Salient features of the IPO:
* RITES Ltd. (RITES) is a wholly owned Government Company, a Miniratna (Category – I) Schedule ‘A’ Public Sector Enterprise. The company is a leading player in the transport consultancy and engineering sector in India and the only company having diversified services and geographical reach in this field. Based on Public Enterprise Survey FY16, it is ranked No. 1 based on net profit and dividend declared in Industrial Development and Technical Consultancy Services sector (Source: RHP).
* The issue is fully OFS, the company will not receive any proceeds from it.
Key competitive strengths:
* Comprehensive range of consultancy services in the transport infrastructure space
* Large order book with strong and diversified clientele base
* Technical expertise and business divisions with specialized domain knowledge
* Strong and consistent financial performance
* Preferred consultancy organization of the Government of India including the Indian Railways
Risk and concerns:
* Lower railway budgets
* Change in government policies
* Higher employee cost and attrition level
* Lower or cancellation of orders
Valuation & recommendation:
There are no comparable listed companies in India that engage in the same line of business as of the company. At the higher price band of Rs. 185 per share, its share is valued at a P/E multiple of 10.2x (to its restated FY17 EPS of Rs. 18.1).
Below are few key observations of the issue:
* Incorporated in 1974, RITES provides consultancy & engineering services to Indian Railways. Services includes conducting technoeconomic feasibility studies & preparation of detailed project reports, design engineering activities, procurement assistance, project management consultancy activities, quality assurance, construction supervision, materials system management & commissioning support, training, leasing & export of railway locomotives, rolling stock, spare parts & other equipment as well as turnkey projects on engineering, procurement and construction basis for railway electrification, railway line up gradation works for railway transport systems and modernization of railway workshops.
* Apart from catering to the railways, the company also provides consultancy services to other transport modes like roads & highways, posts & inland waterways, airport and urban transport like metros. This multi sectoral consultancy de-risks RITES in the event of slowdown in any one sector.
* Over FY16-18, the company’s order book has increased by 35.8% CAGR to Rs. 48,186.8mn in FY18. Around 53% and 3% of the order book are from high margin consultancy and leasing segments. Consultancy and leasing services have an EBITDA margin of around 28% and +30%, respectively. Export segment with margin of 15-17%, contributed 15% to the order book. EPC/Turnkey projects with effective margin of 2-3% formed 29% of the order book.
* The financial health of the company is strong and this can be demonstrated from its asset light & debt free operations and consistency in the financial performance. Over FY13-17, it reported an 11.6% CAGR rise in the earnings on 9.1% rise in the operating revenue. Average PAT margin during the period stood at 26.3%. EBITDA increased by 13.3% CAGR with an average margin of 28.4% during the period. Average RoE and RoIC stood at 17.6% and 16.3%, respectively, during FY13-17.
* The company is consistently paying dividend and has an average dividend payout ratio of over 30%. Since Nov. 2016, it twice went for bonus issue. As of 31st Dec. 2017, it has a capital base of Rs. 2bn with reserves of around Rs. 20bn.
* For the nine month ended Dec. 2017, RITES reported a top-line of Rs. 9,361.5mn with an EBITDA and PAT margin of 32% and 27%, respectively. For FY18E, we are anticipating a top-line of Rs. 14,402.3mn (a growth of 6.4% over FY17) and an EPS of 20.8 per share (a growth of 15.1% over FY17). EBITDA and PAT margin are anticipated at 32.4% and 28.9%, respectively. In FY19, we are expecting a 8.1% rise in the operating revenues to Rs. 15,568.4mn and a 8.7% rise in EPS to 22.6 per share.
* On valuation front, at higher price band, the company is demanding a P/E valuation of 10.2x (to its restated FY17 EPS of Rs. 18.1). The issue seems to be attractively priced considering its strategic importance, limited competition, virtually debt free operations and healthy financial performance. Thus considering the above observation we assign a “SUBSCRIBE” rating to the issue with long term investment horizon.
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