Should investors consider RailTel’s IPO after IRFC’s weak listing?

After IRFC’s weak listing, here’s what investors should look for before investing in RailTel’s IPO.

Should investors consider RailTel’s IPO after IRFC’s weak listing?

We are well aware of the various services provided by the government to the citizens of India. This includes services such as education, electricity, water, insurance, transportation, crude oil, steel, etc. These are provided by various public sector companies at affordable costs. In most scenarios, it is believed that running such businesses for the welfare of the general public could lead to losses. And so, PSUs were introduced.

What is a PSU?
A business owned by the government is termed as Public Sector Undertaking or PSU. In these organisations, a majority (51%) stake is held by the government. This can be the central government, a state government, or a mix. The sector is administered by the Ministry of Heavy Industries and Public Enterprises.

Recently, there was an Initial Public Offering (IPO) from one of the PSU companies called RailTel. Generally, the government takes the IPO route to raise funds and divest in their companies. This way, they can reduce the stake in the government-owned companies by potential privatisation of such companies.

Related: What to keep in mind when investing in an IPO?

The RailTel IPO

Background
RailTel Corporation of India is considered the largest neutral telecom infrastructure provider in India and comes under the sector of Information and Communications Technology (ICT). The organisation began its operations in September 2000 and has been on the go ever since. 

Services include NLD (National Long Distance) services, leased lines, Multi-protocol Label Switching (MPLS) based virtual private network (VPN) facilities, and more. The organisation provides various services under the broad topics of telecom infrastructure services, data centre and managed hosting services, and system integration services.

About the IPO
The RailTel IPO was an Offer for Sale (OFS), so no fresh issue was being made. The introduction of this IPO was for disinvestment purposes.

The company was making a public issue of INR 819 crore with a price band of INR 93-94 per share. An investor needed to buy a minimum lot of 155 shares, thereby putting the final investment of INR 14,570 requirement. Out of the entire issue, 50% was reserved for Qualified Institutional Buyers (QIB), 15% for Non-Institutional Investors (NII), and the remaining 35% for retail investors. 

Valuation and impact
The RailTel IPO was oversubscribed by 42 times. The institutional and HNI portions were subscribed by 65 and 73 times respectively. The retail category was subscribed by 17 times. At an upper band of Rs 94, market cap of Rs 3017 crore, annualised PE of 33x and a P/B value of 2x, the issue seemed fairly valued as per leading analysts.

The IPO had a tepid listing on 26 February 2021. It listed at Rs 109 per share compared to the IPO price of Rs 94 with a premium of 11.27%. However, the price has soared since then with the stock closing at more than Rs 140 on 16 March 2021. It is pertinent to note that even after IRFC’s poor listing, the investors showed faith and trust in RailTel backed by sound fundamentals, government support, and future plans of expansion. 

Related: How IPOs differ from NFOs?

Potential risks

Here are some of the factors that could be potential risks in the future:

  • As the business has a major stake belonging to the government, any change in the rules and regulations may lead to adverse effects on RailTel’s business. 
  • The telecom industry is highly competitive. If the company does not provide up-to-date technology services, it can lead to the business becoming obsolete, thereby losing its USP (Unique Selling Proposition).
  • This industry requires high capital outflow and substantial fixed costs.
  • RailTel is also involved in legal proceedings. If these result in adverse outcomes, its business reputation and cashflow might be impacted.
  • The company is highly dependent on government entities (such as Indian Railways) for revenues.

Related: All about IPOs in India

Should one invest in PSUs?
The answer to the above question is quite subjective. It all depends on one’s risk appetite, the time frame one is investing for, the objective of the returns earned, and so on. After taking into account these factors, one can decide if their requirements are fulfilled by investing in the said instrument. 

Next, let’s understand the various factors that could affect one's decision to invest in PSUs. 

  • Risk appetite: Depending on the risk appetite a person has, they can choose to invest in the company.
  • Period of investment: If an individual wants to invest in the short term, PSUs can be considered. In the longer run, PSUs may not be a good bet as a public company is more likely to generate NPA (non-performing assets), witness slow growth, and lack efficient management. 
  • Returns: If one is looking for good returns in the form of a dividend, some PSU stocks offer good dividends, so choose wisely. 
  • Losses: In some cases, even though the shares are highly subscribed, reports show that the company has made losses.
  • These are some of the factors that may seem to be a dull side of the business. One should understand the business and the market, and invest accordingly.

Related: Is your IPO rightly valued?

Last words
Investing in PSUs or any stock listed on the stock exchange is subject to market risk, so one has to do some research and stock analysis. An investment in a company’s stock has its pros and cons, so be sure to consider the various factors. PSUs are considered a safe bet as the majority stake is held by the government. Look at these proven investment strategies that can be considered for volatile market.

Disclaimer: This article is intended for general information purposes only and should not be construed as investment or tax or legal advice. You should separately obtain independent advice when making decisions in these areas. 

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