Railtel Corporation of India: At the cusp of an inflection point, ICICI Securities

Railtel Corporation of India’s (Railtel) Q1FY23 EBITDA was up 12% YoY, but down 30% QoQ, to Rs670mn. It was impacted by lower billing in telecom services, higher cost of equipment due to chip-set issues and lower-margin defence project execution. Company believes telecom revenue should sequentially improve and project revenue should see a good jump with acceleration in execution, particularly on the VSS project for Railways. Railtel has guided for 20% growth in both revenue and EBITDA for FY23. Project revenue is guided at Rs8bn-9bn for FY23 with EBIT margin of 8-8.5% vs Rs1bn and 3.9% in Q1FY23. Telecom services margin should benefit from lower equipment prices on better chip-set availability. RDN and COD projects should partly add to EBITDA in H2FY23 while towers and Edge-DC will start contributing from H2FY24. We have reduced our EPS estimate by 0.5-6% for FY23E-FY24E, but retained the target price of Rs120, valuing the stock at 15x FY24E EPS. Maintain BUY.

• EBITDA rose 12% YoY (down 31% QoQ). Railtel revenue rose 23% YoY (dipped 19% QoQ) to Rs3.8bn. Telecom services revenue grew 18.6% YoY (down 8.2% QoQ) to Rs2.7bn. Project revenue rose 35.7% YoY (down 38.4% QoQ) to Rs1bn. Employee costs increased 33% YoY (fell 17% QoQ) to Rs516mn while SG&A expenses benefited from lower ECL and fell 50% YoY to Rs175mn. EBITDA rose 12% YoY to Rs670mn. Net profit increased 22% YoY (down 52% QoQ – also impacted by lower other income, down 63% QoQ) to Rs259mn.
• Telecom EBIT rose 6% YoY to Rs408mn. Note: Volatility in unallocated expenses caused volatility in telecom segment EBIT performance vs consolidated EBIT. Telecom revenue grew at a strong 18.6% YoY to Rs2.7bn though it dipped 8.2% QoQ on one-off implementation revenue of Rs130mn in Q4FY22, and general seasonality, first quarter has lower billing. Railtel expects revenue to accelerate in the ensuing quarters of FY23. EBIT margin was down 180bps QoQ to 14.9%, impacted by higher fibre and equipment costs, and higher cost from taking new section from Railways, which the company will sweat in the coming quarters. Easing chip-set issues should help improve margins in the next few quarters. Company has guided for ~19% margin for FY23. Revenue of Rs1.3bn came from NLD services, Rs930mn from ISP and Rs540mn for IP-1. ISP revenue includes Railwire whose subscriber-base is 0.47mn and ARPU was Rs516 in Q1FY23.
• Project orderbook at Rs58bn. Project revenue rose 36% YoY to Rs1bn. Company has added Rs6.6bn worth of orders in FY23-TD. EBIT margin was low at 3.9% for Q1FY23 and EBIT dipped 76% YoY to Rs41mn. This was due to a low-margin (4%) defence order executed during the quarter. Company has guided for FY23 margin at 8-8.5%. Project revenue for the full year is seen at Rs8bn-9bn (assuming chip-set issue is resolved). This would be helped by LOA issued for VSS project worth Rs4.11bn, of which Railtel expects Rs3bn worth of project revenue booking in FY23. RDN project is in final stage of closing tender and last day for submission of tender for COD is 22nd Aug’22. Revenue from these two projects (which have much higher margins) should partly come in H2FY23. Tower and Edge-DC should start adding to growth from H2FY24 onward.
• Other highlights. 1) Tower segment: Company expects to put at least one tower in each railway station, which will expand its tower footprint to 6k from current 1k. Tenancy ratio, currently at 1.25x-1.5x, is expected to grow to 1.5-2x, and will benefit from 5G rollout; 2) RFP for tower and Edge-DC will be rolled out in FY24, and revenue booking will likely start H2FY24 onward; 3) total revenue and EBITDA growth guidance is 20% for FY23; 3) Railwire has seen increased competition and is targeting a subscriber-base of 0.7mn-0.8mn by end-FY23; 4) government’s project Kavach (indigenously created railway collision prevention technology) has seen some tendering from a few railway zonal offices, and Railtel has not participated in the tender due to: a) the technology is yet to be completely tested and proven; b) only a few OEMs have technology know-how; and c) Railtel is yet to tie up with OEMs. Company conservatively believes it can get 25-30% of the Rs300bn to be spent on project Kavach; 5) capex spend will be Rs1.5bn in FY23; and 6) company has cash balance of Rs5.2bn.

For Report, https://www.communicationstoday.co.in/railtel-corporation-of-india-at-the-cusp-of-an-inflection-point/

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