RITES Shares: Exploring the Reasons Behind Today's 48% Drop in the Railway PSU Stock

Shares in RITES Ltd, the state-owned railway PSU, saw a sharp increase on Friday. This spurt came after the stock started trading ex-dividend and ex-bonus following an announcement by the company of a 1:1 bonus share issue and a final dividend of ₹5 per share in the beginning of this year.

RITES’ share price has gone on to touch ₹363.50 on the BSE by 1:45 pm IST and has gained 7.15% from the last close. But, most investors were taken aback when their trading apps showed RITES’ share price drop of 48% in the stock price.

An issue of bonus shares increases the total number of outstanding equity shares and, at the same time, reduces the stock price proportionate to the number of bonus shares issued. This increases the liquidity but at the same time lowers the company's free reserve and surplus.

In the case of RITES, the 1:1 bonus issue means that for every equity share held, equity shareholders would get another equity share, eligibility being based on today's record date for this corporate action. PSU also turns ex-dividend today after declaring a final dividend of ₹5 per share for FY24. This will be paid on October 12. RITES stock decline can be attributed to the steep fall of ₹142 in the stock price was only because of the price consolidation due to the bonus issue.

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As per the stock exchange data, RITES also went ex-bonus in August 2024 with a 1:4 bonus ratio. This issue of bonus too shares one additional share for every four held, thereby increasing the outstanding shares while proportionately reducing the stock price.

Some investors bewildered by this apparent 48% drop in stock price hadn't factored in the bonus adjustment. The truth is it rose 8% on an adjusted basis; RITES stock price touched a high of ₹362.45 during the trading session. Bonus issues like those announced by RITES are most widely used to improve liquidity through relatively low-priced shares and theoretically reduce a company's reserves.

Despite the controversy on the adjustments of price, RITES is firm on its stand as a multidisciplinary engineering and consultancy organization, more so in the railway industry and the rest of the transport infrastructure sectors.

A company with a history of bonus share distribution, RITES had issued bonus shares early this year in August at the ratio of 1:4. This particular issue of 1:1 is yet another testimony to the shareholder-friendly policy that the company has adopted. In the last one year, RITES has delivered a healthy return of 46.17%, and at current levels, stock still trades impressively above key technical moving averages.

RITES’ financials for the quarter ending June 30, 2024. The company said sales from operations were ₹4,857.6 crore, down from ₹5,443.5 crore achieved in the corresponding period the previous year. Revenues were at ₹5,082.5 crore as compared to ₹5,626.3 crore in the same period previous year. Net income was at ₹790.2 crore as compared to ₹1,080.1 crore. Basic and diluted earnings per share from continuing operations were at ₹3.29 compared with ₹4.49 a year ago.

Also, the share is currently trading below 50 days of moving average that is a key indicative parameter of RITES’ stock performance that traders want to follow when the prices seek bullish signals.

RITES’ stock analysis indicates that the current P/E ratio for the stock stands at approximately 38.18; taken against its historical performances, the overvaluation factor seems to have been attached to this stock. Having an EPS of ₹17.74 while the market capitalization ranges around ₹16,166 crores, possible investors would be able to take these values into consideration while making investment choices.

RITES has been a strong contender in the consultancy domain for transport infrastructure and continues to maintain its leadership in the Indian railway sector, popularizing wide-ranging services from concept development to project execution.

RITES is India's biggest transport consultancy and engineering house, offering vast services under one umbrella. Diversified expertise in important sectors across the geographical presence on the Indian terrain offers significant strength in railways, highways, metros, tunnels, bridges, urban infrastructure, sustainability and green mobility, airports, ports, ropeways, institutional buildings, and inland waterways.

RITES, that boasts of being nearly half a century old, has established itself over the years as a preferred partner for setting up and maintaining railway infrastructure in more than 55 countries cutting across Asia, Africa, Latin America, and the Middle East. Besides being the export wing of Indian Railways, RITES also deals with the export of locomotives, coaches, and train-sets.