1
Please refer to important disclosures at the end of this report
1
1
RITES is a wholly owned Government Company, a Miniratna (Category – I)
Schedule ‘A’ Public Sector Enterprise. 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.
RITES has an experience spanning 43 years and has undertaken projects in
over 55 countries including Asia, Africa, Latin America, South America and
Middle East regions.
Healthy order book with diversified clientele base: RITES’ order book stood at
~`4,800cr as of March 2018 (3.5X of FY17 top-line). The company receives orders
on nomination/single tender basis on regular intervals from its clients such as
national government, governmental instrumentalities and public sector
enterprises.
Strengthening EPC/Turnkey business: RITES intends to increase its revenue
mix in Turnkey projects owing to new investments in electrification and railway
infrastructure. So far RITES has been awarded two projects for new railway lines
and two projects for railway electrification.
Preferred consultancy organization of GOI including Indian Railways: RITES
was incorporated by the Ministry of Finance (MoR) and is a nominated
organization of the Indian Railways for export of railway locomotives, coaches
and other equipments, which are manufactured by the Indian Railways (except
exports to Malaysia, Indonesia and Thailand). It is also a nominated organization
for inspection of various materials and equipment purchased by the Indian
Railways.
Outlook & valuation: In terms of valuations, pre-issue PE works out to 12x of
annualized FY18 EPS `17 (at the upper end of the issue price band), which is
reasonably priced considering (a) 3.5x of order book with execution capability
and experienced management, (b) maintaining the RoE level in the range of 17-
18%, (c) diversified client base and (d) increasing opportunity of revenue from
Railways due to new investment in electrification and infrastructure. Given that
the RITES is a preferred consultant of Indian Railways along with other
government authorities with exposure in international operation and fair
valuation of issue, we recommend SUBSCRIBE to issue.
Key Financial
Y/E March (` Mn)
FY2014
FY2015
FY2016
FY2017
Net Sales
10,964
10,126
10,905
13,533
% chg
15
(8)
8
24
Net Profit
2,585
3,140
2,815
3,623
% chg
9
21
(10)
29
EBITDA (%)
25.6
34.3
32.7
26.5
EPS (`)
13
16
14
18
P/E (x)
14
12
13
10
P/BV (x)
3
2
2
2
RoE (%)
18
19
15
18
RoCE (%)
17
18
15
14
EV/EBITDA
7
5
6
7
Source: RHP, Angel Research; Note: Valuation ratios based on pre-issue outstanding shares and at upper end of
the price band
SUBSCRIBE
Issue Open: June 20, 2018
Issue Close: June 22, 2018
QIBs 50% of issue
Non-Institutional 15% of issue
Retail 35% of issue
Promoters
87%
Others
13%
Issue Details
Face Value: `10
Present Eq. Paid up Capital: `200cr
Offer for Sale: **2.52cr Shares
Post Issue Shareholding Pattern
Post Eq. Paid up Capital: `200cr
Issue size (amount): *`460 -**466cr
Price Band: `180-185
Lot Size: 80 shares and in multiple
thereafter
Post-issue implied mkt. cap: *`3600cr -
**`3700cr
Promoters holding Pre-Issue: 100%
Promoters holding Post-Issue: 87%
*Calculated on lower price band
** Calculated on upper price band
Book Building
`.6 per share discount to individual
RITES Ltd.
IPO Note | Consultancy Services
June 18, 2018
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RITES Limited | IPO Note
June 18, 2018
2
Company background
RITES Limited (“RITES”) is a wholly owned Government Company, a Miniratna
(Category – I) Schedule ‘A’ Public Sector Enterprise. 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. RITES has an
experience spanning 43 years and has undertaken projects in over 55 countries
including Asia, Africa, Latin America, South America and Middle East regions. RITES is
the only export arm of Indian Railways for providing rolling stock overseas (other than
Thailand, Malaysia and Indonesia). RITES is a multidisciplinary engineering and
consultancy organization providing diversified and comprehensive array of services
from concept to commissioning in all facets of transport infrastructure and related
technologies.
Since inception in 1974, RITES has evolved from being a transport infrastructure
consultancy and quality assurance services provider and has developed expertise in:
• Design, engineering and consultancy services in transport infrastructure sector with
focus on railways, urban transport, roads & highways, ports, inland waterways, airports
and ropeways.
• Leasing, export, maintenance and rehabilitation of locomotives and rolling stock.
• Undertaking turnkey projects on engineering, procurement and construction basis
for railway line, track doubling, 3rd line, railway electrification, up-gradation works for
railway transport systems and workshops, railway stations, and construction of
institutional/residential/ commercial buildings, both with or without equity
participation.
• Wagon manufacturing, renewable energy generation and power procurement for
Indian Railways through their collaborations by way of joint venture arrangements,
subsidiaries or consortium arrangements.
In India, company’s clients include various central and state government ministries,
departments, instrumentalities as well as local government bodies and public sector
undertakings.
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RITES Limited | IPO Note
June 18, 2018
3
Issue Details
The company is raising ~`460cr through a offer for sale in the price band of `180-185
with Retail and Employee Discount of Rs6/ per share. The offer will constitute ~12.6%
of the post-issue paid-up equity share capital of the company, assuming the issue is
subscribed at the upper end of the price band. The company is offering 2.52cr shares
that are being sold by Government of India (GOI).
Exhibit 1: Pre and Post-IPO shareholding pattern
No of shares (Pre-issue)
%
No of shares (Post-issue)
%
Promoter (GOI)
20,00,00,000
100%
17,48,00,000
87%
Other
0
0%
2,52,00,000
13%
Total
20,00,00,000
100%
20,00,00,000
100%
Source: RHP, Angel Research; Note: Calculated on upper price band
Objects of the offer
As the issue is an offer for sale, RITES will not receive any proceeds from the offer.
Key Management Personnel
Mr. Rajeev Mehrotra: He is the Chairman and Managing Director of RITES since
October 11, 2012. He holds a Bachelor’s Honors degree in Accountancy and Business
Statistics from Rajasthan University and is qualified as a Fellow Member of the Institute
of Cost Accountants of India. He has received a certificate of participation for the
course titled ‘Financial Management Training Program for Electric Utilities held from
April 18, 1994 to May 20, 1994 as offered by the Southern Electric International and
Global Utilities Institute, Samford University, USA. He has been associated with the
Company since October 12, 2007. He has over 34 years of experience, out of which he
has over 10 years of experience at the Board level in RITES. He has also worked with
the National Hydroelectric Power Corporation Limited, Faridabad and Power Finance
Corporation Limited New Delhi in various capacities.
Mr. Arbind Kumar: He is the Director (Projects) of RITES since June 01, 2012. He holds
a Bachelor’s degree in Civil Engineering from Muzaffarpur Institute of Technology, a
Diploma in Management from the Indira Gandhi National Open University, and is
qualified as a Life Fellow of the Institution of Permanent Way Engineers (India). He has
been associated with RITES since January, 2001. He has over 35 years of experience.
He has also worked with the Indian Railways in various capacities, a private company
in Malaysia through RITES, and for the Sultanate of Oman.
Mr. Ajay Kumar Gaur: He is a Director (Finance) of RITES since September 02, 2013.
He holds a Bachelor’s degree in Commerce (Honours). He is qualified as a fellow
Member of the Institute of Chartered Accountants of India. He has been associated
with RITES since January 21, 1985. He has over 33 years of experience. He has also
worked with Container Corporation of India Limited.
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RITES Limited | IPO Note
June 18, 2018
4
Mr. Mukesh Rathore: He is a Director (Technical) of RITES since December 01, 2016.
He holds a Bachelor’s degree in Mechanical Engineering from the University of
Jabalpur and is qualified as a Fellow Member of the Institution of Engineers (India). He
has been associated with RITES since April, 2000. He has over 36 years of experience.
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RITES Limited | IPO Note
June 18, 2018
5
Investment Argument
Healthy order book with diversified clientele base
RITES’ current order book as of March 31, 2108 stands at ` 4,818.6cr, which is 3.5x of
FY17 revenue, which gives strong revenue visibility going forward. RITES has long
standing history of business relationships and collaboration with several central and
state government ministries, departments, corporations, authorities and public sector
undertakings. As a result, RITES, from time to time has been allocated projects on
nomination/single tender basis. RITES is one of the agencies of the Indian Railways for
exporting rolling stock, from India, customized for specific client requirements and
components as manufactured by the Indian Railways (except exports to Malaysia,
Indonesia and Thailand) and for inspections of materials and equipment as procured
by the Indian Railways.
RITES’ domestic as well as overseas clients typically are national government,
governmental instrumentalities and public sector enterprises. Such governments,
governmental agencies and public sector undertakings are engaged in large scale
infrastructure planning and development both in India and abroad. RITES also
undertakes and execute projects funded by multilateral funding agencies.
Exhibit 2: RITES order book mix FY18
Source: RHP, Angel Research
Experienced management personnel and technically qualified team
RITES is led by an experienced and well – qualified management team. The
management team plays a significant role in formulating the company’s business
strategies, accounting procedures and internal control and policies, and has been
instrumental in their growth of operations and consistent performance. RITES had a
total of 3,349 employees as on March 31, 2018. The company has an in–house team
of expert engineers specializing in civil, mechanical, metallurgy, chemical, electrical,
signal & telecom engineering, and specialists in transport and economics, quality
assurance, environment engineering, information technology, finance and general
management. The senior management has an average experience of about 33 years
and they have a pool of 1,400 skilled engineers/ professionals of executive cadre on
their permanent roll. The company also sources requisite manpower from the Indian
2,572.09
140.65
697.74
1,408.20
Order book Mix (` Cr.)
Consultancy Services
Leasing Services
Export Sales
Turnkey Construction Projects
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RITES Limited | IPO Note
June 18, 2018
6
Railways and other government ministries and departments, both on deputation and
permanent basis, according to requirements.
Strengthening the EPC/Turnkey business
RITES has been awarded projects on nomination basis from MoR for construction of
railway lines and electrification of existing/new railway lines and up-gradation of
railway workshops on a fixed fee basis. In these contracts, RITES get fees as a certain
percentage of the cost of the project executed. So far, RITES has been awarded 2
projects for new railway lines and 2 projects for railway electrification. Considering the
extent of new investments in electrification and railway infrastructure, RITES intends to
strengthen its organization for taking more such projects.
Expanding operations in power procurement and renewable energy sector
In order to assist the Indian Railways meet its stipulated target for procurement of
renewable energy, the Indian Railways and RITES has set up a company i.e. Railway
Energy Management Company Limited (“REMCL”), with the objective of synergizing
the technical resource base of RITES and for reducing the carbon footprint of the
Indian Railways through utilization of green energy. RITES holds 51% of issued and
paid–up equity share capital of REMCL. REMCL provides project management and
other consultancy services for the Indian Railways with regard to setting up of wind
energy projects, solar energy projects, power procurement and construction of
transmission lines connected to the Inter–State Transmission System (ISTS). REMCL has
commissioned a wind power project of capacity 26 MW in Jaisalmer, Rajasthan and
has also concluded power procurement contracts for approximately 1,175 MW across
various states in India. Further, the National High Speed Rail Corporation Limited has
mandated REMCL to undertake techno–economic viability studies and related surveys
of power sourcing arrangements for their requirements.
Expanding international operations
RITES intends to continue expanding its international service offerings in order to
acquire new clients. Over the years, RITES has expanded its service offerings to address
new market opportunities and macroeconomic trends arising in the infrastructure
sectors. RITES, recently has been appointed by the Government of Mauritius as a
consultant for implementing light rail project in Mauritius and also to prepare a
detailed project report on Trident Port project. RITES is working in Nepal on 2
integrated check-posts at Birgunj and Biratnagar, and is conducting construction
supervision services of a road project in Botswana through its Subsidiary, RITES
(AFRIKA).
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RITES Limited | IPO Note
June 18, 2018
7
Strong financial performance, healthy balance sheet
RITES has been consistently profitable over the last 5 years and has paid dividends
regularly to shareholders. The company’s stable financial position enables it to satisfy
the minimum financial eligibility criteria for bidding in projects which generally
comprise of financial parameters such as net worth and profitability for various
projects across all market segments. As per the Restated Financial Information, the
total income has grown at a CAGR of 9.61% from `1,083.05cr in FY13 to `1,563.27cr in
FY17 and PAT has grown at a CAGR of 11.61% from `233.06cr to `361.66cr during the
same period.
Exhibit 3: Healthy Balance sheet (`cr)
Source: RHP, Company
Exhibit 4: Return ratio
Source: RHP, Company
634
1402
1629
1883
2037
144
79
94
121
83
0
500
1000
1500
2000
2500
FY13
FY14
FY15
FY16
FY17
Equity
Debt
10%
23%
25%
25%
19%
9%
19%
20%
19%
15%
0%
5%
10%
15%
20%
25%
30%
FY13
FY14
FY15
FY16
FY17
ROE
ROCE
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RITES Limited | IPO Note
June 18, 2018
8
Outlook & valuation:
In terms of valuations, pre-issue PE works out to 12x of annualized FY18 EPS `17 (at
the upper end of the issue price band), which is reasonably priced considering (a) 3.5x
of order book with execution capability and experienced management, (b) maintaining
the RoE level in the range of 17-18%, (c) diversified client base and (d) increasing
opportunity of revenue from Railways due to new investment in electrification and
infrastructure. Given that the RITES is a preferred consultant of Indian Railways along
with other government authorities with exposure in international operation and fair
valuation of issue, we recommend SUBSCRIBE to issue.
Key Risks
High Dependence on Railway orders
RITES receives most of the orders from the Railways segment, hence any slowdown in
railway spending may adversely impact the financial performance of the company.
Currency risk
Over 25% of RITES’ revenue comes from export sales, any adverse fluctuation in
movement of currency may impact earnings of the company.
9
RITES Limited | IPO Note
June 18, 2018
9
Income statement
Y/E March (` Mn)
FY2014
FY2015
FY2016
FY2017
Total operating income
10,964
10,126
10,905
13,533
% chg
7
(8)
8
24
Total Expenditure
8,154
6,657
7,341
9,951
Raw Material
4,706
2,749
3,270
4,735
Personnel
2,707
3,245
3,410
4,169
Others Expenses
742
664
662
1,046
EBITDA
2,810
3,469
3,564
3,582
% chg
29
23
3
1
(% of Net Sales)
26
34
33
26
Depreciation& Amortisation
203
262
346
383
EBIT
2,606
3,207
3,217
3,200
% chg
29
23
0
(1)
(% of Net Sales)
24
32
30
24
Interest & other Charges
0
0
47
113
Other Income
1,270
1,464
1,362
2,099
(% of PBT)
33
31
30
41
Extraordinary Items
(27)
10
(26)
(115)
Share in profit of Associates
-
-
-
-
Recurring PBT
3,849
4,682
4,506
5,071
% chg
18
22
(4)
13
Tax
(1,244)
(1,560)
(1,676)
(1,454)
PAT (reported)
2,605
3,121
2,830
3,617
Adj PAT
2,585
3,140
2,815
3,623
% chg
12
20
(9)
28
(% of Net Sales)
24
31
26
27
Basic & Fully Diluted EPS (Rs)
13
16
14
18
% chg
9
21
(10)
29
Source: Company, Angel Research
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RITES Limited | IPO Note
June 18, 2018
10
Balance Sheet
Y/E March (` Mn)
FY2014
FY2015
FY2016
FY2017
SOURCES OF FUNDS
Equity Share Capital
1000
1000
1000
2000
Reserves& Surplus
13251
15762
17635
18411
Shareholders Funds
14251
16762
18635
20411
Total Loans
823
886
2122
1915
Other Liab & Prov
1211
1219
1266
1576
Total Liabilities
16285
18867
22023
23902
APPLICATION OF FUNDS
Net Block
1968
2105
4185
4052
Capital Work-in-Progress
192
257
70
33
Investments
2000
2000
1700
1200
Current Assets
24613
24472
31031
34021
Inventories
175
67
131
504
Sundry Debtors
3258
3808
5355
4645
Cash own fund
363
2570
2620
2647
Cash client fund
20817
18028
22925
26225
Loans & Advances
1833
1775
3017
2394
Other Assets
5755
5445
4085
6322
Current liabilities
20078
17187
22066
24121
Net Current Assets
4535
7285
8965
9900
Other Non Current Asset
Total Assets
16285
18867
22023
23902
Source: Company, Angel Research
Cash Flow
Y/E March (` Mn.)
FY2014
FY2015
FY2016
FY2017
Profit before tax
3,850
4,682
4,506
5,071
Depreciation
22
35
34
36
Change in Working Capital
1,980
2,489
2,482
5,528
Interest / Dividend (Net)
(973)
(1,068)
(1,080)
(979)
Direct taxes paid
(1,270)
(1,394)
(1,845)
(1,666)
Others
(2,898)
(3,648)
(3,461)
(4,128)
Cash Flow from Operations
711
1,096
637
3,862
(Inc.)/ Dec. in Fixed Assets
(488)
(1,001)
(1,941)
(211)
(Inc.)/ Dec. in Investments
(1,104)
2,696
684
(83)
Cash Flow from Investing
(1,592)
1,696
(1,257)
(294)
Issue of Equity
-
-
-
-
Inc./(Dec.) in loans
-
-
1,206
372
Others
(653)
(533)
(866)
(2,517)
Cash Flow from Financing
(653)
(533)
340
(2,146)
Inc./(Dec.) in Cash
(1,534)
2,259
(279)
1,422
Opening Cash balances
1,898
364
2,622
2,343
Closing Cash balances
364
2,622
2,343
3,765
Source: Company, Angel Research
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RITES Limited | IPO Note
June 18, 2018
11
Key Ratios
Y/E March
FY2014
FY2015
FY2016
FY2017
Valuation Ratio (x)
P/E (on FDEPS)
14.3
11.8
13.1
10.2
P/CEPS
1.3
1.1
1.2
0.9
P/BV
2.6
2.2
2.0
1.8
EV/Sales
1.9
1.6
2.1
1.8
EV/EBITDA
7.3
4.6
6.3
6.9
EV / Total Assets
1.3
0.9
1.0
1.0
Per Share Data (Rs)
EPS (Basic)
12.9
15.7
14.1
18.1
EPS (fully diluted)
12.9
15.7
14.1
18.1
Cash EPS
13.9
17.0
15.8
20.0
DPS
2.7
3.1
6.8
6.7
Book Value
71.3
83.8
93.2
102.1
Returns (%)
ROCE
17.3%
18.2%
15.5%
14.3%
Angel ROIC (Pre-tax)
21%
25%
20%
17%
ROE
18.1%
18.7%
15.1%
17.7%
Turnover ratios (x)
Inventory / Sales (days)
6
2
4
14
Receivables (days)
108
137
179
125
Payables (days)
36
31
30
23
Working capital cycle (ex-cash) days)
78
109
153
116
Source: Company, Angel Research
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RITES Limited | IPO Note
June 18, 2018
12
Research Team Tel: 022 - 39357800 E-mail: [email protected] Website: www.angelbroking.com
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