RailTel Corporation IPO subscribed 6.55 times as the grey market dives

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RailTel Corporation of India’s IPO of Rs 820 crore has observed robust retail participation at bids summing up to 11 times the issue size until now. The subscription will close on Thursday, 18th February.

The premium that the unlisted shares of the company were profiting from in the grey market has slipped in the past few days. Analysts have largely been positive on the issue, as the Mini Ratna firm is debt-free and has been a consistent dividend payer. The IPO is seeking a just valuation of 21.4 times PE on an FY20 trailing basis at the upper limit of Rs 93-94 price band, they said.

Abhay Doshi, a Gujarat-based dealer of unlisted shares who also follows the grey market, said the stock was dominating a premium of Rs 12-14 on Thursday 18th February, which was way lesser than the Rs 47 premium it was benefitting a few days ago.

“The prospects of the company are very good, but it looks like sentiment has changed due to dull participation of QIB and HNI categories till now,” the founder at UnlistedArena.com said.

Till the end of 2nd Day of the IPO, the issue was subscribed 6.55 times with the retail quota getting bids going up to 10.55 times the limit. The qualified institutional buyers’ quota was subscribed 2.97 times and the non-institutional investor category 2.63 times the limit. The portion reserved for employees was subscribed 1.85 times.

The grey market premium still suggests 13-15% rise over the upper limit of the IPO price band.

Fundamental analysts are positive about the company’s growth prospects, though reported sales and profit growth over the recent years have been in single digits. Geojit has a ‘subscribe’ rating on the issue and cites increasing data usage, the government’s digital India initiatives and further diversification plans.

RailTel is one of the mega neutral telecom infrastructure providers in India. Last reported on 31st January, the company had the exclusive right of way along 67,415 route km connecting 7,321 railway stations for laying optical fibre cable. RailTel offers leased line and VPN facilities and also provides IP-1 services.

The state-run company ensures strategic and important network infrastructure is given to the government and some states. The company is also an applying partner for the Bharat Net project to produce an optical fibre cable-based broadband infrastructure.

During FY18-20, RailTel’s revenues grew at a compounded annual growth rate of 7.5% at Rs 1,128 crore in FY20. Over the same period, EBIDTA grew at a CAGR of 12.4% to Rs 334 crore in FY20. Net profit increased by 2.6% CAGR during the period to Rs 141 crore in FY20. Operating margin was more than 28% while the dividend payout ratio was 46-49% for the same period.

One of the main negatives includes the company’s heavy reliance on government entities and, thus, a concentration risk provided that 23.8% of its revenues come from only three high profile customers. It is present in a highly regulated industry, which is a cause of worry.

Choice Broking said, “Considering the futuristic service & growth plans of the Indian Railways and RailTel’s ability to monetise its existing assets through subscription plans and co-sharing with private operators, we feel that fundamentals are positive for the company. Thus, we assign a ‘subscribe’ rating for the issue,.”

Niral Shah of Samco Securities stated that the issue is fairly priced. “It has been commanding a good grey market premium indicating the offer will sail through but keeping the risks in mind, we recommend investors to subscribe for listing gains only,” he said.

Indus Towers (formerly Bharti Infratel), a listed company in the mobile communications infrastructure sector, has a P/E multiple of around 15 and an EV/EBITDA of 3. Other railway infrastructure stocks such as Ircon International, RITES and RVNL are trading at an average P/E of 9.5 times and the fresh The railway IPO, IRFC, had a poor market launch.

Astha Jain of Hem Securities termed the demanding valuations as ‘fully priced,’ but said that the industry dynamics of telecom and telecom data services — where the broadband market is advancing pace with enterprise data services presents huge potential.

“The edge which company holds over its peers in terms of financial performance makes this issue attractive to deploy funds in. Hence we recommend investors to subscribe to the issue for the short & long term,” she said.

Prospective Investors can subscribe to the IPO by purchasing a minimum of one batch of 155 shares or in multiples. Retail investors can bid for a maximum of 13 lots at the lower band limit.RailTel had on Monday 15th February raised funds worth Rs 243.99 crore from 14 secured investors. Foreign portfolio investors who participated were UK based Aurigin Capital through its Aurigin Master Fund and Utilico Emerging Markets Trust, Reliance Capital managed Cohesion MK Best Ideas Sub-Trust, Singapore based, Integrated Core Strategies Asia and Goldman Sachs India.

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