Rites Ltd-IPO Note

Source: RHP, 5Paisa Research; *EPS & Ratios at higher end of the price band and on post IPO shares, **non-annualized numbers

Key Investment Rationale

1. RITES is expediting efforts to scale up its EPC/turnkey business mainly from MoR. The company has been awarded projects for railway lines and railway electrification. The current order book for this division stands at Rs1,408cr. Although, this business could be margin dilutive given EBITDA margin is as low as ~8%. Nevertheless, the company believes that given huge investments in electrification and railways, the increasing traction will help the company strengthen its business by increasing its EBITDA and net profits in absolute terms.

    

2. Orders from MoR, central/state governments and Public Sector Unit (PSUs) form ~77% of the company’s total order book. Incorporated by MoR, RITES has a long association with the Indian Railways, which is the fourth longest rail network in the world. RITES is a nominated organization for the export of railway locomotives, coaches and other equipments manufactured by the Indian Railways (other than exports to Malaysia, Indonesia and Thailand). Thus, we expect RITES to be a prime beneficiary of the government infrastructure spend particularly railways.

    

3. The company’s order book at FY18 end stood at Rs4,819cr including 353 ongoing projects. The order book provides strong revenue visibility of about 3.5 years. The order pipeline looks promising as there are opportunities in the infrastructure sector in India as well as in other countries such as Sri Lanka, Bangladesh and Nepal.

Key Risk

The company faces competition from US, France and Germany based companies particularly in metro and turnkey projects. Despite the company being a preferred player by Indian Railways, it has to bid for many projects (as opposed to nomination basis).

Conclusion

At the upper price band, the stock is valued at undemanding P/E of 10.5xFY17 and 11.4x9MFY18 (annualized EPS). Further, IPO is more attractive for retail investors given the discount of Rs6 per share. We recommend Subscribe for long term.