RailTel: The Hidden Gem in PSU Stocks with Data Centre Potential

Investing in Public Sector Undertakings (PSUs) can often reveal hidden gems with substantial growth potential. One such promising PSU is RailTel Corporation of India, a Miniratna incorporated in 2000 as the Signalling and Telecom arm of Indian Railways. Over the past two decades, RailTel has evolved into a significant provider of internet and telecom solutions for Indian Railways, making strides in sectors like coal, banking, health, and defense.

Why RailTel Stands Out

RailTel’s extensive network of over 21,000 km and 1050 telecom towers in key cities positions it as one of the largest neutral telecom infrastructure providers in India. This robust infrastructure underpins its core operations and offers leased internet lines and retail broadband services to diverse sectors.

The Re-Rating Potential

Bull markets often see stocks getting re-rated, particularly when there’s a compelling reason, such as a change in status from Miniratna to Navratna. Such upgrades enhance the credibility of these entities, making them more attractive to lenders and investors. A recent example is the newly listed green energy company IREDA, whose P/E multiple soared from 25x to 40x following its status upgrade. This prompts speculation about other potential re-rating candidates among Miniratna stocks, including RailTel.

RailTel’s Core Assets

RailTel’s core asset is its extensive pan-India optic fiber network, which spans over 61,000 km along railway tracks, covering key towns, cities, and rural areas. This vast network, coupled with a government-empanelled RailCloud and a specialized security operation centre, bolsters its service offerings. RailTel’s clientele spans sectors like coal, banking, health, and defense, leveraging its capabilities in leased internet lines and retail broadband.

The Data Centre Opportunity

The key growth catalyst for RailTel lies in its potential as a data centre provider. Data centres are critical facilities where companies store their information, ensuring reliable power, cooling, security, and connectivity. They are designed to withstand natural disasters, making them essential for today’s data-driven businesses.

Growth Prospects in Data Centres

A joint report by the Confederation of Indian Industry (CII) predicts that by 2026, data centres in India are expected to attract investments of up to US$10 billion. Currently, Mumbai leads with 49% of India’s data centre capacity, followed by Delhi-NCR and Bengaluru. The Indian government’s Draft Data Centre Policy of 2020 aims to streamline regulatory processes and incentivize investments, further boosting the sector.

Despite India’s significant internet user base, its data centre capacity per user lags behind the US and China, highlighting immense growth potential. India currently has about 151 data centres, ranking 14th globally, and with 880 million users, there’s a clear path for expansion.

RailTel’s Strategic Move

The telecom industry is known for its competitiveness and high capex requirements. RailTel’s mix of rural and urban broadband connections (60:40 ratio) reflects its broad market reach. Despite this, telecom alone may not ensure substantial volume or margin growth.

RailTel has outlined a capex of around Rs 1.8 billion for the next fiscal year, with a similar range expected in the future. As of March 2024, RailTel’s order book exceeded Rs 48 billion, with significant orders from Indian Railways and other entities like Coal India Limited, Ordnance Factory Board, and the Indian Air Force.

Data Centre Expansion

RailTel has already established two data centres in Gurgaon and Hyderabad, offering managed services including cloud and security operations for various government organizations. The company is now planning a 30 MW data centre in Noida, a project expected to attract an investment of approximately Rs 15 billion.

In Conclusion, RailTel’s unique position as a monopoly over the telecom and IT infrastructure requirements of Indian Railways, combined with its strategic expansion into the data centre business, positions it for significant growth. The potential for RailTel to transition from a Miniratna to a Navratna, driven by its burgeoning data centre operations, could serve as a catalyst for a substantial re-rating, making it a compelling investment opportunity in the PSU space. As the digital landscape in India continues to evolve, RailTel stands poised to capitalize on the burgeoning demand for data centres, promising a defence-like boom in its growth trajectory.