ValuePickr Forum

RITES Ltd – PSU With a Difference

**Background: **
Most of the listed PSUs have so many problems – Debt, no growth, stressed assets, issues in cash flow & RoE, Government interference, no pricing power or steady margins, employee cost drags, Plagued by cyclical commodity cycles…

What if there is a PSU, which has none of above issues, growing in revenue & PAT at a increasingly high rate and offers high dividends and guided by a transparent management improving productivity year on year….Welcome Rites ltd.

Rites Ltd is a Miniratna PSU, is consulting & engineering services company, specializing in Railways & transport infrastructure.

Rites Ltd got listed in May 2018, so information available on company is very limited from a historical sense. Information collated by me are from IPO RHP , annual reports, management concalls , interviews etc…

Highlights of RITES ltd :

  1. Signs MoU agreement with Ministry of Railways for every year & takes advantage of market being a PSU (how refreshing for a PSU !)
  2. Zero Debt, Cash rich (currently 1100 crores)
  3. High Margins & ROCE -30%, ROE-20%
  4. No impact from commodity or Impacts in BFSI area or global factors. Only & one thing that matters – Government vision in improving Railways; More the budget & project work in Railways & related sectors, more the growth & profitability

Business Services & Model

MoU Agreement: RITES ltd every year signs a MoU with Ministry of Railways with a revenue target set. So there is clear trajectory set for investors to evaluate yearly progress. MoU signed is only a minimum revenue target. In addition to MoU, they do win other projects domestic/foreign and also in non-Railways sector.

MoU Target for 2018/19 – 1760 crores

RITES achieved 2018/19 -1969 crores (11.9% more)

MoU Target for 2019/20 – 2300 crores

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Governance:

Except for a handful of PSUs, in rest Governance usually is seen to be slack. It’s also a parameter that’s hard to gauge especially in a recently listed entity like RITES. Given this PSU is very similar to a IT company (only in Engineering services), there seems less bureaucracy & more transparency. I request fellow investors to look at conference call transcripts over last few quarters. Current CMD has been very forthcoming in answering all sorts of questions and answers at times go above & beyond expectations (in my opinion).

Productivity

Company has been improving their technology& becoming more digital in their operations including company-wide SAP based Enterprise Resource Planning (ERP); e-procurement for works, goods and services; mobile app for third party inspection services etc. Given most of the work is Project management consultancy, PMP training & certification aid are also given & encouraged along with host of other trainings.

Number of employees have not increased/decreased not even by 1% over the last 9 years. Yet, productivity per employee is only increasing year on year.

In FY19, income per employee was a incredible 67Lakhs.

My Opinion : Though its not apple to apple comparison…Likes of TCS or Infy being consulting companies have this number in USD but pound for pound, this stat for RITES is arguably better than them.

FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 CAGR
E mp loyee 3002 3134 3294 3247 3226 3227 3153 3200 3267 3223 0.79%
Income per Employee 21L 28L 28L 33L 39L 36L 41L 47L 49L 67L 13.7%

Opportunity

Opportunity size is humongous.

Slide from RITES corporate presentation:

Best part about RITES is , given it does PMC work for Railways – Once a PMC work is done, as per mgmt, they are most likely to get a sizable pie from the actual project implementation.

Just couple of examples & opportunities:

  • Every Tier 2 or even Tier 3 are getting Metro lines. Rites almost does all PMC work for them. First they submit feasibility study & project report to Government. Then, Government takes the call to implement the project. Then bidding happens for end to end work. Now, Rites could get end to end from design to implementation or they could get just quality assurance or oversight work.
  • Japan based JICA has won the Mumbai-Ahmadabad high speed rail implementation. But to supplement this, RITES is doing turnkey project in Sabarmati for NHSRCL to convert legacy infrastructure of sheds & workshops. In concall mgmt also indicated other corridors are already in discussion phase like Delhi-Chandigarh-Amritsar, Delhi-Mumbai, Vijayawada-Hyderabad-Bangalore-Chennai. RITES will compete & bid for whatever work they could get in these huge scale projects.
  • DFC projects in other sectors & Electrification projects.
  • Non Rail - Interest in HAM road projects, Ports, waterways & airports - domestic or international

Station Redevelopment Opportunity:

This is a very interesting opportunity for RITES. RITES since IPO has been involved in buying a stake in IRSDC (Indian Railway Stations Development Corporation) SPV founded in 2012. As per latest call, worth of their investment will be 50crore in IRSDC (most likely 20% equity). Business plan is awaited from IRSDC. This deal seems very close to happen

Basically, IRSDC is a SPV to develop new stations & upgrade existing stations & monetise the real estate of a station in a PPP model. This SPV has been granted special power to develop stations without seeking local authorities approval.

Opportunity size is nearly 800 stations to develop.

RITES already got 80 crore of engineering solutions work from IRSDC for the 8 station project they got recently. They are also doing PMC work for Ayodhya & Varnasi stations which are at construction stage.

Whats in it for RITES : RITES mandate in these projects includes assessment of real estate potential, develop station scheme, engineering detailing, bid process management and Engineering project management.

Stock Performance :

RITES was 11 PE at time of IPO. Now, at 13PE.

Stock has appreciated 70%+ in last 1.5 years.

They have been paying dividends on every quarter

In addition, Government disinvested further 15% in market by offering bonus shares 1:4

Investment Thesis

Unlike Road projects, Rail based projects don’t have major issues in terms of land ownership etc. Hence their implementation time frame of any rail/metro projects is reasonably quicker.

Government budget in railways has been increasing for the last 5 years & Government has the will to implement station redevelopment, high speed rail & bullet rail etc in coming years.

Ministry of Railways has given RITES, the job of developing a ‘National Rail Plan’ (NRP-2030) for India. Proposed NRP-2030 shall suggest Railway infrastructure to be created by 2030 with a horizon year of 2050. There is clearly a agenda to improve & upgrade railways in every aspect.

So for me, Railways as a sector is a major investment theme

In this, RITES is on top of the list, given their engineering & consulting moat, track record, negligible working capital, asset light, great financials etc etc…

Risks

  • Inherent risk of being a PSU , open to govt policy changes or possible lack of will with certain projects
  • Coach factories like ICF have said in past that they want to do the export sales themselves instead of being through RITES. Latest news reports also says that it is looking to integrate all coach factories and hive off its locomotive and rolling stock manufacturing units into a single entity called “Indian Railway Rolling Stock Company”. There is not much information if RITES would be affected in such scenario.

References :

RITES Corporate presentation :
RITES_Corporate_Presentation_July_2019.pdf (2.2 MB)

Annual report 2018/19:

DISC : Invested since IPO & been buying on Dips (views biased)
Note : This is my first topic here. So feedbacks/comments appreciated

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In last 1-2 yrs growth is coming from Turnkey project segment and current order book also high for Turnkey is almost 5x to sales…Turnkey is cost plus model and company earn 2-3% margin from it compare to 35-40% from their core consulting biz…
I am seeing growth coming for next 2-3 yrs with reducing margin…

Their answer regarding turnkey margins : They do get a 8.5% fee
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On consultancy:
Almost in every conference call same question is asked - management are saying that there are enough in the pipeline in terms of new consultancy orders.

This was answer to question on new orders in Q1FY20:
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Again on consultancy being the major in order inflow in Q1FY20:
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Also,Turnkey needs no working capital so if a larger order comes they wont say no and they have bandwidth
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Yes, on turnkey project they take Cost+8.5% margin and after expenses company earn net @3% margin.
My point is, we are seeing high growth because of super high growth in low margin Turnkey project. Good thing is that they don’t need any money for these projects …
In Q1FY20, it was good to see that they got new orders in their core consulting business which is a steady state (@10-12%) growth biz…

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Any reason why working capital days is very high - 250 days?

Govt may fast their disinvestment program after todays reduction in Corp Tax (which affect 1.45lac cr govt revenue)…How u see any OFS coming and how it will affect…?

Not sure if you are asking specifically for Rites…If so, I cant see it given GoI have already done 15% stake sale by bonus shares. As for as tax cut, it should help the bottomline of most profitable PSUs including Rites

Ghana Railways Development Ministry and RITES on Tuesday signed a Memorandum of Understanding (MoU) to promote long-term bilateral cooperation in transport and infrastructure projects in West African nation.

The MoU was signed in the presence of Ghana’s Minister of Railway Development Joe Ghartey and Chairman and Managing Director of Rail India Technical and Economic Service (RITES) Rajeev Mehrotra at the International Rail Conference 2019 held here, a release by the RITES Limited read.

Speaking on the occasion, Mehrotra said that the MoU would help RITES to enhance its presence in Ghana, while Accra would be benefitted by technical knowledge, experience, training and resources of Indian Railways and RITES.

“Economic growth in the Republic of Ghana has been on a fast pace and this MoU is a step towards building a long term business relationship between RITES and Ghana’s Ministry of Railway Development,” he said.

“It will also help RITES to enhance its presence in Ghana, which will be benefited by technical knowledge, experience, training and resources of Indian Railways and RITES,” he said.

RITES Limited, a Miniratna (Category - I) Schedule ‘A’ public sector enterprise, is a leading player in the transport consultancy and engineering sector in India, having diversified services and geographical reach.

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Do you know if this will be a consultancy part of business.

Yes, it is the consulting part. Usually, consulting leads to other deals at a later point in time.

That is surely a good news.Thanks.

Sorry for the naive question. What is difference between services for RITES and RVNL? They both seem to offer similar services.

In simplistic terms, RVNL does the actual physical work in terms of laying rails, electrical lines etc.
RITES is more of the brains. Doing feasibility analysis, problem solving interms of complex projects, project report, project management, design, quality checks of final product etc…So, ofcourse, RITES have a huge margin

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In his recent interview to a business channel, RITES CMD that Govt will divest more of its holding in RITES. He also mentioned that it may happen in 3-4 months time.

Can someone kindly explain what is the impact of this on retail investor?

No increase in employee headcount over 10 years is also a negative in the sense that there aren’t enough business opportunities to pursue.

Well am not sure that’s entirely correct when we are seeing steady top line growth. This is not a IT model where they get the numbers & have them on bench for any expected new work. Rites have temporary contract workers pool ,based on the need they seem to use it. Also this is PSU so, I don’t think they will pursue aggressive growth

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Govt as the promoter has to compulsorily dilute stake as its holding is above the maximum permissible limit of 75% for listed entities. For investors in the stock, there will not be much impact. Due to selling there may be a temporary pressure on prices, i.e. prices can go down due to the additional selling. Post dilution it is better as there will be higher liquidity in the stock.

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Can something similar like Engineers India happen to Rites?