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ECL provisioning hurt EBITDA

Railtel’s Q1FY22 EBITDA was hit due to: 1) covid-led lockdown, which reduced revenue execution by Rs500mn in telecom services and projects; and 2) ECL provisioning of Rs302mn. Company remains confident of acceleration in revenue growth in the coming quarters as enquires have started increasing, and incremental ECL provisioning for full-year FY22 is expected to be only Rs100mn. Projects orderbook has grown by Rs3.41bn and the total orderbook now stands at Rs40bn, which provides visibility on future revenue growth.

The biggest trigger for Railtel is Indian Railways’ deployment of LTE network and consequent large orders. This will also help build a good tower business for Railtel with annuity revenues. We cut our EPS estimates by 8% / 7% for FY22E / FY23E and consequently reduce our target price to Rs156 (from Rs167). Maintain BUY.

* EBITDA growth restricted to 3.9% YoY on ECL provisioning. Railtel revenues rose 20.6% YoY to Rs3.1bn driven by 17% growth in telecom services to Rs2.3bn. Project revenues dipped 2.3% YoY to Rs760mn, due to weak execution amid covid-related lockdown. However, EBITDA grew only 3.9% YoY to Rs596mn due to additional ECL provisioning of Rs302mn (vs Rs159mn in Q1FY21), and was mostly related to government dues (which should be realised in future).

Access charges grew by a hefty 38% YoY to Rs996mn. Net profit was 29.5% YoY higher at Rs211mn and gained from dip in depreciation (down 4.4% YoY), higher other income, and lower ETR of 24% (vs 26.8% in Q1FY21). Company incurred capex of Rs180mn during the quarter.

* Telecom revenues were hurt from lower NLD revenues. Telecom revenues were up 16.5% YoY at Rs2.3bn, depressed due to lower NLD revenues of Rs200mn. This was on account of delay in MPLS project delivery to a coal company (it was expected in Jun’21, but got pushed to Aug’21); lockdown and lower government office usage of connectivity services also impacted NLD revenues in Q1FY22. However, the ISP segment grew 77% YoY on likely traction in RailWire. Telecom services EBIT declined 2.3% YoY on higher fixed costs and ECL provisioning.

* Project segment EBIT margins were high at 22.5%. Projects revenues grew 35% YoY to Rs760mn, but fell 56% QoQ as execution on projects was lower due to lockdown. Railtel estimates at least 25% of revenue recognition has been pushed to future quarters. It remains confident of strong project execution given robust orderbook amid improvement in enquiries. Projects EBIT grew 83% YoY to Rs171mn and EBIT margin was strong at 22.5%. The margin bump-up may have been due to higher revenues recognised in COD / RDN, which have no cost but bring royalty payments.

* Orderbook strong at Rs40bn. Railtel’s orderbook stands at Rs40bn; fresh inflow of orders in Q1FY22 stood at Rs3.41bn. Company has started receiving fresh enquires, which increases visibility on sales funnel. It remains hopeful of new large orders from: 1) execution of BharatNet for two states; and 2) Indian Railways’ deployment of LTE network.

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