Rail Vikas Nigam IPO: Here’s All You Need To Know

Rail Vikas Nigam Ltd. is the third company from the railway’s stable to launch an initial public offering as its promoter—Government of India—looks to offload a part of its stake.

The government aims to raise close to Rs 477 crore by selling 12.2 percent stake at Rs 17-19 apiece through the four-day maiden offer that opens on March 29, according to its red herring prospectus.

After the listing, the state-run company will be valued at nearly Rs 3,960 crore.

Business

Rail Vikas Nigam is in the business of executing all types of railway projects, including new lines, doubling, gauge conversion, railway electrification, metro projects, workshops, major bridges, construction of cable stayed bridges and institution buildings, among others.

Incorporated by the Ministry of Railways, the Miniratna company so far has been awarded 174 projects. It has completed 72. The remaining 102 projects are worth Rs 77,504 crore as on Dec. 31, 2018, providing revenue visibility for 10 years.

“Of the Rs 77,000 crore, about Rs 30,000 crore worth of work is that which will take longer time to complete—about five to seven years,” Chief Financial Officer Ashok Kumar Choudhary told BloombergQuint. “The balance Rs 40,000 crore of work will be completed in the next two to three years.”

So far the company has generated most of its revenue by laying new lines and doubling tracks on existing routes, according to its red herring prospectus. New and double-track railway lines also constitute most of the orders of the company.

Rail Vikas Nigam operates on an asset-light model, wherein it hires plant and machinery from contractors. It relies on the Ministry of Railways for deputation of manpower to perform supervisory tasks. The company is also looking to focus more on high-value projects, especially in hilly areas.

Financials

Net worth of Rail Vikas Nigam stood at nearly Rs 3,925 crore as on Sept. 30, 2018. That translates into a book value of Rs 19 apiece. The company also has a cash balance of Rs 1,403 crore.

While Rail Vikas Nigam’s revenue grew at an annualised rate of 34 percent over financial years 2015-2018, its net profit rose at 19 percent during the period, data compiled by BloombergQuint showed. For the first half of the ongoing fiscal, its revenue and net profit stood at Rs 3,623 crore and Rs 254 crore, respectively.

The company’s earnings before interest, tax and depreciation and amortisation reported a compounded annual growth rate of 39 percent over the last four financial years. Its Ebitda margin averaged around 4.8 percent during the period. As of September, its Ebitda and Ebitda margin stood at Rs 161 crore and 4.5 percent, respectively.

Rail Vikas Nigam usually witnesses higher revenue growth in the second half of a financial year as construction activities are curtailed in the first six months due to adverse weather conditions.

The company has a total debt of Rs 2,843 crore, mostly from Indian Railway Finance Corporation—the financing arm of Indian Railways. However, the risk related to this loan is nil as the Railway Ministry takes full responsibility for debt servicing, which only passes through Rail Vikas Nigam’s books.

The company has also been consistently paying dividends to shareholders over the last five years.

Peer Comparison And Valuation

Rail Vikas Nigam will have only one direct listed peer—Ircon International Ltd.

Over the last four financial years, Rail Vikas Nigam has been growing at a faster pace than its peer as Ircon witnessed a slowdown in international orders.

Also, Rail Vikas Nigam has lower debt compared to Ircon as well as a better leverage ratio.

During the financial year ended March 2018, Rail Vikas Nigam not only reported higher return ratios over last year but it’s also better than its peer.

Earnings per share of Rail Vikas Nigam stood at Rs 2.7 in 2017-18. At the upper end of the price band, its price-to-earnings ratio multiple is estimated at 7, according to BloombergQuint’s calculations.

The offer is priced attractively compared to listed peers, according to ICICI Direct. The company has a robust balance sheet and is available at an attractive dividend yield of about 4 percent, it said in a report. “Backed by a solid order backlog and strong execution capabilities, we recommend ‘Subscribe’ to the issue at the offer price.”

Centrum Wealth, too, suggested to ‘Subscribe’ to the issue from a long-term perspective, citing the government’s focus on rail infrastructure spends (metro, port-rail connectivity and electrification, among others), healthy order book, asset-light model and reasonable valuation.