Rites Pacing Ahead On The Right Track

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Kiran Dhawale

RITES Ltd is a newbie in the secondary market as it recently got listed on the bourses on July 2, 2018. RITES is a Mini-Ratna company formed under the patronage of the Indian Railways. The company is involved in transport consultancy and engineering sector in India. The company has diversified services and extensive geographical reach, all under one roof. During the span of around 44 years, the company has undertaken projects in over 55 countries in Asia, Africa, Latin America, South America and Middle East regions. 

Apart from having its presence as a transport infrastructure consultancy organisation in the railway sector, it also provides consultancy services across other infrastructure and energy market sectors, including urban transport, roads and highways, ports, inland waterways, airports, institutional buildings, ropeways, power procurement and renewable energy. It has the benefit of being associated with the Indian Railways. 

The company is involved in design, engineering and consultancy services in transport infrastructure sector with focus on railways, urban transport, roads and highways, ports, inland waterways, airports and ropeways. It undertakes leasing, export, maintenance and rehabilitation of locomotives and rolling stock. It is involved in undertaking turnkey projects on engineering, procurement and construction basis for railway line, track doubling, third line, railway electrification, upgradation works for railway transport systems and workshops, railway stations, and construction of institutional/residential/ commercial buildings, both with or without equity participation. It is also engaged in wagon manufacturing, renewable energy generation and power procurement for Indian Railways through various collaborations by way of joint venture arrangements, subsidiaries or consortium arrangements. 

Well-poised to leverage its expertise to encash opportunities in emerging sectors. 

The company aims to leverage its domain and technical knowledge expertise across the various sub-sectors of the transport infrastructure sector to enter into business opportunities and other emerging sectors either directly or indirectly, by way of coalitions, joint ventures, subsidiaries and consortium arrangements. Further, it has improved its domain knowledge and technical expertise by joining in consortiums with several consulting partners including Systra, Egis Rail S.A, Geoconsult ZT GmbH, among others, from countries such as France, Japan, Austria, U.S.A, Germany and Denmark. Besides, it is looking to expand its operations in evolving sectors and presently it is undertaking projects in sectors such as renewable energy generation, power procurement, railway electrification as well as turnkey projects in upgradation of railway workshops, due to increase in demand in such sectors, government plans and macroeconomic trends. 

Scaling up power procurement and renewable energy segment 

The Indian Railways and RITES have jointly formed a company, Railway Energy Management Company Limited (REMCL), to meet Indian Railways’ stipulated target of procurement of renewable energy. This venture provides project management and other consultancy services for the Indian Railways related to setting up of wind energy projects, solar energy projects, power procurement and construction of transmission lines connected to the Inter–State Transmission System (ISTS). REMCL has commissioned a wind power project of capacity 26 MW in Jaisalmer, Rajasthan and has also concluded power procurement contracts for approximately 1,175 MW across various states in India. Besides, the National High-Speed Rail Corporation Limited has mandated REMCL to undertake techno–economic viability studies and related surveys of power sourcing arrangements for their requirements. The high-speed rail corridor (508 km) between MumbaiAhmedabad sanctioned at a cost of Rs 108,000 crore will also provide growth opportunity for RITES.

Huge investment from Indian Railways augur well for RITES 

The government has envisaged Rs 8.56 trillion capex plan over FY15-FY19, which is almost double the cumulative capex done over the last 15 years and almost four times the capex done over the last 5 years. Out of the total envisaged investments, Rs 2.73 trillion of investments have already been made from FY15 to FY17. Thus, in the coming months, huge amount of investment from Indian Railways is expected, which bodes well for players like RITES. Notably, the opportunities arising from huge new investments in railway infrastructure is likely to further accelerate company’s growth in the years to come. 

Robust order book 

The company’s order book as on July 30, 2018 stands at Rs 5517 crore, which translates into book-to-bill of 3.7x on the operating revenue of FY18. This provides strong revenue visibility for the next 3 to 4 years. Out of the total current order book, 67 per cent orders are from Central and state governments and the rest from others. The company has a long-standing business relationship with several Central and state government ministries, departments, corporations and public sector undertakings, which bodes well for RITES as it ensures repeat orders from its customers. RITES offers a wide range of consultancy services, primarily in the transport infrastructure space, that address the varied and expanding requirements of its clients across the market segments in which they operate. Its diversified sector portfolio in consultancy services in the transport infrastructure sector enables the company to access sectors with growth potential according to changing macroeconomic trends and enables it to expand its operations in sectors in which it already has significant presence. In India, the company’s customers include many Central and state government ministries, departments, instrumentalities as well as local government bodies and public sector undertakings. 

Lean balance sheet and robust financials 

On a standalone basis, RITES is debt-free for more than a decade. Further, the company’s operating revenue has grown at 9.1 per cent CAGR over the period of FY13 to FY17. Also, its net profit during the same period has grown at 11.7 per cent CAGR. On the valuation front, the company is currently available at 15.13x of its TTM earnings. As on FY18, the company ROE stands at Rs 15.8 per cent. 

Looking at the standalone performance of RITES, the company’s full year revenue of 2017-18 rose marginally by 6.4 per cent YoY to Rs 1603 crore, while its gross profit remained virtually stable at Rs 493 crore as against Rs 488 crore in the previous fiscal. Its net profit rose almost 8 per cent YoY to Rs 337 crore. Further, the company’s subsidiary REMCL reported operating revenue of Rs 66 crore in FY18, a growth of almost 18 per cent YoY. The EBITDA for FY18 was at Rs 53 crore, up by 15 per cent from FY17. Notably, REMCL’s profit after tax surged almost 72 per cent YoY to Rs 30 crore. 

On a consolidated basis, in FY18 the consultancy services segment contributed almost 68 per cent to the total revenue, while export sales, turnkey construction projects and leasing services contributed 15.4 per cent, 9.8 per cent and 6.1 per cent. 

Looking at the quarterly performance, in Q4FY18, the company’s operating revenue surged almost 31 per cent over the corresponding quarter of last year to Rs 549 crore. The gross profit during the fourth quarter of FY18 spiked 114 per cent YoY to Rs 130 crore, while the net profit surged 75 per cent YoY to Rs 83 crore. 

The company’s healthy financial position of RITES leads to qualification for bidding projects across all market segments, as there are minimum criteria of net worth and profitability for various projects. RITES is consistently paying dividend and its dividend yield of 2.50 per cent is icing on the cake. For dividend distribution, the company follows the “Guidelines on Capital Restructuring of Central Public Sector Enterprises”, i.e., minimum dividend of 30 per cent of profit after tax or 5 per cent of the net worth, whichever is higher. Remarkably, the company has cash in hand of Rs 1568 crore, which translate into whopping cash of Rs 78.4 per share. Considering the lean balance sheet and the cash-rich status, strong client relationships, robust order book and expansion of power and renewable energy segment, we urge our readerinvestors to HOLD this scrip

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