Better Railway Stock: Ircon International Vs Railtel Corporation of India

The Indian railway system is undergoing a significant transformation driven by two key initiatives:

• Revamping Infrastructure: The government's massive investment of Rs 1 trillion aims to modernise railway infrastructure by procuring new train sets, laying new tracks, and making overall improvements.
• Digital Transformation: A parallel focus lies on digitalising Indian railways, which will enhance efficiency and safety.

This growth spurt will positively impact several railway companies. However, two potential frontrunners are Ircon International and Railtel Corporation of India.

Ircon International is an engineering procurement and construction (EPC) company that undertakes railway projects, whereas Railtel Corporation helps in the modernisation and digitalisation of Indian railways.

Let's compare these companies to determine which is a better railway stock.

# Ircon International

Established in 1976 as a railway construction company, Ircon International is an integrated engineering and construction company.

It undertakes technologically complex infrastructure projects across various sectors, including railways and highways.

Being a public sector enterprise, the company has a strong government backing which helped the company secure several orders over the years.

In the last 50 years, the company has delivered over 400 projects in India and 130 projects across 25 countries.

Some of its clients include BHEL, NTPC, the Ministry of Transport, the government of Sri Lanka, and Bangladesh Railways.

# Railtel Corporation of India

Railtel Corporation of India is a public sector enterprise that owns a pan-India fibre optic network through which it provides broadband and multimedia services.

The company also undertakes modernisation and maintenance of the communications network of Indian Railways.

It has two major lines of business, namely, the telecom and project segments. Through telecom, it provides internet and passive infrastructure services, and through projects segment, it lays and maintains optical fibre cable networks for other entities.

The company has an exclusive seamless right of way (ROW) along 67,950 km of railway track, passing through over 7,300 stations across the country.

Recently, the company also started offering data centre services to its clients.

Particulars	Ircon International	Railtel Corporation of India
Market Cap (in Rs billion)*	222.0	119.6
Order Book (in Rs billion)**	294.4	46

Source: Equitymaster| *As of May 8, 2024|** as of December 2023

If we compare the two companies in terms of marketcap, Ircon International is leading with a marketcap of Rs 222 bn as against Rs 119.6 bn of Railtel.

Ircon International also has a higher order book than Railtel. At the end of December 2023, Ircon's order book was Rs 294.4 bn as against Rs 46 bn of Railtel.

Ircon's expertise in project management and consultancy has helped the company secure a slew of orders in the last few months.

Railtel, on the other hand, is a telecom infrastructure player and has received several orders from railways in recent past.

If we compare the performance of both companies, Railtel is ahead of Ircon International. Railtel Corporation shares have zoomed over 200% in the last year, whereas Ircon share price is not far behind with 180% gains.

# Revenue

Ircon International primarily earns its revenue from project management consultancy, engineering, procurement, and construction (EPC), build, operate and transfer (BOT) or hybrid annuity mode (HAM) projects.

Railtel, on the other hand, earns revenue from providing broadband services and railway projects.

Although the nature of revenue of the two companies is different, it is important to see how the revenue for these companies has grown in the last five years.

In the last five years, the revenue of Ircon International and Railtel Corporation has grown at a compound annual growth rate (CAGR) of 16.7% and 14.4%, respectively.

Strong order book, and rapid development in railways infrastructure has helped Ircon International grow its revenue. For Railtel, the high demand for telecom services, and rapid development of national optical fibre network has supported the revenue growth.

Revenue

Net Sales (in Rs m)	Mar -2019	Mar -2020	Mar -2021	Mar -2022	Mar -2023	5-Year CAGR
Ircon International	47,984	53,911	53,498	73,797	103,679	16.7%
Railtel Corporation of India	10,033	11,281	13,778	15,485	19,635	14.4%

Data Source: Equitymaster

# Profitability

In terms of EBITDA, Railtel is ahead of Ircon. The EBITDA of Railtel grew at a CAGR of 7.3%, whereas Ircon's EBITDA saw a moderate growth of 1.5% CAGR in the last five years.

However, in terms of net profit growth, both companies reported a CAGR of 11% in the last five years.

The gross and net profit margins of the Railtel are higher than Ircon. However, both the companies have witnessed a contraction in margins.

For Railtel, the margins are declining due to a growing proportion of less profitable projects. For Ircon, the growing proportion of competitive bidding projects are expected to keep the margin range bound.

Profitability

EBITDA (in Rs m)	Mar -2019	Mar -2020	Mar -2021	Mar -2022	Mar -2023	5-Year CAGR
Ircon International	4,496	4,180	5,111	5,910	4,847	1.5%
Railtel Corporation of India	2,657	2,846	3,274	4,179	3,773	7.3%
PAT (in Rs m)	Mar -2019	Mar -2020	Mar -2021	Mar -2022	Mar -2023	5-Year CAGR
Ircon International	4,501	4,853	3,911	5,923	7,652	11.2%
Railtel Corporation of India	1,116	1,411	1,425	2,089	1,891	11.1%
Gross Profit Margin	Mar -2019	Mar -2020	Mar -2021	Mar -2022	Mar -2023
Ircon International	9.4%	7.8%	9.6%	8.0%	4.7%
Railtel Corporation of India	26.5%	25.2%	23.8%	27.0%	19.2%
Net Profit Margin	Mar -2019	Mar -2020	Mar -2021	Mar -2022	Mar -2023
Ircon International	9.4%	9.0%	7.3%	8.0%	7.4%
Railtel Corporation of India	11.1%	12.5%	10.3%	13.5%	9.6%

Data Source: Equitymaster

# Debt Management

Railtel Corporation is a debt-free company and has no fixed financial obligations.

Ircon, on the other hand, has a debt of Rs 14.4 bn at the end of the financial year 2023.

Although the company's debt has reduced in the past 5 years, and the debt-to-equity ratio is low at 0.3, there is a fixed financial obligation.

However, the company has sufficient cash flows of Rs 7.5 bn, which can help in funding working capital requirements and expanding its business.

Ircon International, at present, majorly caters to railways and road projects. Now, it plans to expand its portfolio to include renewable power projects, which can help the company achieve healthy profit margins.

Moreover, the company is also planning to build a portfolio of BOT, EPC, and Design, Built, Finance, Operate and Transfer (DBFOT) projects through its subsidiaries and joint ventures.

Railtel Corporation, on the other hand, is actively working on expanding its data centres business. It is targeting Tier II and Tier III towns to set up data centres with an investment of Rs 5 bn.

It is also planning to add more services under its portfolio to cover the entire gamut of enterprise services, such as e-office, edge data centre-centric services, VSS backups, rational dependency networks (RDN), and common operational datasets (COD).

Despite this, it plans to remain debt-free.

Debt Management

Debt to Equity Ratio (x)	Mar -2019	Mar -2020	Mar -2021	Mar -2022	Mar -2023
Ircon International	0.60	0.00	0.10	0.30	0.30
Railtel Corporation of India	0.00	0.00	0.00	0.00	0.00

Data Source: Equitymaster

# Financial Efficiency

Despite having different business models, we can track the financial efficiency of both the companies using similar metrics namely return on capital employed (ROCE) and return on equity (ROE).

Both ROCE and ROE help us estimate the return a company is generating on the total capital and equity capital invested.

The ROCE and ROE of Ircon International averaged 18.5% and 11.1%, respectively, whereas, for Railtel Corporation, the ratios averaged 15.7% and 10.9%, respectively

Clearly, Ircon International has higher return ratios than Railtel Corporation.

Financial Efficiency

ROCE	Mar -2019	Mar -2020	Mar -2021	Mar -2022	Mar -2023
Ircon International	16.0%	24.9%	17.9%	15.7%	18.0%
Railtel Corporation of India	14.7%	14.2%	14.4%	19.0%	16.2%
ROE	Mar -2019	Mar -2020	Mar -2021	Mar -2022	Mar -2023
Ircon International	11.4%	11.6%	8.9%	12.7%	14.7%
Railtel Corporation of India	8.7%	10.3%	10.1%	13.7%	11.5%

Data Source: Equitymaster

# Dividend

A company paying consistent dividends is considered to have more stable financials than a company that doesn't pay consistent dividends.

In the last five years, Ircon International's dividend per share has grown by a CAGR of 47.5%, whereas Railtel Corporation's dividend per share grew by a CAGR of 5.5%.

The dividend yield and dividend payout of Ircon International is also consistently increasing over the years indicating the company rewards its shareholders well.

Railtel Corporation, on the other hand, has also paid consistent dividends to its shareholders by maintaining the dividend per share at Rs 2 to Rs 3. However, the company's dividend yield has gone up over the years.

This clearly shows that both companies are rewarding their shareholders well.

Dividend

Dividend Per Share (Rs)	Mar -2019	Mar -2020	Mar -2021	Mar -2022	Mar -2023	5-Year CAGR
Ircon International	0.4	0.5	1.5	2.5	3.0	47.5%
Railtel Corporation of India	2.0	2.1	2.2	2.4	2.6	5.5%
Dividend Yield	Mar -2019	Mar -2020	Mar -2021	Mar -2022	Mar -2023
Ircon International	1.1%	1.1%	1.3%	3.5%	5.9%
Railtel Corporation of India	0.0%	0.0%	1.5%	1.9%	2.2%
Dividend Payout Ratio	Mar -2019	Mar -2020	Mar -2021	Mar -2022	Mar -2023
Ircon International	9.0%	9.2%	36.1%	39.7%	36.9%
Railtel Corporation of India	56.0%	47.8%	49.6%	36.9%	43.3%

Data Source: Equitymaster

# Valuation

The two important valuation ratios that help in assessing whether a company is undervalued or overvalued are price to earnings (P/E) ratio and price to book value (P/B).

The P/E ratio of Ircon International is 25.6x, whereas its P/B ratio is 3.8x. For Railtel Corporation, the P/E and P/B ratio stands at 48.6x and 6.9x, respectively.

This means that the shares of Railtel Corporation are overvalued compared to Ircon International.

If we compare them with their three-year averages and the industry average, both look overvalued at the current valuations.

Valuations	Ircon International	3-Year Average	Railtel Corporation of India	3-Year Average
P/E (x)	25.6	15.2	48.6	24
P/B (x)	3.8	1.6	6.9	2.7

Data Source: Equitymaster

Which Railway Stock is Better: Ircon or Railtel?

In terms of revenue growth, net profit growth, financial efficiency and dividend payments, Ircon International is leading.

However, with respect to EBITDA growth, profit margins, and debt management, Railtel Corporation is ahead.

The company primarily offers telecom services to Indian railways and has a pan-India optical fibre network to provide broadband services.

It is now planning to diversify its service offerings to cover the entire gamut of enterprise services such as e-office, edge data centre-centric services, VSS backups, rational dependency networks (RDN), and common operational datasets (COD).

For its data centre business, it is planning to set up data centres in Tier II and Tier III towns to take advantage of the growing need for data storage across the globe.

The company is currently implementing a range of projects, including telecom, data centres, railway and metro systems, and the KAVACH Train Collision Prevention System along with REC.

Railtel Corporation is also eyeing international projects in Vietnam and other Southeast Asian nations.

Ircon International, on the other hand, is diversifying its business by including renewable power projects in its portfolio.

Apart from this, it also builds a portfolio of various kinds of projects, such as BOT, EPC, and DBFOT, through its subsidiaries and joint venture associations.

Given the growing need for telecom and broadband services and the rise in infrastructure projects in the railways, both companies are poised to grow.

However, both companies are exposed to challenges in their respective business, such as delays in projects or tough competition.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here.