RITES Limited IPO – Should you invest?
Government of India is going to divest 12% stake in RITES IPO now. RITES IPO (Miniratna) would open for subscription on 20th June, 2018. RITES (Rail India Technical and Economic Services) Limited is multi-disciplinary consultancy organization in the fields of transport, infrastructure, and related technologies. RITES revenues grew at 9% CAGR in the last 5 years. It earns decent profits of over 23%. This IPO price is coming with attractive valuation. What are positive factors in this IPO of RITES Limited? What are the hidden factors in RITES IPO? Should you invest in a RITES Limited IPO? Let me provide some insights about this IPO and do the review.
About Rail India Technical and Economic Services Limited (RITES)
They are a wholly owned Government company, a Miniratna 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. Based on Public Enterprise Survey 2015-2016, company is ranked no. 1 based on net profit and dividend declared in Industrial Development and Technical Consultancy Services sector. They have an experience spanning 44 years and have undertaken projects in over 55 countries, including Asia, Africa, Latin America, South America and Middle East regions. They are the only export arm of Indian Railways for providing rolling stock overseas (other than Thailand, Malaysia and Indonesia). They are a multidisciplinary engineering and consultancy organization providing diversified and comprehensive array of services from concept to commissioning in all facets of transport infrastructure and related technologies.
They have a significant presence as a transport infrastructure consultancy organization in the railway sector. However, they also provide consultancy services across other infrastructure and energy market sectors including urban transport, roads and highways, ports, inland waterways, airports, institutional buildings, ropeways, power procurement and renewable energy. They have, over the years, served various public sector undertakings, government agencies and instrumentalities and large private sector corporations, both in India and abroad.
RITES IPO Issue details
IPO opening date: 20-June-2018
IPO closure date: 22-June-2018
Face Value: Rs 10 per share
Issue price band: Rs 180 to Rs 185 per share
Issue size: 453.6 Crores
IPO Lot size: 80 shares and 80 shares, there-off
Minimum investment: Rs 14,800 on higher price band
Leading Managers: Elara Capital, IDBI Capital Markets, IDFC Bank and SBI Capital Markets
Listing: BSE / NSE
Objects of the RITES Limited IPO issue
The Objects of the issue are
(i) Offer for sale: To carry out the disinvestment of 24,000,000 Equity Shares held by the Selling Shareholder in the Company, equivalent to 12% of the issued, subscribed and paid up Equity Share capital of the Company as part of the Net Offer, and 1,200,000 Equity Shares that will be reserved for Employee Reservation Portion, and
(ii) To achieve the benefits of listing the Equity Shares on the Stock Exchanges. Further, the company expects that listing of the Equity Shares will enhance its visibility and brand image and provide liquidity to our shareholders. Company listing will also provide a public market for the Equity Shares in India.
The company will not receive any proceeds from the Offer and all the proceeds will go to the Selling Shareholder.
The Promoter of the company is the President of India acting through the Ministry of Railways. Govt. of India currently holds, directly and indirectly, 100% of the pre-Offer paid-up Equity Share capital of the Company.
Company Financials (reinstated-Consolidated)
1) The company generated revenue of Rs 1,083 Crores for the year ended Mar-13 and Rs 1,563.2 Crores for the year ended Mar-17 indicating 9% CAGR growth in the last 5 years. Revenues for the 9 months ended Dec-2017 was Rs 1,061 Crores.
2) The company posted a profit of Rs 233 Crores for the year ended Mar-13 and profit of Rs 361.6 Crores for the year ended Mar-17 indicating a 12 % growth of profits in the last 5 years. Profits for the 9 months ended Dec-17 was Rs 252.5 Crores.
3) Its FY17 basic EPS is Rs 17.64 and last 3 years average EPS is Rs 16.11. Its 9 months ended EPS is Rs 12.15. If we annualize its 9 months EPS to entire year, its EPS works out to be Rs 16.2.
Company Financials (reinstated-Standalone)
1) The company generated revenue of Rs 1,081 Crores for the year ended Mar-13 and Rs 1,508.2 Crores for the year ended Mar-17 indicating 9% CAGR growth in the last 5 years. Revenues for the 9 months ended Dec-2017 was Rs 1,014 Crores.
2) The company posted a profit of Rs 227 Crores for the year ended Mar-13 and profit of Rs 354 Crores for the year ended Mar-17 indicating a 12% growth of profits in the last 5 years. Profits for the 9 months ended Dec-17 was Rs 237 Crores.
3) Its FY17 basic EPS is Rs 17.7 and last 3 years average EPS is Rs 16.16. Its 9 months ended EPS is Rs 11.8. If we annualize its 9 months EPS to entire year, its EPS works out to be Rs 15.73.
What are the key strengths of RITES Limited?
Here are the key strengths of the company.
1) Comprehensive range of consultancy services and a diversified sector portfolio in the transport infrastructure space.
2) Large order book with strong and diversified clientele base across sectors.
3) Technical expertise and business divisions with specialized domain knowledge.
4) Experienced management personnel and technically qualified team.
5) Strong and consistent financial performance supported by robust internal control and risk management system.
6) Preferred consultancy organization of the Government of India, including the Indian Railways.
What are the Strategies of RITES Ltd?
Here are the key strategies of the company.
1) Leverage their experience and continue to build on their core competencies in transport infrastructure sector.
2) Strengthen their EPC/Turnkey business.
3) Expand their international operations.
4) Expand their operations in the power procurement and renewable energy sector through their subsidiary, Railway.
5) Energy Management Company Limited, which is the only entity mandated for procurement of power from third parties and for captive renewable energy generation, for the Indian Railways.
Reasons to invest in RITES IPO
1) Good Revenue growth of 9% CAGR in the last 5 years
2) Good profits of over 23% in the last 5 years.
3) They are consistently paying dividends of 30% and have been a good dividend payer.
4) Unique company where there is low competition.
5) Opportunity to invest in Miniratna company.
6) This IPO is coming with attractive valuation.
Risk Factors / Reasons not to invest in an RITES IPO
1) Company will not receive any proceeds from the Offer.
2) They depend on the Ministry of Railways, GoI (“MoR”), central/state governments and central/state PSUs for a significant portion of the contracts on their order book which are awarded on a nomination basis. There is no assurance that future contracts will be awarded to us on nomination basis by these clients. This may result in an adverse effect on their business growth, financial condition and results of operations.
3) They depend on the MoR for a significant portion of their business, including equipment, technical staff etc. Any changes in the government policies or decisions by the MoR may result in an adverse effect on their business growth, financial condition and results of operations.
4) Their current order book may not necessarily translate into future income in its entirety or could be delayed. Some of their current orders may be modified, cancelled, delayed, put on hold or not fully paid for by their clients, which could adversely affect their business reputation, which could have a material adverse effect on their business, financial condition, results of operations and future prospects.
5) They face certain competitive pressures from the existing competitors and new entrants in both public and private sectors. Increased competition and aggressive bidding by such competitors is expected to make their ability to procure business in the future more uncertain which may adversely affect their business, financial condition and results of operations.
6) They are dependent on the line of credit provided by the GoI and other funding agencies provided to countries that they operate in. In the event there is any change in the policies of the GoI or the funding agencies or the countries’ utilization of line of credit or the line of credit is withdrawn or reduced, their business and operations may be adversely affected.
7) Their business is dependent on the continued growth of infrastructure and energy sector, including transport infrastructure and any slowdown in fresh investments in the infrastructure and energy sector or change policies may impact their business and results of operations.
8) They enter into joint ventures and consortium arrangements for completion of their projects which may expose us to additional liabilities on account of their partners’ failure or underperformance and any premature termination of which, may adversely affect their business, reputation, financial condition and results of operations.
9) They are in the process of winding up their subsidiaries, namely RISL, RITES (AFRIKA) and RMAC (Saudi Arabia). The winding up of these subsidiaries may lead to us incurring additional liabilities arising out of such winding up procedures and adversely impact their results of operations and financial conditions.
10) There are outstanding legal and tax proceedings involving the Company. Any adverse decision in such proceedings may expose us to liabilities or penalties and may adversely affect their business, financial condition, results of operations, cash flows and future prospects.
11) They have had negative cash flows from their investment operations and financing activities in the past and may continue to have negative cash flows in the future.
12) They have contingent liabilities on their balance sheet, as stated, as on December 31, 2017. The materialization of their contingent liabilities may adversely impact their financial condition and future prospects.
Recently Listed PSU IPOs and their Performance
Don’t think everything is green here. Let's look at a recent listing of PSU IPO companies
1) Midhani IPO got listed in April-2018. Its IPO Price was Rs 90 and CMP is Rs 142 giving good returns of 58%.
2) HAL IPO got listed in March-2018. Its IPO Price was Rs 1215 and CMP is Rs 990 giving negative returns of 19%.
3) Bharat Dynamics IPO got listed in March-2018. Its IPO Price was Rs 428 and CMP is Rs 398 giving negative returns of 7%.
Recommendation / Investment strategy – RITES IPO
1) On FY2017 standalone EPS of Rs 17.7 and on an upper price band of Rs 185, P/E works out to be 10.4x. On last 3 years average EPS of Rs 16.16, P/E works out to be 11.4x. If we take latest EPS (9 months ended Dec-17) and annualize it, the P/E works out to be 11.8x. Means company is asking for a higher price band Rs 185 where P/E would be in the range of 10x to 12x. There are no listed peers who are in similar business for comparison. However, the issue price at at this P/E of 12x can be considered as attractively priced.
2) Company posted revenue growth of 9% CAGR in the last 5 years. It earns good margins. Its issue price is attractive considering 12x P/E. However, recent PSUs that came for IPOs has not given good returns except for Midhani. Considering the mixed reactions, high investors can invest in this IPO for medium to long term of 4 to 8 years time frame. Investors may or may not get listing gains.
Disclaimer: I have an interest in investing in this IPO and above analysis is based on my personal views. The idea of giving positive and negative factors to investors in this article is to create awareness and education about this IPO. One should NOT constitute this as investment advice to buy or not to buy. Please consult your investment advisor before you invest in such high risk investment options.
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RITES Limited IPO – Should you invest