RITES IPO opens for subscription today. Should you invest?

The initial public offer (IPO) of RITES – a government-owned railway consultancy firm and a Miniratna (Category – I) Schedule ‘A’ Public Sector Enterprise – opens for subscription today. The price band for the issue has been fixed at Rs 180-185 a share (discount of Rs 6 per share for retail shareholders and employees), and the government aims to raise up to Rs 460 crore via this sale. The issue closes on June 22.

Established in 1974, RITES has undertaken projects in over 55 countries including Asia, Africa, Latin America, South America and Middle East regions. It is the only export arm of Indian Railways for providing rolling stock overseas (other than Thailand, Malaysia and Indonesia). 

Going ahead, the company plans to scale up operations in the transport infrastructure space (expansion into turnkey railway, airport, metro projects etc.) along with strengthening its international operations, reports suggest.

So, should you subscribe to this IPO? Here's what leading brokerages across the country suggest.

ANGEL BROKING

In terms of valuation, pre-issue price-to-earnings (PE) works out to 12x of annualised FY18 earnings per share (EPS) of Rs 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 subscribing to issue.

CENTRUM WEALTH

Over FY13-17, RITES registered revenue and PAT CAGR of 9% and 11%, respectively. Average earnings before interest, taxation, depreciation and amortisation (EBITDA) margins and return on equity (RoE) over the period stood at 28% and 18%, respectively. RITES is a virtually debt free company.

At the higher end of the price band of ₹185, the issue is priced at P/E of 10.5x (post dilution) on FY17 and 11.4x on 9MFY18 (annualized) basis, which we believe is attractive. The company has no listed peer. Given RITES competence along with good track record, healthy financials and attractive valuations, we suggest that investors Subscribe to the issue.

IIFL

While the company intends to scale up its turnkey segment, it also aims to increase business share in renewable energy generation and power procurement for Indian Railways through Joint Ventures and subsidiaries. Besides, it’s the only export arm of Indian Railways for providing rolling stock overseas (other than Thailand, Malaysia and Indonesia). 

RITES has delivered ~9% revenue and ~12% PAT CAGR over FY13-17 with operating margin of 26.5% in FY17. At the end of FY18, the company has strong order book of ~Rs.48 billion, which provides revenue visibility for next two - three years. 

The company is almost debt free and is sitting on a cash pile of ~Rs 11.3 billion. While RITES is valued at 11x FY18E (ann.) P/E which is at a discount to its peers like NBCC and Engineers India, the increasing mix of low margin turnkey business in overall revenue pie would likely keep earnings growth under check.

 

ARIHANT CAPITAL

RITES has negligible borrowings. The aim is to maintain a similar level of debt in the next three - five years. The component of debt is restricted only to the energy business. Over the years, it has followed a trend where its revenue is always higher in the last two quarters of the year as compared to the previous two. A similar trend is expected to continue in the coming years. This trend is mainly because of exports.

The issue has been offered at a price band of Rs 180-185 per equity share. At the upper price band of Rs 185, the stock is available at price-to-earnings multiple of 13.5(attractively priced) to its FY18 annualised EPS of Rs 13.54. There are no comparable listed companies in India engaged in the same line of business and hence the threat of competitors is low. Considering these factors, we have a “3.5 star” rating for the issue.