Industry

The telecom industry in India has undergone significant disruption over the past two years, owing to aggressive pricing strategies of the new entrant. 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 FY19.

According to the TRAI, India's wireless as well as wired internet subscriber base is estimated to have reached approximately 690 million at the end of FY20. Further, it is expected to expand at a CAGR of 5% - 7% between FY20 – FY25. The number of wired broadband subscribers are expected to grow at an equal pace vis-à-vis wireless broadband because of increasing competitive intensity, work from home requirements due to the pandemic, and tariff hikes in wireless services. Additionally, the National Digital Communications Policy 2018 entails fixed line broadband services to 50% of the households and providing universal broadband connectivity at 50 mbps to every citizen in India by 2022.

Globally, work from home has become a new norm due to the pandemic. Requests for wired broadband subscriptions have increased majorly in urban areas, as work from home requires a reliable and fast internet connection. Thus, the scenario is likely to provide the much-needed trigger for increase in wired broadband subscriptions, which have remained stagnant for the past three fiscals. CRISIL Research expects the wired internet subscriber base to increase to ~33 million by FY25 from ~22 million in FY20.

Enterprise Data Services (EDS)
Adoption of EDS is projected to rise at a nominal pace over the next five years. Industry growth will be volume led, primarily owing to a continuous decline in bandwidth prices. Realisation, though, is expected to fall, thereby limiting growth. Among the broad segments within EDS, the VPN is expected to show robust growth, owing to cost advantage, flexibility and scalability. CRISIL Research projects revenue of the EDS industry to register a CAGR of 4% - 5% over the next five years, to reach ~Rs. 175 billion in FY25. Among the segments, VPN is likely to grow faster especially after the pandemic as VPN forms a very critical element of corporates business continuity plans.

Domestic Leased Circuit (DLC)
The DLC segment, which is estimated to have recorded a CAGR of 5% in value terms between FY15 - FY20 is expected to record a CAGR of 4% - 5% till FY25 to ~Rs. 106 bn on the back of an improvement in wired broadband penetration that will more than offset a decline in leased line prices. The Government has set a target of connecting 2.5 lakh homes via the BharatNet project which will provide a substantial opportunity for DLC demand. Future growth of DLC segment to be driven by backhauling operations and Government initiatives.

Data center services

Data center services store data and provide support to companies by offering extensive IT infrastructure, including servers, firewalls, storage systems and various other IT components, in a different place. Potential growth in the data center services business is aided by:

• Artificial intelligence, Internet of Things, big data and digitalization.
• Cloud computing becoming the pre-requisite for business organizations.
• Security operations center as a service (SOCaaS); and
• Businesses trying to replace their capital expenditure by operating expenditure i.e., making use of third-party services.

With the rising demand for EDS owing to work from home, OTT apps and the expected rise in digitalisation across sectors, demand for data centres is expected to grow manifold. The increasing penetration of internet will also prove as a catalyst to the data centre industry.

Indian Railways to offer significant opportunities
In the coming years, Indian Railways is focusing enhancing passenger experience by enabling suitable technology to introduce SMART coaches on its network. The high-speed mobile communications network is aiming to include modern features like CCTVs with facial recognition, emergency talk-back system, Wi-Fi infotainment system, automatic plug-door and step control.

Government emerging as an important end user
The Government is also emerging as an important end user, mainly on account of the surge in e-governance initiatives. Most government projects are expected to be executed using VPN. The Government's intent to improve rural connectivity will further aid growth in the laying of optic fiber cable. Some of the important projects are:

• State-wide area network
• Accelerated power development and reform programme
• Crime and criminal tracking network system
• National intelligence grid
• Public distribution system
• India Post
• Property registration
• Sulekha plan monitoring system
• National knowledge network (NKN); and
• Kerala fiber optic network (KOFN).

Under the Digital India initiative, proposed e-governance measures, such as business process re-engineering, electronic storage of information, and workflow automation, are expected to fuel demand because the Government proposes to create data centres for states to consolidate services, applications and infrastructure and ensure efficient electronic delivery of government services to citizens (G2C), businesses (G2B), and other government agencies (G2G).

Retail, healthcare also seeing adoption of VPNs; SMEs to provide opportunities in low bandwidth space
With rapid expansion in the number of retail outlets across categories such as hypermarkets, department stores, and specialty stores, high enterprise bandwidth is expected in this sector. Supermarkets and department stores are connected to their banks via VPN and synchronize every transaction directly with their head office. Healthcare, airlines, and travel are other sectors rapidly deploying VPN connectivity. Incumbent users are likely to see consolidation and shift to higher bandwidth services. Therefore, it is expected that SMEs will provide opportunities in terms of volume in the low bandwidth space of speed less than or equal to 2 Mbps.

Key service provided by Indian Telecom Players

Key financial parameters of the Key Telecom Companies

Source: Company RHP

Key financial parameters of the Key IT/ICT Companies

Source: Company RHP

Risks

• The company derives a substantial portion of its revenue from PSUs and Indian Railways. In FY20, its top three customers were PSUs accounting for ~25% of its revenue. The government currently prefers RailTel for providing telecom infra services to PSUs and any change in the policy in this regard could result in loss of business.
• The company suffers from project execution risk. In FY20, RailTel took an exceptional loss of Rs. 49.3 crores for doing impairment of the assets belonging to its halted North Eastern Project.
• In FY20, RailTel suffered from a very long debtor cycle which was as high as 164 days. Such long receivable days can strain a company's balance sheet as it might have to rely on short-term borrowings for managing its operating expenses. However, this risk is mitigated by long payable days for RailTel.
• The telecom industry in India is highly regulated and changes in laws, regulations or governmental policy could potentially adversely affect the business of the company.
• They rely on third parties for certain services, including empanelled partners and OEMs for ICT hardware implementation, software delivery, and digital transformation.

Company Description

RailTel Corporation of India Limited (RailTel) was incorporated on September, 2000 with an aim of modernising the existing telecom system for train control, operation and safety and also, to generate revenue by creating nationwide broadband & multimedia network by laying optical fibre cable by using rights-of-way along the railway tracks. It is an information and communications technology infrastructure provider and one of the largest neutral telecom infrastructure providers in India. RailTel operates data centres in Gurugram and Secunderabad to host and collocate critical applications for customers including the Indian Railways. RailTel offers diverse services across various industries such as telecom network services, telecom infrastructure services, managed data centre & hosting services and projects.

Valuation

Currently, Indian Railway is undergoing a digital transformation and RailTel is going to play a key role in this transformation. In the coming years, public Wi-Fi will be available at all railway stations and entertainment content would be made available for travellers which would aid in company’s growth. Further, the current order book of the company stands at ~Rs 4,000 crores which includes installation of video surveillance system across 6,000 railway stations, installation of 14,000 CCTV on railway stations, to lay state-wide optical fibre network in Kerala and Haryana. Data centre services could also witness a growth in the future as the government plans to invest in smart cities, health, e-office projects, and education. RailTel has a strong balance sheet and has been consistent dividend payer. It also leads the pack of the telecom industry with ~13% profit margins and ~14% ROCE. At the upper band of Rs. 94, the issue is valued at PE of 21.4x of FY20 EPS. We recommend to subscribe the issue for long term as well as for the listing gains.

Key Information

Use of Proceeds:
To carry out the disinvestment of 87,153,369 Equity Shares by the Selling Shareholder and to achieve the benefits of listing the Equity Shares on the Stock Exchanges.

Book running lead managers:
ICICI Securities Limited, IDBI Capital Markets & Securities Limited and SBI Capital Markets Limited.

Management:
Puneet Chawla (Chairman and MD), Sanjai Kumar (Director of Network, Planning and Marketing and Whole Time Director) and Anand Kumar Singh (Director of Finance and Whole time Director).