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Improved prospects; margin to remain soft

Q3 revenue flat YoY on exports decline

RITES (RITE IN) revenue rose 1% YoY to INR 6.8bn in Q3FY24, in line with our estimates. Consultancy revenue grew 6% YoY to INR 3.3bn as project consultancy, up 21%, offset the fall in the inspection business, down 25%. Exports consultancy was down 53% while domestic consultancy was up 14%. Turnkey revenue rose 9% YoY to INR 2.6bn, leasing was up 3% to INR 365mn, and power generation up 39% to INR 31mn. Exports revenue slumped 38% YoY to INR 580mn. Management expects exports revenue to rise from H2FY25 on execution of 10 locomotive order from Mozambique (INR 2.9bn) received in Q3.

Export orders make a comeback after four year; more to follow

Exports fell 38% to INR 580mn in Q3FY24 on a draining backlog. It expects to win two more orders worth INR 10.5bn in the near term (Bangladesh order worth INR 8.5bn and the rest from Zimbabwe). Management expects steady revenue realization from Q2FY25 as execution picks up on existing and upcoming orders.

EBITDA margin compresses 380bp YoY to 24.7%

Cost of export sales fell 40% YoY in Q3 on lagging business; employee expenses were flat, and Other operating cost was down 8%. Cost of turnkey construction rose 21%, and transmission charges were up 8%. EBITDA fell 13% YoY to INR 1.7bn, in line with our estimates, as Indian Railways’ inspection business shifts to competitive bidding. EBITDA margin contracted 380bp YoY to 24.7%. With changing dynamics, management reduced our EBITDA margin to 20% with a FY19-23 average at 28%.

Valuation: reiterate Sell with a higher TP of INR 515

We raise our EPS by 10% for FY24E, 4% for FY25E and 8% for FY26E amid exports recovery. We increase our TP by 39% to INR 515 from INR 370 on 16x ([from 13x; three-year average one-year forward) December 2025E P/E, as we roll forward. We reiterate Sell on margin compression in consultancy and an outperformance of 44% vs the Nifty in the past three months. We expect an earnings CAGR of 15% during FY23-26E with a ROE and ROCE of 23% and 24%, respectively, during FY24-26E as the WC cycle may remain low despite the rise in turnkey construction along with a strong dividend yield of ~2.3% for FY24E.

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