Cmp – 250
Market Cap – 4,957 cr
Target – 435
Potential Return- 75%
Industry – Railway Infrastructure & Consultancy



Company Overview

Rail India Technical and Economic Services Ltd. (“RITES”) a wholly owned Government Company, a Mini Ratna, is a leading player in the transport consultancy and engineering sector in India.

RITES Ltd. was incorporated by the Ministry of Railways, Government of India (“MoR”), in 1974. It has the benefit of being associated with the Indian Railways, which is the fourth longest rail network in the world. It is also the only export arm of the Indian Railways for providing rolling stock overseas (other than Thailand, Malaysia and Indonesia).

RITES 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 has evolved from being a transport infrastructure consultancy and quality assurance services provider and has developed expertise in different broad based categories of products and services.

The company has been involved in and have contributed to the development of transport infrastructure in India for the last 43 years.

RITES is a nominated organization of the Indian Railways for the export of railway locomotives, coaches and other equipment which are manufactured by the Indian Railways (other than exports to Malaysia, Indonesia and Thailand).

The company is also a nominated organization for inspection of various  materials  and equipment purchased by the Indian Railways.

Industry Overview & Outlook

GOI has been very proactive and has brought in a variety of measures to step up public investments – which include substantial increase in budgetary outlays in high-impact sectors, push for private sector investments, building institutional capacity through establishment of new infrastructure PSUs, and intensive implementation follow-up for completion of projects.

The amount of investments made during the last 3 years is almost 75% of the total investments made in the railways during the past decade (FY04 – FY14). Also, MoR has also been able to achieve over 90% of its planned investments over the last 3 years.

Indian Railways has already identified 70 projects worth Rs.7000 crores for development through state JVs.

In the Union Budget 2017-18, GOI has allotted Rs.64000 cores to NHAI for roads and highways and Rs.27000 crores to PMGSY for rural roads.

Capital support from the budget for railways is proposed at Rs.64,587 crores in 2019-20. The Railways’ overall capital expenditure program in 2018-19 is of Rs.1,58,658 crores.

The Operating Ratio is expected to improve from 98.4% in 2017-18 to 96.2% in 2018-19 and further to 95% in 2019-20 (BE). Union Cabinet gave approval for road building projects worth Rs. 7,000 crores including Bharat Mala program.

The investment will target constructing 83,677 km of roads in next 5 years. These road building projects, include Bharat Mala project of around 34,000 km with an investment of Rs.5350 cr.

Products & Services

Consultancy services : These services include conducting techno-economic and feasibility studies and  preparation  of  detailed  project  reports,  design  engineering  services,  procurement assistance services, project management consultancy services, quality assurance services and inspection, training services, construction supervision, materials system management services, commissioning support and general transaction advisory services including operation and maintenance.

Locomotive Leasing services : Locomotives leasing services was started by the company in the year 2009 through leasing WDS6 locomotive to non-railway clients for their in-plant shunting operations in sectors such as power, steel, ports and cement. The company leases locomotives to domestic and foreign clients. The company also operates and maintains railway systems of domestic clients. The domestic locomotive leasing business has grown from a single loco in 2009 to 44 locomotives as on date.

Export of locomotives, rolling stock, equipment and spares: The company exports railway locomotives, passenger coaches, wagons equipment and spare parts. Export offerings consist of integrated project export  packages  for  railway  locomotives  and rolling  stock  along  with providing technical support for operation and maintenance of a wide variety of rolling stock of varied specifications for various railway systems abroad. The company also provides various after – sales services for rolling stock including the supply of spare parts and training of maintenance personnel as well as undertakes research and development activities in order to develop new products to meet client requirements and reduce costs.

Turnkey construction services : RITES undertakes construction projects such as railway line enhancement works for railway systems, modernization of railway workshops and building works at cost plus basis. The company also undertakes turnkey construction projects on engineering, procurement and construction basis, with or without equity participation in such projects. As part of such turnkey projects, the company is responsible for completing such construction works by way of achievement of stipulated milestones, adhering to the project completion  schedule  and  complying  with  the  standards  and  specifications  as  per  the requirements of the client.

Investment Rationale

Constant support from Government of India: The next leg of growth will be from government capex.

1. The company is able to get several assignments on nomination/ single tender basis from various government entities including  the  Indian  Railways  because  of  company’s ownership by the MoR coupled with the ability to execute business in compliance with various policies and procedures of governmental departments.

2. The company’s  status  as  a  public  sector  undertaking  and  already  established relationships with governments & its entities and other public sector enterprises in India as well as across various countries where the company has undertaken projects in the past can  be  effectively  leveraged  to increase  presence  and  participation in  new emerging infrastructure sectors and to develop new business relationships both in India as well as internationally.

3. This should enable the company to enhance synergies between the varied divisions of the company and to strengthen the financial performance even further.

4. GOI aims to boost public and private investment in infra sector through various schemes such as NHDP,  PMGSY, Bharat Mala scheme, etc. along with introducing business-friendly strategies that will balance profitability with effective project execution.

5. The proposed capex plan by the Ministry of Railways in 2019-20 budget at Rs.1.58 lakh crores is three times average capex per year from 2009-2013. Whereas last 4 years, average capex into railways was 65,000-75,000 cr. This signals an exponential growth opportunity for RITES which will lead to an exponential growth in order book.

6. Upcoming 3 Dedicated Freight Corridors approved by GoI command a capex of almost Rs.84000 crores with 10-11% towards rolling stock and 35-40% towards electrification and network expansion. RITES which is involved in providing infrastructure services and also being the sole nominee for providing rolling stock will greatly benefit from this demand. This is over and above the orders that the company will keep on securing to export rolling stock to neighboring countries.

Scope for Expansion – Sector and Geography wise :

1. RITES plans to expand operations in other urban transport and transport infrastructure sectors including metro rail projects and high speed corridor projects.

2.  The company also plans to monetize the growth opportunities in Africa, South Asia, Middle East and other developing nations, for rehabilitation and up gradation of roads and railway systems, leasing of railway locomotives and other rolling stock by way of import of such goods and services from India due to similarities of technical standards and specifications.

3. The company has also expanded its operations in emerging sectors and are currently undertaking projects in renewable energy, power procurement, railway electrification and modernization works as well as turnkey projects in upgradation and modernization of railway workshops.

4. Indian Railway Stations Development Corporation Limited has approached RITES for equity participation by contributing upto 25% equity share capital.

5. RITES intends to increase its revenue mix in Turnkey projects owing to new investments in electrification and railway infrastructure. So far RITES has been awarded two projects for new railway lines and two projects for railway electrification.

6. The company intends to pursue such business opportunities, directly or indirectly, through subsidiaries, joint ventures or consortiums, as special purpose vehicles, in India or abroad, in order to specialize in the leasing business on an exclusive basis and in order to facilitate financing of such operations.

Strong order book and diverse clientele:

1. As of December 31, 2018, the company’s order book stood at Rs. 6,054 crores, which includes 353 ongoing projects of value over Rs. 1 crore each. The company has L1 orders to the tune of 1,200 cr. Order book to sales is attractive at 3 times.

2. The company as of March 31st, 2018 had 22 ongoing projects in various international markets.

3. The company regularly provide services to some leading public sector entities, such as: National Thermal Power Corporation Limited. Dedicated Freight Corridor Corporation of India Limited, High Speed Rail Corporation of India Limited, Indian Port Rail Corporation Limited, Steel Authority of India Limited, Delhi Metro Rail Corporation Limited, Metro – Link Express for Gandhinagar and Ahmedabad Company Limited, Airports Authority of India, The National Highways Authority of India, among others.

Financial Performance:

1. The company has more than Rs. 1800 crores in cash excl, advances received from clients (total 3,400 cr), long term borrowings of less than Rs.70 crores indicating a strong balance sheet and a reduced working capital cycle. RITES can post high ROCE of 18-20%.

2. Last 3 years, RITES has generated Cash Flow from Operations of 1,570 crores and average capex of 60-80 crores per year. Market value of the investments stand at 250 crore. Dividend yield of 2.5%

3. Attractive Valuations– At CMP 250 RITES is trading at 8.5 times FY20 EPS. We assign a 15 times multiple to FY20 EPS estimates, arriving at a target of 435.

4. Strong balance sheet, healthy dividend payout ratio, increased budget allocation for railway infrastructure by GOI and constant growth in order book through increased turnkey projects expansion makes RITES an attractive investment to bet on