Recommendations from Construction & Engineering Sectors

This section gives a recommendation of a stock having stock price below Rs 100 with sound fundamentals and expected to give handsome returns over a one-year time horizon.

RAIL VIKAS NIGAM LIMITED 

MOVING ON SMOOTH RAILS 

HERE IS WHY
Good financial performance in the past three years
Asset-light model.
High dividend yield. 

Rail Vikas Nigam Limited (RVNL) was incorporated with the objective to undertake rail project development, mobilisation of financial resources, and implementation of rail projects pertaining to strengthening of the ‘Golden Quadrilateral’ and port connectivity as well as raising extrabudgetary resources for project execution. RVNL is in the business of executing all types of railway projects including new lines, doubling, gauge conversion, railway electrification, metro projects, workshops, major bridges, construction of cablestayed bridges, institutional buildings, etc.

RVNL’s major client is the Indian Railways and its other clients include various central and state government ministries, departments, and public sector undertakings. RVNL functions as an executing arm of Indian Railways and works for and on behalf of the Ministry of Railways for projects assigned to it for execution. It generally works on a turnkey basis and undertakes the full cycle of project development from conceptualization to commissioning including stages of design, preparation of estimates, calling and award of contracts, project and contract management, etc.

The company works on an asset-light model wherein all the machinery, plants and stores for execution are provided by the contractor. The company has been given authority to dispatch funds by the central government. This gives it speed in execution as the clearance process is expedited. RVNL has successfully mobilised funds for the construction of new lines by creating project-specific SPVs with strategic stakeholders. Its large capital base can be leveraged to raise funds as per its original mandate. As RVNL can award large-value contracts, it has been able to attract the best infrastructure companies in India.

Rail projects have been witnessing a lot of traction in the last few years with the government’s active interest in metro projects and rail upgradation. The company has seen good sales due to the government’s push of modernising the Indian railway network. This trend will continue in the near future with everincreasing demand for better, faster and comfortable transportation. With RVNL’s growth as a major provider of a variety of rail infrastructure, there is an opportunity of securing rail infrastructure projects overseas.

The company has shown consistent increase in its financial performance over the last three years. Its RoCE has improved from 3.85 per cent in FY16-17 to 13.07 per cent in FY18-19. RoE has also improved in this period from 11.14 per cent to 14.58 per cent. Gross sales have grown from Rs 5,920 crore in FY16-17 to Rs 10,069 crore in FY18-19, showing a CAGR of 30.41 per cent. In the same period its EBITDA has grown from Rs 522 crore to Rs 882 crore, showing a CAGR of 29.98 per cent. Its PAT has also grown from Rs 382 crore to Rs 607 crore, showing a CAGR of 26.05 per cent.

The high dividend yield of 6.4 per cent gives investors a risk cushion. Good prospects of the industry as a whole due to the government’s push for improvement of railways and metro projects, increasing sales and profit numbers, healthy dividend payout ratio and dividend yield, and an asset-light model makes the company a lucrative buy. The stock is currently trading at a reasonable PE of 7.76x. These factors make it a value stock. By virtue of these factors, we recommend our readerinvestors to BUY this stock.