Rail India Technical and Economic Services Ltd. will become the first state-run railway company to launch an initial public offering as the government looks to offload part of its stake in the consultant.
The government will raise up to Rs 460 crore by selling 2.52 crore shares at Rs 180-185 apiece in the three-day offer that opens today. That will bring down its stake by 12.6 percent.
The government also plans to take Indian Railway Finance Corporation Ltd. and Ircon International Ltd. public. The stake sales will contribute towards its divestment target of Rs 80,000 crore for the financial year 2018-19.
RITES is a transport and engineering consultant—incorporated by the Ministry of Railways—that provides services overseas. It also offers services for leasing, export, maintenance and rehabilitation of locomotives and rolling stock. The company takes up projects on engineering, procurement and construction basis for the railways.
RITES derives higher margins from consultancy business, which contributes more than half of its order book.
- The net worth of the company as of December was close to Rs 2,224 crore, translating into a book value of Rs 111 per share. It had more than Rs 1,300 crore in cash.
- Revenue has been growing at an annualised rate of 9 percent, while the net profit rose at 11 percent CAGR over financial years 2013 to 2017.
- For the first nine-months ended December, revenue and net profit stood at Rs 936 crore and Rs 243 crore, respectively.
- Earnings before interest, tax and depreciation and amortisation rose at a CAGR of 13 percent, while Ebitda margin expanded by more than 370 basis points in the last five years to 26.5 percent.
- For the first nine-months ended December, Ebitda and Ebitda margin stood at Rs 300 crore and 32 percent, respectively.
- The company tends to report higher revenue in the second half of a financial year, driven by exports.
- RITES, which has a debt of Rs 70 crore, has been paying dividend consistently for the last five financial years.
- Company’s return ratios on an annualised basis for financial year 2018 are lower compared to the previous 12 months.
- The company’s order book grew at an annualised rate of 35.8 percent over three years to March 2018 to more than Rs 4,500 crore. Nearly 77 percent of its order come from government-owned companies.
RITES has generated positive cash flows from operations in last five years. The cash conversion cycle—a measure of how fast a company converts cash into inventory and accounts payable—has become longer.
Earnings per share for financial year 2018 on an annualised basis works out to Rs 16.2. At the upper end of the price band, it will trade at 11.4 times its earnings, according to BloombergQuint’s calculations.
- Reasonable valuations, buoyant outlook on railway capex and robust order book.
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- RITES has a good track record, healthy financials and attractive valuations.
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- Well poised to benefit from the large opportunities in the infrastructure, especially railways.
- Given the financials and business, valuations are attractive.
- Issue is reasonably priced.
- Positives: execution capability, experienced management, diversified client base and increasing opportunity of revenue from Railways.
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