Competing Telecom And Rail Projects Will Yield Mixed Outcomes

Key Takeaways

• Low profit margins and competition in telecom hinder RailTel's future growth, especially in the telecom and RailWire segments.
  
• Dependencies on project execution and Ministry of Railways decisions pose risks to future revenue and earnings.
  
• RailTel's strategic project execution and collaborations boost revenue and net earnings, with sustained growth from both railway and non-railway sectors.

Catalysts

Provides broadband telecom and multimedia networks and services in India and internationally.

• RailTel Corporation has a robust order book of ₹6,616 crores, which provides visibility of sustained growth in operating income in coming quarters. However, if the backlog is not executed efficiently, it may not translate into anticipated future revenue growth.
  
• The company's order inflow for the year was ₹3,146 crores, only slightly higher than the previous year's ₹2,583 crores, indicating potential stagnation if new significant projects are not acquired. This could impact future revenue growth.
  
• The company's profit margins remain relatively low, particularly in the project segment, at 4-5%. Any continuation of low-margin project wins could suppress future profitability, affecting net margins.
  
• The ongoing cut-throat competition in the Telecom and RailWire segments, with bigger players utilizing new technology and smaller ISPs aggressively pricing, could limit RailTel's ability to grow Telecom revenues at the desired double-digit rate.
  
• The uncertainty surrounding the rollout of significant railway projects like LTE and 5G, along with dependency on the Ministry of Railways decisions, could delay anticipated revenue inflows and impact overall earnings.

RailTel Corporation of India Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming RailTel Corporation of India's revenue will grow by 14.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 8.6% today to 10.4% in 3 years time.
• Analysts expect earnings to reach ₹5.4 billion (and earnings per share of ₹16.81) by about May 2028, up from ₹3.0 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 22.6x on those 2028 earnings, down from 34.5x today. This future PE is lower than the current PE for the IN Telecom industry at 23.7x.
• Analysts expect the number of shares outstanding to grow by 0.14% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.53%, as per the Simply Wall St company report.

RailTel Corporation of India Future Earnings Per Share Growth

Risks

• RailTel reported a significant Q-on-Q growth in operating revenue by 70% from Q3 to Q4 FY '25, demonstrating strong revenue potential due to successful project execution and increased order book from both railway and non-railway sectors.
  
• The company maintained a healthy order pipeline with a total order book of ₹6,616 crores, showcasing a sustained future revenue stream, particularly as 30% of the order book is from railways, which suggests continued engagement with high-volume government projects.
  
• RailTel's profit after tax grew by 22% in FY '25 compared to the previous year, showing an improvement in net margins, which may stabilize or improve further with the execution of high-value projects.
  
• The company's robust expansion in exploring new opportunities, including data centers and collaboration with significant players like Microsoft, indicates potential growth in earnings, contributing positively to its financial health.
  
• RailTel's commitment to maintaining a growth target of 25% to 30% along with continuous engagement in high-margin projects such as cybersecurity and telecom enhancements suggests a positive outlook for revenue and net earnings stability.

Valuation

• The analysts have a consensus price target of ₹265.0 for RailTel Corporation of India based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹51.9 billion, earnings will come to ₹5.4 billion, and it would be trading on a PE ratio of 22.6x, assuming you use a discount rate of 12.5%.
  
• Given the current share price of ₹322.4, the analyst price target of ₹265.0 is 21.7% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.