Reblog: Rites Ltd IPO review

Rites Limited (Rites) (erstwhile known as Rail India Technical & Economic Services Ltd.) is a wholly owned Government Company, a Miniratna (Category – I) Schedule ‘A’ Public Sector Enterprise and 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 has an experience spanning 43 years and 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). The company is a multidisciplinary engineering and consultancy organization providing a diversified and comprehensive array of services from concept to commissioning in all facets of transport infrastructure and related technologies.

Rites was incorporated by the Ministry of Railways, Government of India (“MoR”) and have the benefit of being associated with the Indian Railways, which is the fourth longest rail network in the world. It has developed expertise in (1) Design, engineering and consultancy services in transport infrastructure sector with focus on railways, urban transport, roads and highways, ports, inland waterways, airports and ropeways; (2) Leasing, export, maintenance and rehabilitation of locomotives and rolling stock, (3) 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; and (4) Wagon manufacturing, renewable energy generation and power procurement for Indian Railways through our collaborations by way of joint venture arrangements, subsidiaries or consortium arrangements.

Its client list includes various central and state government ministries, departments, instrumentalities as well as local government bodies and public sector undertakings. These include Indian Railways, NTPC, Dedicated Freight Corridor Corporation of India Limited, High Speed Rail Corporation of India Limited, Public Works Department, DMRC, Steel Authority of India Limited, Rashtriya Ispat Nigam Limited, Hindustan Petroleum Corporation Limited, Bharat Coking Coal Limited, Metro Link Express for Gandhinagar and Ahmedabad (MEGA) Company Limited, Indian Port Rail Corporation Limited, Airports Authority of India, among others. Rites also engages with various large private sector corporations including L&T Metro Rail (Hyderabad) Limited, Kanti Bijlee Utpadan Nigam Limited (KBUNL), Cimmco Limited, Titagrah Wagons Limited, Snowmex Engineers Limited, Unity Infraprojects Limited, Rajdeep Buildcon Private Limited, Mahalsa Constructions Private Limited, Marymatha Constructions Limited, AFCON Infrastructure Limited, INCAP, ARK Services, MNEC Consultants Private Limited, Indian Geotechnical Services Limited, Geokno India Private Limited and NATRIP Implementation Society among others.

The company plans to increase the scale of operations in railway infrastructure sector by taking up turnkey projects and expansion of services for metro and airport projects etc. Also, through joint ventures and subsidiaries, it intends to increase the share of business in renewable energy generation and power procurement for Indian Railways, manufacturing of wagons and joining upcoming opportunities like station development etc.

For listing gains and diluting stake of Govt. of India, Rites is coming out with a maiden IPO of 25200000 shares of Rs.10 each by way of offer for sale via book building route with a price band of Rs. 180 – Rs. 185 to mobilize Rs. 453.60 cr. to Rs. 466.20 cr. (based on lower and upper price bands). It is offering a discount of Rs. 6 per share to eligible employees and retail investors. Issue opens for subscription on 20.06.18 and will close on 22.06.18. It has reserved 1200000 equity shares for eligible employees. Thus net public offer will be 24000000 equity shares with allocation of 50% to QIBs, 15% for HNIs and 35% for retail investors.  Minimum application is to be made for 80 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE and NSE. BRLMs to this offer are Elara Capital (India) Pvt. Ltd., IDBI Capital Markets & Securities Ltd., IDFC Bank Ltd, and SBI Capital Markets Ltd. Link Intime India Pvt. Ltd. is the registrar to the issue.  Issue constitutes 12.60% of post issue paid up capital of the company. These beings offer for sale, it’s paid up equity remains same at Rs. 200 crore post issue. It has issued entire equity at par so far and has also issued bonus shares in the ratio of 4 for 1 (June 1984), 1 for 1 (July 1987), 1 for 1 (August 1997), 1 for 1 (June 2003), 9 for 1 (February 2008), 6 for 4 (October 2012), 1 for 2 (November 2016) and 1 for 3 (March 2017). Thus since inception, it has made eight bonus issues. Average cost of acquisition of shares by the promoters is Rs. 0.005 per share.

On performance front, Rites has (on a consolidated basis) posted growth of CARG 15.62% in top line and CAGR 7.73% in PAT for last three fiscals (FY15 to FY17). For last four fiscals, Rites reported turnover/net profits of Rs. 1223.47 cr. / Rs. 260.61 cr. (FY14), Rs. 1159.11 cr. / Rs. 312.21 cr. (FY15), Rs. 1226.73 cr. / Rs. 282.93 cr. (FY16) and Rs. 1563.27 cr. / Rs. 361.76 cr. (FY17). For first nine months of FY ended on 31.12.17 it has earned net profit of Rs. 252.54 cr. on a turnover of Rs. 1061.06 cr. For last three fiscals, it has posted an average EPS of Rs. 16.11 and an average RoNW of 16.77%. Issue is priced at a P/BV of 1.7 based on its NAV of Rs. 108.60 as on 31.12.17. Its current order book is little over Rs. 4800 crore comprising 53% for consultancy services, 29% for Turnkey projects, 15% for exports and the rest for leasing and power generation projects. Out of total contracts on hand 77% is from Central/State Governments and the rest from others. If we annualize latest performance and attribute it on fully diluted equity post issue, then asking price is at a P/E of around 11, thus it is attractively priced. It has no listed peers to compare with. Company is having asset-light business model that augurs well for lucrative returns going forward.

On merchant banker’s front, four BRLMs associated with this offer have handled 31 public offers in the past three years, out of which 10 issues closed below the offer price on listing date.

Conclusion / Investment Strategy

Investment in this attractively priced consultancy Miniratna (Category-1) may be considered for medium to long term. (Subscribe).

The original review is written by Dilip Davda, appears on and is available here.

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