Article

Rites Ltd-IPO Note

07 Aug 2019 Nikita Bhoota

Issue Opens: June 20, 2018
Issue Closes: June 22, 2018
Face Value: Rs 10
Price Band:  Rs 180-185
Issue Size: ~ Rs 466 cr
Public Issue: 2.52 cr shares (at upper price band)
Bid Lot: 80 Equity shares   
Issue Type: 100% Book Building

Shareholding (%)

Pre IPO

Post IPO

Promoter

100.0

87.4

Public

0.0

12.6

Source: RHP

Company Background

RITES is a leading player in the transport consultancy and engineering sector in India. It provides consultancy (67% of 9MFY18 sales) in urban transport, roads and highways, ports, inland waterways, airports, power procurement, etc. It is also engaged in leasing (7.5% of 9MFY18 sales) and exports (16.9% of 9MFY18 sales) of locomotives and rolling stock. Further, RITES undertakes turnkey projects (6.9% of 9MFY18 sales) on engineering, procurement and construction basis for railway lines, railway electrification, etc. The Ministry of Railways (MoR) and RITES have a 49:51 joint venture - Railway Energy Management Company (REMC) for power procurement including renewable energy for railways. Power generation contributes 1.7% to 9MFY18 sales.

Objective of the Offer

The offer consists of offer for sale of up to 2.52cr shares (Rs466.2cr) by the government of India (GOI). It includes employee reservation of 12 lakh shares. There is a discount of Rs6 per share (at the cut-off price) to the retail investors and employees. The net offer consists of ~2.4cr shares. The object of the offer is to carry out disinvestment plan of GOI.

Financials

Consolidated (Rs cr)

FY15

FY16

FY17

**9MFY18

Revenue from operations

1,013

1,091

1,353

936

EBITDA Margin %

34.3

32.7

26.5

32

Adj. PAT

312

281

353

243

EPS (`)*

15.6

14.1

17.6

12.1

Growth y-o-y (%)

19.7

-9.8

25.4

-

P/E*

11.9

13.1

10.5

-

P/BV*

2.2

2

1.8

-

RoE (%)

18.6

15.1

17.3

-

Source: RHP, 5Paisa Research; *EPS & Ratios at higher end of the price band and on post IPO shares, **non-annualized numbers

Key Investment Rationale

  1. RITES is expediting efforts to scale up its EPC/turnkey business mainly from MoR. The company has been awarded projects for railway lines and railway electrification. The current order book for this division stands at Rs1,408cr. Although, this business could be margin dilutive given EBITDA margin is as low as ~8%. Nevertheless, the company believes that given huge investments in electrification and railways, the increasing traction will help the company strengthen its business by increasing its EBITDA and net profits in absolute terms.

     

  2. Orders from MoR, central/state governments and Public Sector Unit (PSUs) form ~77% of the company’s total order book. Incorporated by MoR, RITES has a long association with the Indian Railways, which is the fourth longest rail network in the world. RITES is a nominated organization for the export of railway locomotives, coaches and other equipments manufactured by the Indian Railways (other than exports to Malaysia, Indonesia and Thailand). Thus, we expect RITES to be a prime beneficiary of the government infrastructure spend particularly railways.

     

  3. The company’s order book at FY18 end stood at Rs4,819cr including 353 ongoing projects. The order book provides strong revenue visibility of about 3.5 years. The order pipeline looks promising as there are opportunities in the infrastructure sector in India as well as in other countries such as Sri Lanka, Bangladesh and Nepal.

Key Risk

The company faces competition from US, France and Germany based companies particularly in metro and turnkey projects. Despite the company being a preferred player by Indian Railways, it has to bid for many projects (as opposed to nomination basis).

Conclusion

At the upper price band, the stock is valued at undemanding P/E of 10.5xFY17 and 11.4x9MFY18 (annualized EPS). Further, IPO is more attractive for retail investors given the discount of Rs6 per share. We recommend Subscribe for long term.

Research Disclaimer

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Rites Ltd-IPO Note

07 Aug 2019 Nikita Bhoota

Issue Opens: June 20, 2018
Issue Closes: June 22, 2018
Face Value: Rs 10
Price Band:  Rs 180-185
Issue Size: ~ Rs 466 cr
Public Issue: 2.52 cr shares (at upper price band)
Bid Lot: 80 Equity shares   
Issue Type: 100% Book Building

Shareholding (%)

Pre IPO

Post IPO

Promoter

100.0

87.4

Public

0.0

12.6

Source: RHP

Company Background

RITES is a leading player in the transport consultancy and engineering sector in India. It provides consultancy (67% of 9MFY18 sales) in urban transport, roads and highways, ports, inland waterways, airports, power procurement, etc. It is also engaged in leasing (7.5% of 9MFY18 sales) and exports (16.9% of 9MFY18 sales) of locomotives and rolling stock. Further, RITES undertakes turnkey projects (6.9% of 9MFY18 sales) on engineering, procurement and construction basis for railway lines, railway electrification, etc. The Ministry of Railways (MoR) and RITES have a 49:51 joint venture - Railway Energy Management Company (REMC) for power procurement including renewable energy for railways. Power generation contributes 1.7% to 9MFY18 sales.

Objective of the Offer

The offer consists of offer for sale of up to 2.52cr shares (Rs466.2cr) by the government of India (GOI). It includes employee reservation of 12 lakh shares. There is a discount of Rs6 per share (at the cut-off price) to the retail investors and employees. The net offer consists of ~2.4cr shares. The object of the offer is to carry out disinvestment plan of GOI.

Financials

Consolidated (Rs cr)

FY15

FY16

FY17

**9MFY18

Revenue from operations

1,013

1,091

1,353

936

EBITDA Margin %

34.3

32.7

26.5

32

Adj. PAT

312

281

353

243

EPS (`)*

15.6

14.1

17.6

12.1

Growth y-o-y (%)

19.7

-9.8

25.4

-

P/E*

11.9

13.1

10.5

-

P/BV*

2.2

2

1.8

-

RoE (%)

18.6

15.1

17.3

-

Source: RHP, 5Paisa Research; *EPS & Ratios at higher end of the price band and on post IPO shares, **non-annualized numbers

Key Investment Rationale

  1. RITES is expediting efforts to scale up its EPC/turnkey business mainly from MoR. The company has been awarded projects for railway lines and railway electrification. The current order book for this division stands at Rs1,408cr. Although, this business could be margin dilutive given EBITDA margin is as low as ~8%. Nevertheless, the company believes that given huge investments in electrification and railways, the increasing traction will help the company strengthen its business by increasing its EBITDA and net profits in absolute terms.

     

  2. Orders from MoR, central/state governments and Public Sector Unit (PSUs) form ~77% of the company’s total order book. Incorporated by MoR, RITES has a long association with the Indian Railways, which is the fourth longest rail network in the world. RITES is a nominated organization for the export of railway locomotives, coaches and other equipments manufactured by the Indian Railways (other than exports to Malaysia, Indonesia and Thailand). Thus, we expect RITES to be a prime beneficiary of the government infrastructure spend particularly railways.

     

  3. The company’s order book at FY18 end stood at Rs4,819cr including 353 ongoing projects. The order book provides strong revenue visibility of about 3.5 years. The order pipeline looks promising as there are opportunities in the infrastructure sector in India as well as in other countries such as Sri Lanka, Bangladesh and Nepal.

Key Risk

The company faces competition from US, France and Germany based companies particularly in metro and turnkey projects. Despite the company being a preferred player by Indian Railways, it has to bid for many projects (as opposed to nomination basis).

Conclusion

At the upper price band, the stock is valued at undemanding P/E of 10.5xFY17 and 11.4x9MFY18 (annualized EPS). Further, IPO is more attractive for retail investors given the discount of Rs6 per share. We recommend Subscribe for long term.

Research Disclaimer