Rites Limited
Verdict: A ‘slow coach’
IPO Snapshot:
Rites Limited is entering the primary market on Wednesday 20th June 2018 with an offer for sale (OFS) of up to 2.52 crore equity shares of Rs.10 each by promoter (Government of India), in the price band of Rs. 180 to Rs. 185 per share, with a retail discount of Rs. 6 per share. Representing 12.60% of the post issue paid-up share capital, total issue size is Rs. 461 crore at the upper end of the price band. Issue closes on Friday 22nd June and listing is likely on 2nd July.
Company Overview:
Rites Limited, a wholly owned subsidiary of the Government of India, is a transport infrastructure consultant to the Indian Railways and many other government agencies and PSUs such as NHAI, Airports Authority of India, Indian Port Rail Corporation, Delhi Metro Rail Corporation, NTPC, SAIL, Dedicated Freight Corridor Corporation, High Speed Rail Corporation of India, Metro–Link Express for Gandhinagar and Ahmedabad Company etc. At Rs. 4,800 crore, its outstanding order book (31-3-18) is quite large, comprising 77% from Govt. projects. Typically, 3 years is the average estimated project time, and this order book is also approximately 3 times company’s annual revenue of Rs. 1,350 crore.
Financial Performance:
Over FY13 to FY17, company’s revenues grew at a CAGR of 9.1% while net profit growth was slightly higher at 11.6%, thanks to higher growth rates of other income (mainly treasury profits). Of the Rs. 1,350 crore revenue clocked in FY17, 62% came from consultancy services and 28% from exports, with balance from leasing services and turnkey construction projects. Reported FY17 PBT stood at Rs. 507 crore, which included Rs. 71 crore one-time gains on sale in JV investment. Below is the extract of company’s financial statement:
| Rs crore | 9MFY18 | FY17 | FY16 | FY15 |
| Revenue from operations | 936 | 1,353 | 1,091 | 1,013 |
| - YoY growth | NA | 24% | 8% | -8% |
| Other Income | 125 | 210 | 136 | 146 |
| - Interest on bank deposits, bonds + dividend income | 78 | 100 | 98 | 101 |
| Total Income | 1,061 | 1,563 | 1,227 | 1,159 |
| PBT (reported) | 389 | 507 | 451 | 468 |
| PBT (excluding one-time gains in FY17) | 389 | 436 | 451 | 468 |
| Core PBT (reported PBT excluding one-time gains and interest/dividend income) | 311 | 335 | 353 | 367 |
| - YoY growth | NA | -5% | -4% | 25% |
| Core PBT as a % of reported PBT | 80.0% | 76.9% | 78.3% | 78.4% |
In FY16 and FY17, when company’s revenue from operations rose 8% and 24% YoY respectively, core PBT (derived by subtracting one-time gains and interest/ dividend income from reported PBT) declined 4% and 5% YoY respectively, which is quite disappointing and depicts lack of pricing power in the hands of the company. Further, core PBT accounts for roughly 80% of reported PBT indicating that a large chunk of 20% of profits is earned from treasury activity, which is a non-core operation (although recurring), due to huge cash position of Rs.1,380 crore (31-12-17). Surplus cash on books raises a big question mark on many PSUs and this company is no exception. Another ‘typical’ trait which this company shares with other PSUs is high outstanding debtors, at over 5 months of revenues.
For 9MFY18, company’s revenue from operations stood at Rs. 936 crore, while total income was at Rs. 1,061 crore, versus FY17 total income of Rs. 1,563 crore, which is quite a flat performance. PBT for the first nine months was at Rs. 389 crore and PAT at Rs. 252 crore, leading to an EPS of Rs. 12.15 for 9MFY18, against an EPS of Rs. 17.63 for FY17. As of 31-12-17, company has an equity of Rs. 200 crore and net worth of Rs. 2,172 crore (BVPS Rs. 109). Company’s own cash, equivalents and liquid investments stood at Rs. 1,380 crore. Excluding total debt of Rs. 70 crore, company has surplus liquidity of over Rs. 1,300 crore, or cash per share of Rs. 66.
Objects of Issue and Shareholding Pattern:
Since the IPO is a 100% OFS, no proceeds will flow into the company (and rightly so), company is sitting on surplus cash and is not in need of funds. Govt. shareholding in the company will decline to 87.4% post listing.
Valuation:
At Rs. 185 per share, company’s market cap will be Rs. 3,700 crore and EV Rs. 2,782 crore, which leads to PE multiple of 10x and 11x based on FY17 and FY18E earnings respectively. While valuations are not stretched, company’s historic financial performance has been a mixed bag, as highlighted in financial performance above. Although it is a consulting company, RoE of 17.28% (FY18) is not attractive, given that the business is asset light and also large chunk of earnings accrue from risk-free treasury gains. Dividend yield works out to about 2.1% (all central PSUs mandated to pay a minimum annual dividend of higher of 30% of PAT or 5% of net worth) which is again in-line, and nothing extra-ordinary. Retail discount of Rs. 6 per share (3.2% at upper end of price band) is again not a juicy-enough carrot. Also, past performance of recent PSU listings spoilt the party for this company. Of the 7 PSU IPOs in the past 18 months, only 2 are ruling above IPO price (Cochin Shipyard up 8% in 9 months and Midhani up 58%) whereas 5 of them (HAL, Bharat Dynamics, New India, GIC and HUDO) are ruling flat to 22% below IPO price. Since better opportunities are available in the already listed space, along with somber mode among marketmen, there may be few takers for this issue.
Conclusion:
Track record of past PSU IPOs play spoilt-sport along with the company’s mediocre fundaments. Given reasonable valuations, while there is nothing avoid about it, there is nothing for a subscribe too. In view of the subdued secondary market conditions, listing gains appear unlikely. Hence, one can give this issue a miss.
Disclosure: No interest.