RITES IPO opens today: 10 things to know before investing

NEW DELHI: State-owned Rail India Technical and Economic Services (RITES) is all set to launch its Rs 466-crore IPO on Wednesday, which will be the first divestment exercise of the current fiscal by the government.

Last year, Finance Minister Arun Jaitley had announced Indian Railways’ plan to list subsidiaries after the merger of the Railway Budget with the Union Budget.

For fiscal 2019, the government has set a divestment target of Rs 80,000 crore. Other railway firms which are likely to hit primary market include Rail Vikas Nigam (RVNL), Indian Railway Finance and IRCON International.

With RITES’s offer, the government intends to divest 12.6 per cent of the stake in the company.

Here's a list of 10 things you should know before subscribing to the offer.

About the company
RITES is a wholly-owned government company, a Miniratna (Category – I) Schedule ‘A’ public sector enterprise, which was established in 1974 under the aegis of Indian Railways.

According to its DRHP, it is a leading player in the transport consultancy and engineering sector in India and the only company having diversified services and geographical reach in this field under one roof.

It is the only export arm of Indian Railways for providing rolling stock overseas (other than Thailand, Malaysia and Indonesia). Apart from transport consultancy, it also provides consultancy services across other infrastructure and energy market sectors including urban transport, roads and highways, ports, inland waterways, airports, institutional buildings, ropeways, power procurement and renewable energy.

About Indian Railways Sector
As per Indian Railways Statistical Publications 2016, Railways is one of the world’s largest rail networks with 66,687 km of route lengths. It is a state-owned public utility of the Government of India under the Ministry of Railways. Railways operates both long distance and suburban rail systems on a multi-gauge network of broad, metre and narrow gauges. It carried 22.2 million passengers and 3.03 million tonnes of freight each day during 2015-16. The enterprise also owns locomotive and coach production facilities at several places in India.

In the last three years, the government has made significant progress in initiating infrastructure creation. The chart below shows the amount of investments made during the last three years is almost 75 per cent of the total investments made in the railways during the past decade (FY04 – FY14). Also, MoR (Ministry of Railways) has been able to achieve over 90 per cent of its planned investments over the last three years. Details of capital investments in Indian Railways are provided below.


About the offer
The price band of the offer has been set at Rs 180-185 per share with face value of Rs 10. It doesn't comprise any fresh issue of shares, but OFS (offer for sale) of 2.52 crore shares. This apart, 0.12 crore shares are reserved for eligible employees. At the upper price band of the offer, the company aims to raise Rs 466.2 crore. The three-day public offer will close on June 22. The promoter holds 100 per cent stake in the company and post IPO this will come down to 87.4 per cent. Shares will be listed on both the NSE and BSE.

Risk factors
The company has listed a host of risks related to its business. Some key threats are listed below:

· It relies on the Ministry of Railways, GoI (“MoR”), central/state governments and central/state PSUs for a significant portion of contracts on its order book, which are awarded on a nomination basis. There is no assurance that future contracts will be awarded to it on nomination basis by these clients. This may result in an adverse effect on its business growth, financial condition and results of operations.

· "Our current order book may not necessarily translate into future income in its entirety or could be delayed. Some of our current orders may be modified, cancelled, delayed, put on hold or not fully paid for by our clients, which could adversely affect our business reputation, which could have a material adverse effect on our business, financial condition, results of operations and future prospects," it says.

· RITES faces certain competitive pressures from the existing competitors and new entrants in both public and private sector. Increased competition and aggressive bidding by such competitors is expected to make its ability to procure business in future more uncertain which may adversely affect its business and financial conditions.

· The company's project management and turnkey construction contracts have long execution periods and such project related costs and revenue estimates may vary from the actual costs incurred and actual revenues generated. This may adversely affect its business and future prospects. "We also carry the risk of rectification/repair/replacement during the defect liability period which may have additional implications," it said.

Lead managers
Elara Capital, IDBI Capital, IDFC Bank and SBI Capital Markets are the book running lead managers of the offer while Link Intime India is the registrar.

Strengths
· The company provides a comprehensive range of consultancy service offerings, primarily in the transport infrastructure space, in order to address the varied and expanding requirements of the clients across the market segments in which they operate.

· The comprehensive range of services enables the company to access additional business opportunities from existing clients as well as to address the requirements of a larger base of potential new clients and also enables the company to develop long-term relationships with clients in India as well as abroad.

· It has developed specialized expertise over the years in providing consultancy services across major market segments in the transport infrastructure sector including railways, urban transport, roads and highways, ports, inland waterways, airports and ropeways.

· It has a diversified sector portfolio in consultancy services in the transport infrastructure sector that enables them to access sectors with growth potential according to changing macroeconomic trends and also enables them to expand operations in the sectors in which it already have significant presence.

· RITES has the ability to collaborate and work jointly through alliances, joint ventures, subsidiaries and consortium arrangements. This enables them to enhance the quality of services and allows them to focus their attention on certain large–scale projects and to develop technical expertise and domain knowledge through collaboration with their partners in comparatively newer market segments.


Financials
RITES reported a 9.1 per cent CAGR rise in total operating revenue over FY13-17 to Rs 1,353.36 crore in FY17. Consulting business, which contributed almost half to the top-line, increased by 10.2 per cent CAGR. Export business contributing 28 per cent to the top-line, increased by 5.3 per cent during the period. For the nine month ended December 2017, top-line stood at Rs 936.15 crore.

Total operating expenses increased at a slower pace in comparison to the revenue growth; and increased by 7.8 per cent CAGR over FY13-17. As a result, EBITDA increased by 13.3 per cent CAGR to Rs 358.28 crore in FY17. Average EBITDA margin during the period stood at 28.4 per cent. For nine months of FY18, EBITDA stood at Rs. 2,99.65 crore with a margin of 32 per cent.

PAT increased by 11.6 per cent CAGR to Rs 361.66 crore in FY17. Average PAT margin during the period stood at 26.3 per cent. For the nine months of FY18, reported PAT stood at Rs. 252.54 crore with a margin of 27 per cent.


Board of Directors
Rajeev Mehrotra is chairman and managing director of the company. Arbind Kumar is the director projects while Ajay Kumar Gaur is the director finance. Mukesh Rathore is the director Technical. Satish Sareen and Vidya Rajiv Yeravdekar are among the independent directors. As of November 30, the company has a total of 3,401 employees.


Valuation and recommendations
On valuation front, at higher price band, the company is demanding a P/E valuation of 10.2 times (to its restated FY17 EPS of Rs 18.1). The issue seems to be attractively priced considering its strategic importance, limited competition, virtually debt-free operations and healthy financial performance, says Choice Broking in its research report. It has assigned 'subscribe' rating to the issue with long-term investment horizon. Another brokerage Arihant Capital says since there are no comparable listed companies in India engaged in the same line of business, the threat of competitors is low. It, too, finds the valuation attractive.