Railtel Corporation of India’s (Railtel) Q2FY23 EBITDA was down 8.6% YoY (up 50% QoQ on normalisation of its telecom services) to Rs1bn as project services margin continued to be depressed (EBIT margin: 3.4%). However, Railtel shared strong guidance: 1) revenue / EBITDA growth of 20% in FY23 and beyond; 2) project business revenue of Rs10bn in FY23 (Rs15bn possible in FY24 with pick-up in execution); orderbook is healthy at Rs45bn (reassessment has led to a decline from Rs58bn from Q1FY23); 3) addition of new services especially consultancy, as well as monetisation of certain assets, will provide an upside; and 4) Kavach and allied services will likely lend significant delta to EPS. We increase our EPS estimates by 3-11% over FY23E-FY24E, and target price to Rs160 (from Rs120), as we raise the P/E multiple to 18x FY24E EPS (earlier: 17x). Maintain BUY. Risks: Slower revenue growth particularly in project services, and lower margins in telecom services.
- EBITDA fell 8.6% YoY (rose 50% QoQ). Railtel revenue rose 19.6% YoY (14% QoQ) to Rs4.3bn. Telecom services revenue grew 11% YoY to Rs3bn. Project revenue rose 45% YoY to Rs1.3bn. Employee costs increased 28% YoY (fell 15% QoQ) to Rs440mn. EBITDA dipped 8.6% YoY (+50% QoQ) to Rs1bn on high base. Net profit declined by 18% YoY (>2.1x QoQ) to Rs552mn (it was also impacted by lower other income, down 50% to Rs114mn). Company has guided for revenue and EBITDA growth of 20% each for FY23, and sustaining it. Railtel will likely benefit from continued growth in telecom and project services (in addition, consultancy and monetisation are large upside opportunities).
- Telecom EBIT rose 14.6% YoY to Rs811mn. Note: Volatility in unallocated expenses caused volatility in telecom segment EBIT performance vs consolidated EBIT. Telecom revenue grew 10.9% YoY (7.6% QoQ) to Rs3bn. Railtel expects revenue to accelerate on rising execution of projects, while the Kavach project has large upside in the medium term. EBIT margin was up 90bps YoY (12.6pps) to 27.5% on normalisation of telecom services, and Railtel suggested segmental margins are likely to sustain at Q2FY23 levels. Revenue of Rs2.7bn (+20% YoY) came from NLD services, Rs1.9bn (+13% YoY) from ISP and Rs900mn (+6% YoY) from IP-1 in H1FY23. ISP revenue includes Railwire whose subscriber-base is 05mn and is guided to rise to 0.6mn by end-FY23.
- Project orderbook at Rs45bn. The project orderbook stood at Rs58bn in Q1FY23, and the company has reassessed and adjusted it to Rs45bn. The orderbook has Rs20bn worth of orders from the Railways and Rs25bn from non-railway segment (largely PSUs). Railtel has added >Rs8bn worth of orders in FY23-TD. Project services revenue increased 45% YoY to Rs1.3bn and the company anticipates FY23 to end with a revenue base of Rs10bn. In H2FY23, project revenue will benefit from recognition of majority of revenue from the VSS project. In FY24, project services revenue is likely to touch Rs15bn. EBIT margin was low at 3.4% for Q2FY23 and EBIT dipped 14% YoY to Rs46mn. Company has guided for segmental EBIT margin at 7-8%. RDN project is in final stage of tender-closing and will be awarded by Dec’22; however, company is reassessing COD project scope. Tower and Edge-DC tendering process should begin from Q3FY23.
- Other highlights. Railwire subscriber-base is guided to reach 0.6mn in FY23 (downward revision from earlier guidance of 0.8mn); total revenue and EBITDA growth guidance is 20% for FY23, and beyond (reiterated); 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 the technological 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; apart from Kavach project wins, Railtel has significant advantage to provide communication solutions to the Railways, and partner it for deploying LTE network across railway tracks; there is huge opportunity in consultancy services (wherein Railtel now provides services for tendering orders, building project-scope, etc. to PSUs), and monetisation; NMDC has awarded a large project to Railtel wherein scope includes consultancy, execution and telecom services; revenue opportunity from this is Rs2bn in FY24; and cash balance was Rs4.7bn as Q2FY23-end.