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Exports slippage weighs on Q2

RITES reported a weak Q2FY27, with revenue up just 1.5% YoY and ~8% below our estimate, as dispatch of the first Bangladesh rake slipped by ~10-12 days into Q3, leaving export revenue at nil (vs INR 604mn in Q2FY26). EBITDA margin moderated to 21.9% (23.6% YoY) on a higher share of low-margin turnkey work (turnkey revenue up 66% YoY), and PAT fell 11.0% YoY to INR 971mn, 14% below our estimate. Company highlighted export shipment is expected in Q3FY27 and FY27E revenue growth is retained. Provisioning for the pay revision effective January 2027 will start in Q4FY27. The order book was broadly flat QoQ at INR 93.9bn (~3.8x TTM revenue), as ~INR 5bn of inflows offset execution, and RITES was declared L1 in a US$41mn (~INR 4bn) Sri Lanka order for five seven-coach train sets. Post the result we have marginally trimmed EPS estimate by 3%/1% for FY27E/28E but retain BUY with TP of INR265 (25x 1HFY29 EPS). RITES’ asset-light business model, negative working capital cycle and expected ~19% RoE by FY28E remain key positives. The stock also offers an div. yield of ~4-5%

Export slippage drives the miss:

RITES reported revenue of INR 5.6bn, up 1.5% YoY and ~8% below our estimate. Turnkey grew 65.9% YoY to INR 1.9bn and leasing grew 14.5% YoY, but consultancy declined 4.3% YoY and export sales were nil (INR 5mn vs INR 604mn in Q2FY26), as the first Bangladesh rake was dispatched only in early Q3. EBITDA stood at INR 1.2bn, down 5.8% YoY and 8%/5% below PL/street, with margins at 21.9% (vs 23.6% YoY and 21.5% in Q1FY27). Supplies and services cost rose to 47% of revenue (vs 34% YoY) on the higher turnkey share, partly offset by lower other expenses and export purchases; employee cost was up only 2.2% YoY. PAT came in at INR 971mn, down 11.0% YoY and 14%/10% below PL/street, also hit by lower other income (down 14.3% YoY) and a lower JV share (INR 10mn vs INR 43mn). PAT attributable to shareholders was INR 862mn, down 12.3% YoY. The company declared a second interim dividend of INR 1.90 per share (payout ratio: 96.9%, yield: ~4%).

Order book steady:

They have an order book of INR 93.9bn as of Q2FY27 (down 0.6% QoQ, up 3.3% YoY), led by Turnkey (INR 45.1bn, 48%), Consultancy (INR 27.1bn, 29%) and Exports (INR 18.2bn, 19%), with Leasing (INR 2.4bn) and REMC (INR 1.2bn) making up the balance. By mode, the book is 63% competitive and 37% nomination, while fresh inflows are now 70%+ competitive. Implied Q2FY27 inflows were ~INR 5.0bn, led by Consultancy (INR 4.2bn), followed by Leasing (INR 0.5bn) and Exports (INR 0.4bn); turnkey saw no net additions, and its book eased to INR 45.1bn from INR 47.2bn as execution picked up. Disclosed wins in the quarter included Patna Metro consultancy (INR 0.8bn) and the Bidar-Kalaburagi electrification PMC (INR 0.6bn), while the US$35mn South Africa locomotive order (INR 3.3bn) appears to be still outside the reported book, as the export book rose by only INR 0.4bn. The turnkey book is fully cost-plus, mainly educational institutions and hospitals, and is 12-24 months old, so execution should pick up further in H2. Management continues to win about one order a day and remains on track for its INR 100bn target; the Sri Lanka L1 and the South Africa order together would take the book close to it.

Exports to drive H2 growth:

Export revenue was nil in Q2 because revenue is booked only on dispatch of a full rake, and the first Bangladesh rake (18 coaches) slipped by ~10-12 days into Q3 after final third-party checks. Of the 200-coach order, nine rakes (182 coaches) remain; at least two are expected in Q4FY27 and the balance seven in FY28, with pace improving from the third rake as design and acceptance stabilise. Delivery of the five Mozambique locomotives (~INR 1.5bn) is set to start with the first loco in Q4FY27, with the order completing by H1FY28 at the latest. By our estimate, three Bangladesh rakes and the first Mozambique loco imply FY27 export revenue of ~INR 3bn, in line with the earlier minimum guidance. RITES has also been declared L1 for a US$41mn Sri Lanka order (five seven-coach train sets, 12-month delivery from LC opening), and about 20 developmental locomotive conversions for African markets will ship over time, starting with two ready units in the coming months.

Guidance:

Management retained its guidance of double-digit consolidated revenue growth in FY27, despite H1 growth of ~5%, as export deliveries and turnkey execution step up in H2. Pay revision provisioning (8th CPC for CDA scale / 3rd PRC for IDA scale, effective 1 January 2027) will start in Q4FY27 and continue every quarter; the amount is still being worked out but was called substantial. Even so, management aims to surpass FY26 PAT and stated margin red lines of 18-20% EBITDA and 15-16% PAT on a consolidated basis, while ruling out a return to 25%+ EBITDA margins given the shift to competitive bidding. Consultancy growth, in single digits over the last 2-3 years, is expected to touch double digits in the near future, with Quality Assurance already up ~15% YoY.

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