Rites Ltd. – Should you invest?

Company Overview:

RITES Ltd., a Government of India Enterprise was established in 1974, under the aegis of Indian Railways. RITES is incorporated in India as a Public Limited Company under the Companies Act, 1956 and is governed by a Board of Directors which includes persons of eminence from various sectors of engineering and management. It provides multi-disciplinary services to its clients in the fields of transport, infrastructure and related businesses.

Earlier, Rites specialized in consultancy services mostly to railways transportation but over the years company has expanded its scope of services. It has also diversified into planning and consultancy services for other infrastructure projects including airports, ports and highways and have started undertaking turnkey projects whereby they provided end-to-end services.

RITES is the only export arm of Indian Railways for providing rolling stock overseas (other than Thailand, Malaysia and Indonesia). The company has an experience spanning 46 years.

Services:

The company provides services under multiple segments.

• Consultancy Services – Provides consultancy services in transport infrastructure, mainly roads, metros, highways, airports and ports.

• Locomotive Leasing – Leases locomotive and provides maintenance services to domestic as well as foreign clients.

• Exports – It provides exports and after sales services for railway locomotives, passenger coaches, wagons rolling stock etc.

• Turnkey Projects – Undertakes construction projects such as enhancement work of railway lines and modernization of railway workshop.

Subsidiaries:

As of March 31, 2021, the company has two subsidiaries namely M/s RITES (Afrika) (Pty) Limited and M/s REMC Limited. Also, it has two JV’s namely M/s SAIL-RITES Bengal Wagon Industry Private Limited and M/s Indian Railway Stations Development Corporation Limited.

Key Rationale:

Q2FY22 – RITES Ltd. reported a good set of Q2FY22 numbers. The company reported revenue of Rs.755 crs (up 72% YoY), EBIDTA of Rs.216 crs (up 68% YoY), and PAT of Rs.169 crs (up 30% YoY).

It registered EBITDA margins of 28.6% in Q2FY22 as against 29.2% in Q2FY21. RITES booked Consultancy sales of Rs.265 crs (up 4.5% YoY), Export sales of Rs.341 crs, (no export sale in Q2FY21 owing to the lockdown).

Leasing of Rs.33 crs (up 22% YoY), and Turnkey of Rs.110 crs (down 28% YoY). While the margins of the Consultancy Segment stood at 46.8%, Leasing/Export/Turnkey projects reported EBITDA Margins of 38%/26%/1.8% respectively. During the quarter, higher export sales supported the revenue growth.

2.Tie-up with BEML

RITES Ltd. signed a memorandum of understanding (MoU) with BEML Limited to explore and jointly bid for opportunities in the fields of Metro systems and export of rolling stock. As part of the MoU, RITES will provide expertise in design, engineering, marketing and any other support that may be required for tapping domestic and overseas opportunities while BEML will be responsible for manufacturing of customized metro coaches and rolling stock. The MoU will allow both companies to leverage each other’s expertise and technologies to optimize operations and expand on a global level.

3.Financial Performance

The company has a strong balance sheet with almost zero debt (Debt/equity ratio of 0.01) and a huge cash and cash equivalents of Rs.3100 crs which is nearly 50% of the company’s market cap. EBITDA Margin has been maintained 28% on an average for the past 6 years.
Avg. RoE is 19% for the past 5% years and Avg. ROCE is around 27% for the same period. Capex for FY22 stood at Rs.100 crs (Rs.69 crs already done in H1FY22).

Growth Drivers:

Prime Minister Mr. Narendra Modi announced a Rs.100 lakh crore master plan for multi-modal connectivity in October 2021, with the goal of developing infrastructure to lower logistic costs and improve the economy.

In the Union Budget 2021, the Government allocated Rs.60,241 crs (US$ 8.28 billion) for road works and Rs.57,350 crs (US$ 7.88 billion) for the National Highways. The government plans to construct 8,500-kms road by March 2022. Under the Union Budget 2021-22, the Government allocated Rs.110,054.64 crs (US$ 15.19 billion) to the Ministry of Railways

Outlook:

The company has an adequate order book executable over the next 2-3 years. It expects infrastructure activities to pick up and the National Rail Plan & National Infrastructure Pipeline is expected to provide definitive direction, going forward.

The company intends to maintain a strategic focus on international projects, exports, and domestic mega projects to capture growth opportunities. RITES exports segment is back on track and has started picking up.

Company has done Rs.330 crs revenue till now in exports. Rites Ltd is aiming at Rs.700-750 crs revenue in exports FY22 and going forward it expects overall revenue to reach FY20 levels in terms of FY22 revenue.

Rites Ltd is expected that with more contribution of exports, margins are expected to go up. It also expects the trend to continue till the middle of FY23. Company has also got Turnkey projects across the zonal railways. Highway and metros orders have matured and company also have some orders will get finalized in Q3FY22, hence Order book to expand.

Conclusion:

Rich Return Ratios, asset-light business model and better execution capabilities make RITES the best bet amongst Rail Infra peers.

The strong financials of the company, its relationship with the Government and various private players and company’s expertise points at a secular growth in company’s business for next 3-5 years.

Hence, we recommend a BUY rating in the stock with the target price (TP) of Rs.302, 15x FY22E EPS

Hope you liked our Article, please do read our other articles on “Top 10 Debt Free Companies in India“