RITES IPO: Valuation reasonable, growth prospects look good

The initial public offering (IPO) of RITES, a governmentowned mini-ratna, primarily providing consultancy and construction services for transportation projects, is an opportunity for long-term investors wanting to cash on India’s infrastructure growth.

The IPO entails disinvestment of 12.6 per cent stake by the government. Given the growth prospects, order book, healthy financials and reasonable valuation, investors could subscribe.

RITES initially provided consultancy services to the railways. It has diversified to other transportation sectors such as metro rail projects, roads, airports, etc, enhancing its growth outlook. Consultancy services are still over 60 per cent of revenues but with RITES coming under Indian Railways (IR), it has also started exporting locomotives, rolling stock, equipment and spares. The latter now forms 28 per cent of its revenue.

Most business segments are growing well. In addition to export, RITES is also doing well in leasing services and turnkey construction. The leasing of locomotives, a good margin business, has improved its revenue contribution to about seven per cent. Turnkey construction is growing faster and, having procured orders from the railways (doubling of rail lines, electrification, etc), is expected to become the second largest contributor (a fifth of overall revenue), from only 2.3 per cent in FY17.

Given its diverse services across the transportation spectrum and expanding clientele, the rising investment in railways, metros and other infrastructure projects point to a robust growth outlook.

Strong financials

Given its ownership, it is not surprising that the government accounts for 77 per cent of the order book (pending execution), say analysts (at ~48.2 billion or almost 3.6 times the FY17 revenue). With the government and railways as clients, RITES has reported a compound annual growth of about 15 per cent in revenue over three years and a high operating margin, of 35-42 per cent. Return on equity, an important parameter for investors, has remained at close to 18 per cent. The dividend history is strong, too.