Rites Ltd-IPO Note

Rites Ltd-IPO Note
IPO
by Nikita Bhoota 19/06/2018

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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Basic Money Mistakes Every Individual Makes and How to Avoid It

Basic Money Mistakes Every Individual Makes and How to Avoid It
02/07/2018
Untitled Document

"Your salary has been credited to your account." Who doesn't get excited about this message? But remember, a wise man once said that it's not your salary that makes you rich, it's your spending habits. You live life king size in the first week of the month. By the time it's the last week, you tend to survive on the bare minimum. Your happiness can turn into financial mayhem if you are not careful about your money habits. Here are four common money mistakes that you can avoid.

Living beyond your means: It is said that rich people stay rich by living like they are broke. And, broke people stay broke by living like they are rich. Today, each one of us is living a materialistic life. It is believed that the more you own, the more successful you are. The state is such that people have started resorting to loans for living as per the societal standards. However, this is an ill-advised way of living and would lead you to a financial mess. To avoid this, you should stick to a budget. The 50/20/30 rule may help. As per this rule, 50% of your monthly income must be for your monthly expenses, while 30% can be kept aside for your entertainment and leisure. And, you must save and invest the remaining 20%.

No robust retirement plans: Death is certain and so is retirement. Have you saved enough for your old age? Saving for the recurring expenses from your peak working days could be your best bet. Start keeping aside some percentage of your hard-earned money for your future, and let the compound interest do the miracle for you. Many in the organized sector have the privilege of getting retirement plans from their company. Make the most of it by contributing as much as possible.

Not saving for emergencies: Life is full of surprises- good and bad. If preparing for good times is necessary, be prepared for tough times, which are inevitable. Without any financial support, you are more likely to fall prey to high-interest loans. Thus, having an emergency fund is like having a cushion that can act as a buffer until the time you get back on your feet.

Emotions-driven investing: Investing based on the daily headlines could be troublesome. A glad tiding may make you want to invest without a lot of thought. On the other hand, an unfavourable news may make you panic and run away. Either way, you may lose out on opportunities. Emotions may either cause you to take more than you can handle or could deter you from doing something that is beneficial for you. Thus, it is advisable to keep emotions and money matters separate.

Conclusion: Managing money could be a tricky affair, especially when you are at the start of your career. To err is human. But not learning from the mistakes can be devastating. Use these tips and avoid making these basic money mistakes in your daily life.

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How can I invest in Indian stocks as an NRI?

How can I invest in Indian stocks as an NRI?
03/07/2018

With the rupee’s strength dwindling in comparison to major foreign currencies, non-resident Indians (NRIs) may look at investing in their home markets in order to reap high returns. If you are among these NRIs looking to capitalize on the falling rupee, all you need to do is follow the below steps:

Eligibility

First of all, you must find out whether you are eligible to invest as an NRI. By definition, an NRI is an Indian citizen who -

  • Has been in India for less than 182 days in a financial year
  • Has been in India for less than 365 days in the past 4 financial years

Once you have figured out your eligibility criteria, you can get down to the brass tacks.

Step 1: Opening an NRE (Non-resident Rupee)/NRO (Non-resident Ordinary Rupee) savings account

An NRI has to open either one of these accounts to be able to invest in the Indian markets. The major differences between the two accounts are as follows:

Parameters

NRE

NRO

Repatriation

All funds along with interest earned may be repatriated without paying
any tax on the interest amount

Only $1 million may be repatriated per year, including interest

Tax Treatment

It is tax-free

It is subject to Income tax, Wealth tax, and Gift Tax

Joint Holding

Only NRIs may jointly hold this account

Both resident Indians and NRIs may be joint account holders

 

Step 2: Get a PIS permission letter from the bank

PIS (Portfolio Investment Scheme) permission letters allow NRIs to purchase/sell shares and debentures under the Portfolio Investment Scheme. It stands as an approval from the Reserve Bank of India (RBI) to invest in the stock markets. The bank where you open your NRE/NRO savings account takes care of this process.

Step 3: Open a trading & demat account, connect it to the PIS

Finally, you will need to open a trading and a demat account to start investing. The following documents are a must for opening the accounts:

  • Copy of PIS permission letter
  • Copy of FEMA (Foreign Exchange Management Act) declaration
  • Copy of PAN card
  • Overseas address proof – (driving license/foreign passport/bank statement (not more than 2 months)/notarized copy of rent agreement)
  • Passport size photograph
  • Proof of bank account (cancelled cheque leaf of NRE or NRO savings bank account)
  • Declaration of P.O. Box in your residing country
  • FATCA (Foreign Account Tax Compliance Act) Declaration Form

Note: Copies of PAN card, passport, the power of attorney, and foreign address proof must be notarized by the Indian Embassy, the Consulate General, or through a public notary in the NRI’s country of residence.

Step 4: Trading

  • To begin trading, you must first allocate funds from the NRE/NRO bank account to the PIS
  • The bank notifies the brokerage firm about the allocated funds. These funds are then updated to the trading account
  • Upon purchasing a stock, the brokerage firm sends the buy contract note to the bank at the closure of business. The bank then debits the PIS account and credits the firm
  • Similarly, on selling a stock, the brokerage firm sends a sell contract note to the bank at the closure of business before crediting the PIS account with the proceeds.

Preferable avenues for investment

  1. Real estate: NRIs can only invest in commercial or residential properties. Proceeds from the sale of agricultural land, etc., must be deposited in an NRO account
  2. Direct equities: PIS account is mandatory for investment
  3. Term deposits & NCD: A safe and viable option for risk-averse NRIs
  4. NPS: Ideal for those retaining their Indian citizenship and planning to come back
  5. Mutual funds: These do not need a PIS account for investing, but FATCA rules impose certain restrictions on US and Canadian citizens

Do remember!

  • You cannot hold more than 10 % stock in any listed Indian company
  • For short-term capital gains (STCG), a taxation of 15% is made on any gains on stocks sold before 1 year
  • For long-term gains on stocks held for more than a year, profit on which is less than Rs1,00,000 the tax is exempted
  • To map both NRE/NRO accounts with the trading account, you need to get two client IDs from the broker
  • Profiting from the F&O segment is considered as business income according to the Income Tax department

Happy Investing!

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Habits That Could Ruin Your Entire Portfolio

Habits That Could Ruin Your Entire Portfolio
05/07/2018

Building up an equity portfolio for wealth creation by way of investing in stocks has become quite the norm these days. However, one requires knowledge and patience to make big money in the markets. Moreover, one must be disciplined or their bad habits could ruin the opportunity to make profits.

Here is a list of practices that could ruin your entire portfolio:

1) Underestimating The Power of Compounding

When investing their hard-earned money in the market, people often tend to miss out on the knowledge of compounding. The thing about compounding is that its effect is only visible after a few years. If an investor has invested an amount at 15% compound interest, then your capital would be eight times in 10 years and 16 times in 20 years. One can enjoy compounding if they invest with a long-term perspective in mind.

2) Ignoring Company Valuations

Before investing in a particular stock, it is essential to know about the company’s particulars such as its valuation, and its operating and financial costs, etc. Many investors tend to ignore this fact and invest blindly. Given the current market situation, it is better to consider all the critical points before investing. Markets never stick to the guidelines and are often overvalued or undervalued at times, but in the long run, they come back to their core principles.

3) Overstepping Your Boundaries

Most often, investors take the advice of their friends or family when investing instead of conducting proper research on the subject. Right now, the prospect of multi-bagger stocks  are on the circuit, and they are stocks that give over and above their cost; such stocks also shoot up if a high-profile investor enters the scene. All these seem like great reasons to invest in such shares, but that plunge should only be taken after proper research.

4) Stocks Are Not for Emotional Bonding

Emotional bonding with your stocks is called “anchoring”. This is the most commonly occurring problem with investors. Investment experts conclude that it is not a wise move to pour your emotion into stocks as it prevents you from understanding its original position. We automatically assume that the particular stock will always yield good returns and can never go negative. This assumption has been proven detrimental in the recent years.

5) Greed Is Not Advisable for Financial Health

Currently, our stock markets are in the trend of ‘bull’, so investors try looking for value stocks, i.e. those stocks whose acquisition price is at an all-time low, but when it doubles back, you end up getting a lump sum amount as profit. If only this were true! In reality, it is not. Some stocks are cheap because that is their real worth. Most often, investors do not realize this simple guideline and spend a considerable amount in these stocks. The result of this spending becomes disastrous after a certain period. Finding gems in a trash can is just a saying, not a principle to be followed when investing in the market.

6) Knowing The Right Time to Exit

Investors should know when to quit. However, this is quite easy to say but a difficult thing to do in reality. A person refuses to accept that their shares are failing, but still does not sell them. Such actions damage the portfolio ultimately. Experts suggest that real money is only made when you exit a profit-making portfolio and not by holding on to the negative portfolios.

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Secrets of successful trading

Secrets of successful trading
01/08/2018

People who are new to stock markets are often enthusiastic about trading and look for quick and easy ways to become rich. These factors usually restrict their understanding of the market, and they lose out on tactics of trading. Below are ten trading secrets for the newbie traders.

1. Limit the capital investment

Most of the beginners are eager to earn quick money. They have a perception that investing a lot of money during initial days can help them earn money. The most valuable tip for any beginner is that he should spend a limited amount of money as capital initially. It is better to set a percentage limit to the capital invested in one company or trade.

2. Do not expect early profits

The mindset of most of the beginners is to earn short term gains. It acts as a hindrance in rational decision making. Hence, beginners should make sure that they carry the right attitude for trading, not expecting quick profits.

3. Keep a trading journal

Staying updated with recent events and news is essential in the stock market. Trade journals are the best source for gaining knowledge. A trader should get into the habit of reading these journals and relate them to their daily trading.

4. Risk analysis

Risk analysis is critical to evaluate which stocks or securities should an investor invest in. Beginners tend to give less importance to risk analysis. Hence, they are not aware of the impact of loss in trading. It is imperative for traders to understand risk management right from the very beginning so that they can hedge losses.

5. Invest time to understand different techniques

People who start to learn trading are familiar with limited techniques. They become complacent with this procedure and fail to learn new methodologies. To be a successful trader, it is a must to evolve different skills and techniques.

6. Avoid penny stocks

Penny stocks are traded on the stock exchanges and provide high return along with high risk. These stocks have a small market capitalization and lack liquidity. New traders should be cautious of these stocks as they can easily get tempted to buy these stocks in order to earn high returns.

7. Control over emotions

It is very common for beginners to get carried away by emotions. It restricts their rational thinking and they lose focus on their trades. One needs to be in control of emotions irrespective of profits or losses.

8. earn the basics first

A lot of people start trading without actually knowing the basics of the stock market. They are not aware about how the market functions. Lack of knowledge narrows the focus of trader to a single strategy which he is aware of.

9. Avoid leverage

It is always advisable to not use the leveraged money (borrowed) while investing. It increases the price of trading and limits the understanding of the trader.

10. Diversification

Diversification is the process of investing in different instruments in order to minimize risk. It is useful for beginners who lack knowledge about specific sectors. It is always wise to diversify your investments across different sectors and industries. 

Next Article

How long should long-term be in investing?

How long should long-term be in investing?
02/08/2018

You would have often come across advertisements suggesting that lazy vacations or travel abroad is possible through long-term investments. They might be a lucrative option for many, but most people would still be confused by what constitutes a long-term investment? Investing in order to take care of the expenses of a marriage may take 5 years, while investing for a house may take 15 years and children’s college fees can possibly take nearly 20 years. All these are examples of long-term investments of varying lengths.

The textbook definition

For taxation purposes, investments in listed stocks and equity mutual funds are considered to be long-term if the holding period is more than one year. The holding period is defined as the period from one day after the investment has been made to one day after the investment has been encashed.

The ground reality

Going by the book, any investment above one year is a long-term investment. However, this definition could be quite inadequate for practical purposes. Most investors would look at a long-term investment as a way to even out losses and maximise gains. In fact, long-term investments are preferred because they help us to ride out the investment cycles and achieve parity, if not profit.

The bottom-line

Most analysts would agree that a better definition of a long-term investment would be “An investment that has a higher probability of maximising returns over a 10-year period as compared to alternatives.

To support this, you can draw upon some hard-hitting research on the basis of BSE data. Using this, you can also find a median which you can use a benchmark.

Before you begin, let’s take a couple of parameters into consideration-

  • Growth isn’t permanent. Disruptive companies continue to create ripples until bold becomes the new normal.

  • When things get worse, they usually don’t stop until they hit rock bottom. Rebounds are rare.

  • All data considered are for capital aggregation investments. Income generation schemes such as bonds, debentures, etc are not as influenced by time, as by interest rates.

  • FDs and other fixed return investments are not dependent on time as well, and so are ignored.

  • Let us first define some popular investment return targets. Let us choose the figures for 8%, 10%, 12%, 15%, and 16.2%-the last one being average market return for last 33 years.

  • The data taken into consideration uses month-end values for Sensex from April 1979 to October 2012. 

The probability of achieving these returns within a time period comes to something like this:

Year

Probability of achieving 8% returns

Probability of achieving 10% returns

Probability of achieving 12% returns

Probability of achieving 15% returns

Probability of achieving 16.2% returns

3

36%

58%

53%

50%

48%

4

31%

64%

59%

53%

52%

5

29%

68%

63%

56%

53%

6

23%

72%

66%

61%

59%

7

21%

76%

74%

66%

62%

8

20%

78%

74%

67%

61%

9

19%

78%

76%

68%

64%


The six-series’ mentioned in the graph are in order of the six rates of investments that have been set as targets.

This takes into consideration some high-performing and a low-performing stock. And as can be seen from our initial premise, the investments top out around the 10-year period.

Statistically speaking, a period of more than 10 years may be considered only for academic interest as a decade is really as far as you can see.

From analysis, you can notice the following facts-

  • The high-performing stocks started to peak after the 5-year mark.

  • They continued an appreciable rate of growth till they crossed the 7-year threshold.

  • After the 7-year threshold, they flattened out to a plateau.

  • The low-performing stock, on the other hand, continued to drop steadily.

  • The dip became more and more pronounced after the 7-8-year time period.

  • Thus, you can take an optimum measure of the 6-7-year period as the best median in which to invest for the “long-term”.

In general, a 10-year cycle would help us to reach a plateau after which our stocks’ value would either fall or remain constant. Within this phase, it’s better to cash out in the 6-7-year period and invest in the next big thing.