Rail Vikas Nigam

Verdict: Not very electrifying

IPO Snapshot:

Rail Vikas Nigam is entering the primary market on Friday 29^th March 2019 with an offer for sale (OFS) of upto 25.35 crore equity shares of Rs. 10 each by the Government of India (GoI), in the price band of Rs. 17 to Rs. 19 per share, with a retail discount of 50 paise per share. Representing 12.16% of the post issue paid-up share capital, issue will raise Rs. 477 crore (at the upper end) and close on Wednesday 3^rd April 2019, with listing is likely on 11^th April. Important to note that issue is opening on the last working day of FY19, so that financials upto 30-9-18 presented in the RHP need not be updated, to comply with the 6 month timeline. 

Company Background:

Rail Vikas Nigam, a 15 year-old Mini Ratna (Category 1) wholly owned GoI subsidiary, executes railway projects such as doubling lines, new lines, electrification, gauge conversion, metro projects etc. for the Ministry of Railways, having an order book of Rs. 77,504 crore (31-12-18) for 102 ongoing projects. Company earns consolidated management fee on the annual expenditure incurred for the execution of projects at the rate of 9.25% for metro projects, 10% for national projects, 8.50% for other plan heads. Currently, it does not have any national projects.

Objects of Issue and Shareholding:

Since issue is a 100% OFS, no proceeds will flow to the company. Instead, GoI’s FY20’s divestment target of Rs. 90,000 crore will be partly met by the issue proceeds of Rs. 477 crore, after FY19 divestment target of Rs. 80,000 crore was successfully met for the second year in a row. Post IPO, GoI’s shareholding in the company will shrink to 87.84% from current 100%.

Financials: Steady Growth

Between FY15-18, consolidated revenue from operations, PBT and PAT have risen at a CAGR of 34%, 21% and 19% respectively, thanks to higher contribution from doubling railway lines and new lines. FY18 consolidated revenue grew 28% YoY to Rs. 7,597 crore, with PBT jumping 22% YoY to Rs. 664 crore. However, 24% of this PBT was earned from non-related / non-core items, such as interest on FD etc., excluding which, PBT margin from operation stood at 6.7% (on core PBT of Rs. 507 crore). For H1FY19, revenue and core PBT stood at Rs. 3,623 crore and Rs. 239 crore respectively, maintaining margins at 6.6%. EPS for FY18 and H1FY19 were reported at Rs. 2.73 and Rs. 1.22 respectively. 

As of 30-9-18, company’s net worth stood at Rs. 4,062 crore, resulting in BVPS Rs. 19.48 (IPO price marginally lower than book value). Total debt (all from Indian Railway Finance Corp.) was Rs. 1,963 crore with cash and equivalents of Rs. 1,272 crore, leading to net debt to equity ratio of 0.17:1. FY18 RoE grew to 14.5%, from FY17’s 12.5%.

Valuation:

At Rs. 19 per share, company’s market cap and EV will be Rs. 3,960 crore and Rs. 4,650 crore respectively, which discounts historic (FY18) earnings by PE and EV/EBITDA multiples of 7x and 6.5x respectively. Q4 is generally a very strong quarter for execution of government projects, leading to FY19E PE and EV/EBITDA multiples of 6x and 5.5x respectively for the company.

Peer Ircon International, which made its debut on the bourses in September 2018, is ruling 16% below its IPO price, despite 20% and 40% YoY jump in revenue/PAT during 9MFY19. Ircon is nearly half the size (with topline of Rs. 4,500 crore) of Rail Vikas, has better net margins (10.3% in FY18 vs 7.5% for Rail Vikas), but lower RoE (12% vs Rail Vikas’ 14%+). With market cap of Rs. 3,760 crore, Ircon is trading at FY19E PE and EV/EBITDA multiples of 6.8x and 5.2x respectively, indicating that pricing of Rail Vikas is in-line and not much is left on the table, other than the retail discount of a token on 50 paise per share or 2.6% of upper end. 

Poor Track record of PSU IPOs in past 2 years:

Of the 10 IPOs made by PSUs in the past 24 months, only 2 are in the green (Rites and Midhani). Balance 8 stocks are down 30% on an average! Most recent issues of Sept 2018 i.e. Garden Reach and Ircon are both down 16%, despite BSE Sensex gaining 5.5% during this period. Rs. 223 crore MSTC IPO closing has to be extended last week after poor subscription figures.

Besides the PSU tag, another negatives weigh on the issue. Company’s equity base is quite large at Rs. 2,085 crore. With a face value of Rs 10 each, shares are being offered at Rs. 19 and may be considered as penny stock (given price per share below Rs 25). Dividend yield at 4.2% (based on FY18 dividend per share of 80 paise) is nothing abnormal, and similar to most other PSU stocks. 

Conclusion:

Issue can be summarized as under - 

• Positives: (i) consistent financial growth (ii) healthy order book
• Neutral: (i) valuation in-line with peer (ii) 4% dividend yield
• Negatives: (i) poor track record of recent PSU IPOs (ii) penny stock (iii) PSU stocks out-of-flavor in secondary market

Since negatives out-number positives, the IPO can be given a miss.

Grey Market Premium (GMP) of Rail Vikas Nigam: Grey Market Premium of Rail Vikas Nigam is an unofficial figure, against guidelines of SEBI. We strongly recommend investors against following the grey market premium. To know more about grey market premium and how it operates, read our article on ‘grey market premium’ in Pathshala column.

Disclosure: No Interest.