Recommendation from Telecommunications Services company

This section gives a recommendation of a stock having a stock price below Rs 150 with sound fundamentals and expected to give handsome returns over a one-year time horizon.

RAILTEL CORPORATION OF INDIA: MAINTAINING A SOLID GROWTH CURVE

HERE IS WHY
✓Increasing market share
✓Strong business outlook
✓Debt-free status

India, at present, is the second largest telecommunications market and has the second-largest subscriber base in the world as of August 2022. Both wireless and landline broadband subscriptions have been increasing every year. As per a recent report published by Deloitte-CII, the Indian telecom industry is expected to grow by USD 12.5 billion every three years with the launch of 5G services in India. Considering these facts and expecting a bright future for the industry, our latest recommendation for this issue is a company with increasing market share, namely, RailTel Corporation of India Limited.

The company owns a pan-India optic fibre network that provides broadband and multimedia services, as well as modernisation and maintenance of the Indian Railways’ communications network. RailTel Corporation of India was established in 2000 under the Ministry of Railways to modernise the railway communication network and contribute to the goals of the National Telecom Policy 1999. Under telecom, its revenue streams are diversified to national long distance contributing 31 per cent to the operating revenueand infrastructure (14 per cent).

The project segment contributed 33 per cent to the operating revenue in FY 2022 and its contribution is expected to increase going forward. If we look at the company’s recent performance on a consolidated basis, it recorded growth in revenues on a yearly basis but its net profit declined in the same period. On a sequential basis, however, the performance significantly improved, with a jump in top-line from ₹376.09 crore in Q1FY23 to ₹428.71 crore in Q2FY23. EBITDA margins have also improved significantly from 17.77 per cent in Q1FY23 to 23.41 per cent for Q2FY23. 

The bottom-line has also jumped to ₹55.24 crore in Q2FY23 from ₹25.85 crore for Q1FY23. The telecom business contributed the most to its turnover of ₹295 crore in Q2FY23 compared to ₹274 crore in Q1FY23, registering a sequential growth of 8 per cent. The project business also contributed to its turnover of ₹134 crore in Q2FY23 as compared to ₹103 crore in Q1FY23, registering a sequential growth of 30 per cent. The total income stood at ₹440 crore in Q2FY23 against ₹385 crore in Q1FY23, registering a sequential growth of 14 per cent.

The company is focusing on solidifying its existing foothold in sectors like railway, coal, banking, defence as well as exploring new ones like health, education and others. In Q2FY23, the company has maintained its momentum of bagging new orders in different sectors with new orders of more than ₹800 crore in H1FY23. It has bagged three new orders since the beginning of the month. RailTel Corporation of India is currently trading at a TTM PE of 20.29x and 2.59 times its book value. 

The company has a three-year average ROE and ROCE of 11.69 per cent and 16.32 per cent, respectively, with three-year compounded sales and profit growth of 15.57 per cent and 15.58 per cent, respectively, and has an average CFO / PAT of 1.64x. The company is virtually debt-free. The current order book of the company stands ₹4,500 crore which is 2.6 times its trailing 12-month net revenue, demonstrating visibility in the top-line over the medium term. The company has a robust balance-sheet and is available at a cheap valuation compared to its peers. Considering these factors, we recommend BUY.