IGI Logo

RailTel Corporation of Indi

* RailTel Corporation of India is coming out with a 100% book building; initial public offering (IPO) of 8,71,53,369 shares in a price band Rs 93-94 per equity share. 

* Not more than 50% of the issue will be allocated to Qualified Institutional Buyers (QIBs), including 5% to the mutual funds. Further, not more than 15% of the issue will be available for the non-institutional bidders and the remaining 35% for the retail investors.

* The issue will open for subscription on February 16, 2021 and will close on February 18, 2021.

* The shares will be listed on BSE as well as NSE.

* The face value of the share is Rs 10 and is priced 9.30 times of its face value on the lower side and 9.40 times on the higher side.

* Book running lead manager to the issue are ICICI Securities and IDBI Capital Markets & Securities.

* Compliance Officer for the issue is Jasmeet Singh Marwah.

Profile of the company

The company is an information and communications technology (ICT) infrastructure provider and is one of the largest neutral telecom infrastructure providers in India. It is a Mini Ratna (Category-I) Central Public Sector Enterprise, wholly-owned by the Government of India and under the administrative control of the Ministry of Railways. It was incorporated on September 26, 2000 with the aim of modernizing the existing telecom system for train control, operation and safety and to generate additional revenues by creating nationwide broadband and multimedia network by laying optical fiber cable by using the right of way along railway tracks.

The transport network is built on high-capacity dense wavelength division multiplexing (DWDM) technology and an Internet protocol/ multi-protocol label switching (MPLS) network over it to support mission critical communication requirements of Indian Railways and other customers. The company operate data centers in Gurugram, Haryana and Secunderabad, Telangana to host and collocate critical applications for customers including the Indian Railways. In addition to strategic and critical network infrastructure services, it also undertakes various ICT projects for the Indian Railways, central government and state governments, including various train control system projects for Indian Railways.

Proceed is being used for:

Carrying out the disinvestment plan.
Achieving the benefits of equity share listing on the stock exchanges.

Industry overview

The Indian telecom services industry can be broadly segregated into wireless, wireline and enterprise services. Wireline services are traditional landline calling services and wired broadband service. Wireless service includes mobile calling, short messaging service (SMS), wireless broadband, video conferencing service, triple play service, and over-the-top (OTT) platforms. Enterprise services provide network connectivity across locations and users in an organization.

The Indian telecom industry has undergone significant disruption over the past two years, owing to aggressive pricing strategies of new entrants. The smaller players, who could not compete, merged with larger players, who managed to stay afloat. As the number of players has reduced from eight to four over the past two years, the industry is seeing early signs of recovery, especially in the last two quarters of Fiscal 2019. CRISIL Research expects revenue to improve in the next two fiscals, driven by increase in ARPU, owing to tariff hikes. To be sure, the Indian telecom industry has seen some pricing discipline over the past one year, with schemes such as minimum recharge plans and charging for off-net calls, and also tariff hikes. After experiencing pricing stability in the last two quarters of Fiscal 2019, players marginally increased prices beginning first quarter of Fiscal 2020. Following the Supreme Court order on AGR in December 2019, players further increased tariffs on various popular packs by 30% to 40%.

In 2016, the Government of India increased the FDI ceiling in the telecom sector from 74% to 100% through the Foreign Investment Promotion Board (FIPB) and the government’s consolidated FDI policy. The FDI policy circular retained the FDI cap of 100% in telecom services (including IP Category - I), of which, up to 49% investment can be done through the automatic route. Investments are expected to pick up in the sector as the government aims to see the commercial rollout of 5G services in the coming years

Pros and strengths

Among largest neutral telecom infrastructure providers in India with pan-India optic fiber network:The company is one of the largest neutral telecom infrastructure providers in India As of January 31, 2021, it had exclusive right of way along 67,415 route kilometers connecting 7,321 railway stations for laying optical fiber cable. It has 59,098 route kilometers of optical fiber cable network and has connected 5,929 railway stations across towns and cities in India, as of January 31, 2021. It has city wide access network that stands at over 18,000 kilometers as of January 31, 2021. It offers high-capacity bandwidth of up to 800G at 87 locations in India, as of January 31, 2021. It also offers leased line and VPN facilities and also provide IP-1 services. This allows the company to offer a unique proposition to telecom service providers in India. The company also provide strategic and critical network infrastructure to the GoI and certain state governments including the NKN project, a national project aimed at connecting higher education and research institutions on a single high speed broadband network, where it has been selected as one of the implementing partners to provide high capacity.

Diversified portfolio of services and solutions:The company offer a diversified portfolio of ICT services and solutions including MPLS-VPN, leased lines services, TPaaS, eOffice services and data center services, large network hardware system integration, software and digital services. In addition to laying optical fiber cable network, its transport network is built on high capacity DWDM and an IP/ MPLS network over it to support communication requirements of the Indian Railways and other key customers. It has also built its optical fiber cable network across cities and towns in India to provide end-to-end bandwidth services through leased circuits, MPLS-VPN ports or Internet bandwidth ports.

Key partner to the Indian Railways in digital transformation: The company serve as a key network for the Indian Railways. It provides a variety of services to the Indian Railways and have implemented MPLS data network for integrated payroll and accounting system, unreserved ticketing system, freight operations information system and coaching operations information systems. As of December 31, 2020, its MPLS-VPN for railways intranet aggregated to over 74.7 Gbps capacity and Internet to over 25.06 Gbps capacity. It is responsible for upgradation of RailNet over a WAN by providing centralized mailing system and security systems through the supply, installation and commissioning of IP-MPLS network at divisions, zones, production units and central training units of the Indian Railways. It is also working with the Indian Railways to transform railway stations into digital hubs by providing public Wi-Fi at railway stations across India.

Experience in executing projects of national importance with robust pipeline of projects: The company has been successfully completed a number of long-term projects for provision of ICT services across India. These include the NKN and Bharat Net (formerly, the National Optical Fiber Network) projects for providing high-capacity bandwidth pipes for educational institutions of higher learning and laying optical fiber cable for connectivity of gram panchayats in India. It is also executing projects for public sector enterprises. For ESIC, it has undertaken operations and maintenance of the network and infrastructure operations in connection with implementation of social security programme that enables stakeholders to avail anytime, anywhere healthcare services across the country and creation of a medical database. As part of its work for the MHRD, its role involves commissioning and maintaining secured campus Wi-Fi infrastructure in central universities in India. As of January 31, 2021, it had executed and were maintaining Wi-Fi at 26 universities

Risks and concerns

Revenues depends on projects awarded by government establishments: The company’s business and revenues are substantially dependent on projects awarded by government establishments, including central, state and local authorities and agencies and public sector undertakings. Any adverse changes in government policies and budgetary allocation resulting from a change in government policies or priorities, could materially and adversely affect its financing, capital expenditure, revenues, or operations relating to its existing and proposed projects as well as its ability to participate in competitive bidding or negotiations for its future projects. For instance, the company performed certain services under the National Optical Fiber Network project on behalf of Bharat Broadband Network (BBNL) for connecting various gram panchayats in India, and income was recognized on the basis of terms of agreement executed between the two companies till March 31, 2017. In addition, a substantial portion of the company’s revenues is derived from three key customers, namely, the National Informatics Centre Services Inc., the Indian Railways and the Employees’ State Insurance Corporation of India. Revenue generated from these three customers represented 42.13%, 23.41%, 25.09% and 23.82% of its total revenue from operations, as restated, in Fiscal 2018, 2019 and 2020 and in the six months ended September 30, 2020, respectively.

The telecommunications industry characterized by technological changes: The telecommunications industry is characterized by technological changes, including an increasing pace of change in existing mobile systems, industry standards, customer demand, preferences, behaviour, and ongoing improvements in the capacity and quality of network. As new technologies develop, the company’s equipment may need to be replaced or upgraded, or its networks may need to be rebuilt in part or in whole in order to sustain its competitive position in the Indian telecommunications industry. As a result, the company may require substantial capital expenditures and access to related technologies in order to integrate new technologies with its existing technology and phase out outdated and unprofitable technologies. If the company is unable to modify its networks and equipment on a timely and cost-effective basis, it may lose customers and subscribers.

Require significant amounts of capital to finance business expansion: The company may incur higher levels of capital expenditure than currently anticipated in order to maintain and expand its network coverage, including establishing its fiber optic cables both underground and overhead. Its ability to finance its operating and capital expenditures, including for its business expansion, will depend significantly on its ability to generate cash from its operations or obtain alternative financing. It may not be successful in financing such expenditure and such capital expenditure may not result in the growth of its business and the expected positive impact on its results of operations. If the company’s capital expenditure requirements increase due to these or other factors, it may have an adverse impact on its business, results of operations, financial condition and prospects. Further, future network expansion will be dependent on future demand for its services. If the company underestimate its future capital needs or overestimate its future cash flows, it may require additional funding to meet its expenditure requirements, including by raising debt.

Depend on continued service of employees: The company’s current and future success is dependent upon the continued service of its key management personnel, senior management personnel and its employees. The company’s industry is characterized by high demand and increased competition for skilled employees, and it may need to offer in order to attract and retain its employees in the future. It cannot assure you that it will be able to attract and retain the key personnel that it will need to achieve its business objectives. As the company utilize advance technologies in its operations and business, it requires expertize and skilled employees. It may not be able to identify, attract or retain such employees with the skillsets it requires in a timely manner, on commercially favorable terms or at all. Although the company has employment agreements with members of its key management personnel and senior management personnel, It cannot assure you that it will be able to retain key members of its management team. If the company is unable to offer competitive salaries to its employees, it may not be able to retain them.

Outlook

Incorporated in 2000, RailTel Corporation is a public sector business unit, wholly owned by the Government of India (GOI) and administrated by the Ministry of Railways. It is an Information and Communication Technology (ICT) infrastructure provider company. The company was established with the key objective to modernize telecom infrastructure and today, it is one of the largest telecom infrastructure providers. It has a diversified Board and senior management team with significant industry experience. It has also executed a MoU with Transparency International India and developed the ‘Integrity Pact Program’ that focuses on promoting greater transparency with its vendors and suppliers. On the concern side, the company rely on third parties for certain services, including empaneled partners and OEMS for ICT hardware implementation, software delivery and digital transformation. If hardware or software products provided to the company by third-party suppliers are defective or related services are unsatisfactory, it may create technical problems in the delivery of its services, damage its reputation and result in the loss of customers. Besides, the company depends on and use certain intellectual property of third-parties, including of its suppliers of technology it uses for its network, for its business and in order to provide its services to customers.

The issue has been offered in a price band of Rs 93-94 per equity share. The aggregate size of the offer is around Rs 810.52 crore to Rs 819.24 crore based on lower and upper price band respectively. On the performance front, total income marginally increased by 12.30% from Rs 10,382.66 million in Fiscal 2019 to Rs 11,660.05 million in Fiscal 2020. The company has recorded a profit for the year of Rs 1,410.66 million in Fiscal 2020 compared to Rs 1,353.56 million in Fiscal 2019. The company also intends to work with banks and financial institutions to create an integrated network and build capabilities of managing NOC operations of such institutions. It plans to enhance its focus on provision of services that have high market attractiveness and in particular work with the Indian Railways. The company intends to work with the Indian Railways to develop and manage their proposed LTE network that will create a private network along a railway track. It also intends to leverage its existing technology and work with the GoI to implement its capabilities in other countries