Is This the Best PSU Stock in the Market?

Re-rating stocks is the norm in bull markets. Especially if the markets find a popular reason for doing so.

For instance, take the case of PSUs getting redesignated from Miniratna to Navratna.

As the term 'ratna' suggests, these entities are already considered jewels in the government's crown. However, what makes such entities more credible for lenders and investors is their status as a ratna.

Going from a Miniratna to a Navratna is akin to a promotion. Herein the government vouches for the entity's financial stability and credibility to execute prestigious projects.

Such change of status recently happened for a newly listed green energy company IREDA. And without blinking, markets offered the stock a substantially higher P/E ratio. The stock's P/E multiple went from 25x to 40x in a month. There was no change in the company's fundamentals.

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

A miniratna incorporated in 2000 as the signalling and telecom arm of Indian Railways caught my attention.

Over the past two decades, RailTel has evolved into a prominent internet and telecom solutions and services provider for Indian Railways. It is, in fact one of the largest neutral telecom infrastructure providers in the country.

The company's core asset is its extensive pan-India optic fiber network. The network spans over 61,000 km along railway tracks. It covers key towns, cities, and even rural areas.

In the key cities, RailTel has a network of over 21,000 km, with 1,050 telecom towers. It also has a government empanelled RailCloud, a specialised security operation centre, and a highly qualified team of domain experts.

The company already offers leased internet lines and retail broadband to sectors like coal, banking, health, defence, etc.

Wonder why these matter beyond the core business of the company?

Well, that's because these make the entity an ideal candidate for becoming one of India's key data centre companies.

What are data centres?

A data centre 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 centres are becoming increasingly important to businesses. Businesses today are data driven and this means that data centres are needed to house servers.

But what is the growth opportunity here?

A joint report by the Confederation of Indian Industry (CII) predicts that by 2026 data centres are expected to fetch investments upto US$ 10 billion.

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

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

As India continues to make significant strides in the digital landscape, these projections signal a transformative phase in the country's technological evolution.

The government has also proposed the Draft Data Centre Policy in 2020 to streamline regulatory processes and incentivise investments.

Currently, India has about 151 data centres, ranking 14th in the world. With 880 million users, India has witnessed a surge in data centre investments.

However, when compared to the US and China in terms of internet penetration and number of internet users, India's numbers pale in terms of data centre capacity per user.

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

Despite High Internet Penetration, India Lags in Data Centre Infra

What is in it for RailTel?

The telecom business is extremely competitive. Companies typically endure cutthroat pricing.

RailTel has a rural and urban mix for broadband connections in 60:40 ratio, with a focus on rural areas. So, the telecom business alone can neither ensure volume nor margin growth for the company.

Telecom is a capital (capex) heavy business. RailTel has outlined capex of around 1.8 bn for next financial year. In the future too, the capex requirement is expected to remain in the same range.

As of March 2024, RailTel's order book stood over Rs 48 bn. The company has received large orders from the Indian Railways for services such as the 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 key growth catalyst is expected to be the data centre business.

RailTel has already set up two data centres (at Gurgaon and Hyderabad) from which it provides host of managed services including cloud and security operations for various government organisations.

The company is now planning to create a 30 MW data centre at its Noida plot of 17,000 sq. metres, under a partnership model. This is expected to be an investment opportunity of approximately Rs 15 bn for the data centre partner.

So, the Miniratna is on a reasonably sound footing due to its monopoly over the telecom and IT infrastructure requirements of Indian Railways.

However, RailTel's potential to deliver higher growth on the back of its data centre business and its subsequent ranking as a Navratna could be the triggers for rerating.

Investors should track this company closely.

Warm regards,


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