RITES IPO Review: Monopoly play in railways

Rail India Technical and Economic Services (RITES Limited) IPO opens this week following disappointing listings of recent PSU IPOs. The company, offering consultancy and engineering services in the field of railways, has set the price of the offer for sale (OFS) in the range of INR180 – 185 per share. Retail investors and RITES employees will be eligible for a discount of INR6 per share. Investors can apply for minimum 80 shares and in multiples thereafter. The public offer will not involve sale of new shares and thus, the company will not get any funds from RITES Limited IPO.

At the lower end of the price band, the IPO will mobilize anywhere from INR448.31 crore to INR460.91 crore. Following the IPO, the equity stake of President of India will come down from 100% to 87.4%. As equity markets are currently struggling and confidence in PSUs after poor show of recent IPOs is low, it will be interesting to see if RITES manages to garner enough support. We try to figure out the answers through RITES IPO Review.

RITES Limited IPO details

Subscription Dates 20 – 22 June 2018
Price Band INR180 – 185 per share (retail discount INR6 per share)
Fresh issue Nil
Offer For Sale 25,200,000 shares (INR448.31 – 460.91 crore)
Total IPO size 25,200,000 shares (INR448.31 – 460.91 crore)
Minimum bid (lot size) 80 shares
Face Value  INR10 per share
Retail Allocation 35%
Listing On NSE, BSE

RITES IPO Review: No fresh shares to be issued

All the 25,200,000 shares to be sold in RITES IPO will be offered by the President of India who is the sole owner of the company as of now. As such, it will be the government of India which will get all the funds from the offer and the company will not any IPO proceeds.

Our regular readers know that we are not great fans of pure OFS IPOs because they are often used to offer exit to promoters at high prices. Nevertheless, PSU IPOs have been exceptions in the past.

RITES IPO Review: Transport Consultancy

RITES’s services include 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.

Read Also: Varroc Engineering IPO Discussion

Even though RITES has railways in its name, the miniratna is a diversified player with interests in other modes of transportation including urban transport, roads and highways, ports, inland waterways, airports and ropeways. In addition, it offers services in the field of institutional buildings, power procurement and renewable energy. Apart from Indian Railways, its customers include NTPC, Dedicated Freight Corridor Corporation of India Limited, High Speed Rail Corporation of India Limited, Public Works Department, DMRC, Steel Authority of India Limited, Rashtriya Ispat Nigam Limited, Hindustan Petroleum Corporation Limited, Bharat Coking Coal Limited, Metro Link Express for Gandhinagar and Ahmedabad (MEGA) Company Limited, Indian Port Rail Corporation Limited, Airports Authority of India, among others.

RITES IPO Review: Rising revenues, stable margins

In the last few years, the Indian government has done a good job of investing in infrastructure development and railways have been among the prominent areas. RITES has been a major beneficiary of this spending and this shows in its financial figures. While the company has not shown exponential growth and even demonstrated a dip in revenues in FY2015, the overall trend is of topline going up. However, it is the profitability aspect where the company shines and its asset-light operations and debt-free status contribute here. Earnings rose from INR238.1 crore in FY2013 to INR353.3 crore in FY2017 with margins consistently remaining in excess of 21%.

Rites Limited’s financial performance (in INR crore)

FY2013 FY2014 FY2015 FY2016 FY2017 9M FY2018
Total revenues 1,083.1 1,223.5 1,159.1 1,226.7 1,563.7 1,061.1
Total expenses 753.5 835.8 691.8 773.2 1,044.7 669.4
Profit after tax 238.1 258.8 314.0 280.0 353.3 239.0
Net margin (%) 22.0 21.2 27.1 22.8 22.6 22.5

RITES IPO Review: Invest or avoid?

As we have seen so far, the company is in a sweet spot with its unique product and service offerings and has robust operations.  Its long-standing relationship with several central and state government ministries, departments, corporations, authorities and public sector undertakings mean that it is often allocated projects on nomination or single tender basis. While it is not an ideal scenario and may change going forward, the company’s strong order book of INR4,818.7 crore as of 31 March 2018 indicates that RITES has a competitive advantage over its competitors in the market. Talking of competitors, there are not many out there in the market with a similarly broad set of services. For example, RITES is one of the agencies of the Indian Railways for exporting rolling stock customized for specific client requirements. This is an expertise which is unlikely to be matched by its competitors any time soon.

In terms of valuations, the company’s Earnings Per Share (EPS) stood at INR17.64 for FY2017 and this translates into Price/Earnings (P/E) ratio range of 10.18 – 10.46. After adjusting for discount for retail investors, this ratio declines to a super attractive range of 9.86 – 10.14. The company’s Return on Net Worth (RONW) also stands at a formidable 17.31% and despite its asset light model, the Net Asset Value (NAV) of INR102.12 per share compares well with the price band of INR180 – 185 per share.

Being a PSU, RITES is expected to pay regular dividends to the government and that makes it an attractive play for investors seeking regular payouts. It has indeed paid regular dividends in the last five years and the dividend per share in FY2017 stood at INR7.3 per share. Adjusting for retail discount, the effective dividend yield for IPO investors at the upper end will be 4%.

Overall, our analysis of RITES IPO tells us that the offer is a good opportunity to invest in a miniratna company and reasonable valuations further make it attractive for investors, especially for retail investors. Head to our discussion page for RITES IPO to see what fellow investors think about the offer.

RITES IPO Review: Monopoly play in railways
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Krishna Bagra

Coming from a family of investors and financial analysts, Krishna learnt wading through regulatory filings pretty early in her career. At IPO Central, Krishna plays twin roles of contributor and head of research desk. She can also be reached at +krishnabagra .

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