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Is this the best PSU stock in the market?

May 21, 2024

Is this the best PSU stock in the market?Image source: mesh cube/www.istockphoto.com

Revaluing stocks is the norm in bull markets. Especially if the markets find a popular reason for it.

For example, take the case of PSUs being redesignated from Miniratna to Navratna.

As the term ‘ratna’ suggests, these entities are already considered jewels in the crown of government. However, what makes such entities more credible to lenders and investors is their ratna status.

Going from a Miniratna to a Navratna is like a promotion. Here the government guarantees the financial stability and credibility of the entity to carry out prestigious projects.

Such a status change recently took place for a newly listed green energy company IREDA. And without blinking, the markets offered the stock a substantially higher price/earnings ratio. The stock’s price-to-earnings ratio went from 25x to 40x in a month. There was no change in the fundamentals of the company.

One wonders if other such miniratna stocks are potential revaluation candidates in the making.

A mini ratna established in 2000 as the signaling and telecom arm of the Indian Railways caught my attention.

Over the past two decades, RailTel has emerged as a leading provider of internet and telecom solutions and services for the Indian Railways. In fact, it is one of the largest neutral telecom infrastructure providers in the country.

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The company’s key asset is its extensive pan-India fiber optic network. The network covers more than 61,000 km along railway lines. It covers important towns, cities and even rural areas.

RailTel has a network of more than 21,000 km in the most important cities, with 1,050 transmission towers. It also has a government-established RailCloud, a specialized security center and a highly qualified team of domain experts.

The company already provides rental internet lines and retail broadband to industries such as coal, banking, healthcare, defense, etc.

Do you wonder why these are important beyond the company’s core activities?

That’s because these make the entity an ideal candidate to become one of India’s premier data center companies.

What are data centers?

A data center is a facility where companies store their information. They provide reliable power, cooling, security and connectivity. What makes them unique is that they are designed to withstand natural disasters such as hurricanes or earthquakes.

Data centers are becoming increasingly important for companies. Businesses today are data-driven and this means that data centers are needed to house servers.

But what is the growth opportunity here?

A joint report by the Confederation of Indian Industry (CII) predicts that data centers are expected to attract up to $10 billion in investments by 2026.

According to the report, Mumbai currently accounts for the largest share of data centers (49%). The city has benefited from the presence of a landing station and submarine cable connections.

Delhi-NCR has about 17% of the total data center capacity, followed by Bengaluru.

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As India continues to make significant progress in the digital landscape, these projections indicate a transformative phase in the country’s technological evolution.

The government has also proposed the draft data center policy 2020 to streamline regulatory processes and boost investments.

Currently, India has around 151 data centers, which rank 14th in the world. With 880 million users, India has witnessed a surge in data center investments.

However, when we compare with the US and China in terms of internet penetration and number of internet users, India’s figures pale in terms of data center capacity per user.

This reflects the country’s potential to expand this crucial digital infrastructure.

Despite high internet penetration, India lags behind in data center infrastructure

Despite high internet penetration, India lags behind in data center infrastructure

What’s in it for RailTel?

The telecom sector is extremely competitive. Companies usually have to deal with cutthroat prices.

RailTel has a 60:40 rural and urban mix for broadband connections, with a focus on rural areas. So the telecom sector alone cannot guarantee either volume or margin growth for the company.

Telecom is a capital-intensive business (capex). RailTel has planned a capital investment of approximately EUR 1.8 billion for the next financial year. The capex requirement is expected to remain within the same bandwidth in the future.

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As of March 2024, RailTel’s order book stood at over Rs 48 billion. The company has received large orders from the Indian Railways for services such as content on demand, video surveillance systems and e-offices.

It also has orders from Coal India, Ordnance Factory Board, Indian Air Force, etc., for system integration and bandwidth requirements.

However, the main growth catalyst is expected to be the data center business.

RailTel has already set up two data centers (in Gurgaon and Hyderabad) from where it provides a host of managed services including cloud and security operations for various government organizations.

The company now plans to build a 30 MW data center on the 17,000 sq ft Noida plot, under a partnership model. This is expected to be an investment opportunity of around Rs 15 billion for the data center partner.

The Miniratna is thus on a fairly sound footing thanks to its monopoly over the telecom and IT infrastructure requirements of the Indian Railways.

However, RailTel’s potential to achieve higher growth through its data center business and subsequent ranking as Navratna could prompt a revaluation.

Investors should watch this company closely.

Cordial greetings,

Tanushree Banerjee
Tanushree Banerjee
Editor, StockSelect
Equitymaster Agora Research Private Limited (Research Analyst)