBIT margin was 22.9% (down 370bps QoQ).

* Project orderbook at Rs54bn.

Project revenue dipped 10% YoY to Rs1.7bn despite orderbook continuing to grow at Rs54bn. Project revenue was impacted by execution challenges from chip shortage, which has not completely receded, and may also impact Q4FY22. The company remains confident of executing projects in FY23. Project business EBIT dipped 70.5% YoY to Rs144mn on normalisation of margins to 8.7% (vs 26.4% in Q3FY21).

Other highlights.

1) Company has guided EBITDA margin of 25-26% on steady state basis; 2) cost had inflation from change in power cost recognition; 3) employee cost had Rs150mn one-offs; 4) Railtel is in the process to award content on delivery project to new entity and anticipate at least Rs6.3bn revenue over 10 years. Railway display network (RDN) project is under execution which should help earn revenue of Rs10bn over next 10 years; and 5) Railway will start awarding modernisation work which should help Railtel.

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