The three-day initial public offering (IPO) of the state-owned RailTel Corporation of India opens for subscription today. The price band for the IPO has been fixed at Rs 93-94 per share and the issue will close on February 18.

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At the upper end of the price band, the government would raise a little over Rs 819 crore. The offer will give Rs 819.24 crore to the government but the company will not get any money from this offer.

The information and communications technology infrastructure provider would be the sixth initial public offerings this year. The RailTel IPO will be a complete offer for the sale of 8.7 crore equity shares by the government. Half of the issue is reserved for qualified institutional buyers, 35 percent for retail investors, and 15 percent for non-institutional bidders.

Most brokerages have advised subscribing to the issue on the back of robust fundamentals, better margins, diversified portfolio, and expectations of strong growth in the future. Analysts believe that the company is going to play a key role in the digital transformation of Indian Railways. The government's aggressive expansion plan with respect to building railway infrastructure over the next 5 years will further be a key positive.

Here's what leading brokerages have to say about the RailTel IPO issue:

IIFL Securities - Subscribe from a long term perspective

Railtel has strong backing from the Government of India (GoI) stands to gain from securing projects from GoI and PSUs on a nomination basis. It has right of way for laying optical fiber cable along railway tracks which will expand its network in tandem with new rail line constructions.

Railtel’s revenues have grown at 7.5 percent CAGR over FY18-20 and has healthy EBITDA margins. The margins have declined in H1FY21 owing to non-recurring items but are at normal levels after adjustments. Our modest 6 percent revenue CAGR over FY20-23E and steady-state margin assumption results in FY23E P/E of 17x, which is fair considering additional growth drivers from Indian Railways initiatives. Hence, we recommend 'subscribe' from a long-term perspective.

Angel Broking - Subscribe for long-term as well as listing gains

The company also has a strong financial position (debt-free) and has been consistently paying dividends since 2008. Its margins and return ratios are better compared to other telecom players in India.

RailTel has priced its issue at 21.4x PE on an FY20 trailing basis, which is quite reasonable by looking at the strong future growth rates of the company. We expect a good listing and are positive about the long-term prospects of the industry as well as the company. We recommend 'subscribe' to the RailTel IPO for the long-term as well as for listing gains.

Choice Broking - Subscribe

Other railway infrastructure companies (IRCON, RITES and RVNL) are trading at an average P/E of 9.5x. However, considering the futuristic service and growth plans of the Indian railways and RailTel’s ability to monetize 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.

Religare Broking - Subscribe from a long-term perspective

RailTel intends to create open radio access networks, small cell and tower infrastructure at railway stations for hosting telecom players to assist with their preparation for the 5G network. Further, it plans to continue to invest in expanding its network and deploying the latest technologies to enable a high capacity next-generation network to deliver sustained value to its customers and improve their experience. It also intends to diversify and expand its services and solutions. The financial performance of the company has been tepid with Revenue/PAT CAGR of 7.5 percent and 2.6 percent over FY18-20. However, it has consistently paid a dividend since FY08. On the valuation front, the company is valued at a PE of 21.4x FY20 EPS. From a long-term perspective, investors can consider applying for the IPO.

Geojit Financial Services - Subscribe

In FY20, RailTel had the highest net profit margin among key telecom companies and key IT/ICT companies in India, with a profit margin of 12.5 percent. The company expects strong growth in data center services in the future as the government plans to invest in smart cities, health, e-office projects, and education.

At the upper price band of Rs 94, RailTel is available at a P/E of 21.4x on an FY20 basis, which appears fully priced. Considering, increasing data usage, GoI’s digital India initiatives and further diversification plans of RailTel, we assign a Subscribe rating for the issue.

Samco Securities - Subscribe for listing gains

Since RailTel is a debt-free company and pays consistent dividends it could witness some traction, but for long-term investors, there are a few red flags. Firstly, the company has delivered single-digit revenue and PAT CAGR of 7.5 percent and 2.5 percent respectively from FY18 to FY20. There is a high dependence on government entities and concentration risk is given that 23.8 percent of its revenues come from the top three customers. Its presence in a highly regulated industry is another cause of concern. Overall, the company is fairly priced at its FY20 P/E of 21.3 times. 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.

(Edited by : Ajay Vaishnav)