PC - RITES IPO Note - June 2018 edit 1backoffice.phillipcapital.in/Backoffice/Research... · status. It provides project consultancy services – from concept to commissioning –

INSTITUTIONAL EQUITY RESEARCH

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RITES Ltd De‐risked model; low on valuations vs. peers ‐ Subscribe INDIA | RAILWAYS | IPO Note

19 June 2018

RITES Ltd (RITES) is a government‐owned company, engaged in transport consultancy, and more recently in turnkey execution of railway projects. RITES has a diversified presence across all major verticals in the transport sector. In FY17, its revenues/EBITDA/PAT was Rs 13.0/3.5/3.0bn, translating into 26.8% EBITDA and 23.4% PAT margins. RITES had an order book of Rs 48.2bn as of FY18, implying a book‐to‐bill of 3.5x FY18E revenues.

About RITES Incorporated in 1974, RITES is a government‐owned company with 'Miniratna (Category‐1)' status. It provides project consultancy services – from concept to commissioning – in the transportation infrastructure sector.

IPO rationale: Offer for sale by the government The IPO is an offer for sale by the government to raise Rs 4.6bn and dilute shareholding by 12.6%. At the price band of Rs 180‐185, the stock trades at 12x FY17 PE.

Key positives • De‐risked play on the transportation sector: RITES offers consultancy services to all sub

segments of the transport sector. It provides services to traditional railways, rail projects of power companies, metro rail projects, ports, and highways. It is also involved in leasing railway locomotives to domestic non‐railway customers and exports locos. In the past three years the company has also been nominated by the Indian Railways to undertake turnkey execution of railway projects in new line laying, doubling and gauge conversion. Based on our estimates the Indian Railways contributed ~35% of RITES’ FY18 revenues; the rest came from other sectors, making it truly diversified.

• Decent domestic‐export mix: RITES has undertaken projects in 50+ countries and it is one of the only companies under the Indian Railways permitted to export rolling stock. In the past three years, the contribution of exports has averaged 25% of sales; it typically rises when locomotives are supplied to overseas clients.

• Steady historical track record: RITES has maintained stable growth. In the past ten years, its revenue/EBITDA/PAT has grown at 9%/9%/10%, average ROE has been 20%, fixed asset turn has been 3.2x, and it has been free‐cash positive in all but one year.

• Favourably placed against other railways subsidiaries: Based on recent filings of two other railway companies, viz. IRCON and RVNL, we believe that though RITES ranks lower in term of growth parameters, it ranks higher in terms of longevity of business model due to exposure to multiple end markets, higher margin, and higher return profile (please refer to our competitive matrix on page 8).

Key risks • Growing share of turnkey projects would lead to lower consolidated EBITDA margins.

Management expects project revenues to yield EBITDA margins of 2‐3% against 15‐50% margins of its ‘consultancy, export, and leasing’ segment.

Our view: SUBSCRIBE RITES should benefit from growing railways capex, new metro projects, development of airports in tier 2 and 3 cities, and infrastructure investments in countries where India’s EXIM Bank has provided funding. We expect RITES’ FY17‐21 revenue/EBITDA/PAT CAGR at 15%/12%/10%. Its earnings growth should be lower than its listed peers such as Engineers India (EIL) and NBCC. However, RITES’ business is not as cyclical as its peers. Its valuation (12x FY18, 10x FY19) at its issue price of Rs 185 reflects lower growth profile and is reasonable compared to EIL’s 22x FY19 PE and NBCC’s 31x. We rate RITES IPO as ‘SUBSCRIBE’; what the company may lack in growth, it should more than compensate in diversification and capital preservation, along with an attractive dividend yield, which limits downside risk.

SUBSCRIBE COMPANY DATA ISSUE OPENS 20th June 2018ISSUE CLOSES 22nd June2018PRE‐ ISSUE EQUITY SHARES 200mnPRICE BAND Rs 180 – 185NO OF SHARES OFFERED 25.2mnISSUE SIZE Rs 4.5‐4.6bnMKT CAP Rs 37bn STANDALONE FINANCIALS Y/E Mar, Rs bn FY17 FY18E FY19E FY20ENet Sales 13.03 13.85 18.13 19.77EBIDTA 3.50 3.42 4.45 4.60Net Profit 3.04 3.09 3.75 3.89EPS, Rs. 15.2 15.4 18.8 19.5PER, x 12.2 12.0 9.9 9.5EV/EBIDTA, x 1.1 0.9 nm nmP/BV, x 1.8 1.7 1.6 1.4ROE, % 15.6 14.7 16.7 15.9

PhillipCapital India values your support in the Asiamoney Brokers Poll 2018.

We appreciate your vote.

Jonas Bhutta (+ 9122 6246 4119) [email protected] Vikram Rawat (+ 9122 6246 4120) [email protected]


RITES LTD IPO NOTE

About the IPO • Rs 4.5‐4.6bn issue of 25.2mn shares at a price band of Rs 180‐185 per share • Issue includes offer for sale by promoter 'Government of India (GoI)' • Market capitalisation at price band: Rs 36‐37bn • Post‐issue, GoI's shareholding to reduce to 87.4% from 100% RITES ‐ Issue details ISSUE OPENS 20th June 2018ISSUE CLOSES 22nd June 2018PRE‐ ISSUE EQUITY SHARES 200mn ‐ LOWER BAND Rs 180 ‐ UPPER BAND Rs 185PRICE BAND Rs 180 ‐ 185 ‐ FRESH ISSUE Nil ‐ OFS 25.2mnNO OF SHARES OFFERED FOR SALE 25.2mnRETAIL AND EMPLOYEE SHARE (%) 38.1%RETAIL DISCOUNT (RS) Rs 6ISSUE SIZE Rs 4.5‐4.6bnPOST‐ ISSUE EQUITY SHARES 200mnMKT CAP Rs 36‐37bn

Share holding pattern post‐issue

Source: RHP, PhillipCapital India Research Allocation of shares offered in the IPO

Shares (mn) % of Net/gross issueRetail 8.40 35.0%Non‐institutional 3.60 15.0% ‐ Mutual fund 0.60 2.5% ‐ Other QIBs 11.40 47.5%QIBs 12.00 50.0%Net Issue 24.00 95.2%Employees 1.20 4.8%Total Issue 25.20 100.0%

Source: RHP, PhillipCapital India Research RITES: Corporate actions

Date Offered (mn) Pre‐offer O/s Post‐offer O/s % of Pre‐offerBonus issue 4:1 (FV Rs 100) Jun‐84 0.04 0.01 0.05 400.00%Bonus issue 1:1 (FV Rs 100) Jul‐87 0.05 0.05 0.10 100.00%Bonus issue 1:1 (FV Rs 100) Aug‐97 0.10 0.10 0.20 100.00%Bonus issue 1:1 (FV Rs 100) Jun‐03 0.20 0.20 0.40 100.00%Sub‐division of FV into Rs 10 vs. Rs 100 Nov‐07 ‐ 0.40 4.00 0%Bonus issue 9:1 (FV Rs 10) Feb‐08 36.00 4.00 40.00 900%Bonus issue 6:4 (FV Rs 10) Oct‐12 60.00 40.00 100.00 150%Bonus issue 1:2 (FV Rs 10) Nov‐16 50.00 100.00 150.00 50%Bonus issue 1:3 (FV Rs 10) Mar‐17 50.00 150.00 200.00 33%

Source: RHP, PhillipCapital India Research

GOI87.4%

Others12.6%


RITES LTD IPO NOTE

About the company RITES, incorporated in 1974, is a government‐owned company with 'Miniratna (category‐1)' status. It provides design, engineering and consultancy services in the transport infrastructure sector with focus on railways, urban transport, roads and highways, ports, inland waterways, airports, and ropeways. It has also started executing projects on turnkey (EPC) basis for railways and buildings. Additionally, it is engaged in the export, leasing, maintenance, and rehabilitation of locomotives and rolling stock. Through its subsidiary and JVs, RITES is also engaged in renewable power generation and supply of power, and manufacturing of wagons.

• Railway Energy Management Company Ltd (REMCL), a 51% owned subsidiary, is engaged in the renewable energy generation and power procurement for the Indian Railways. It is mandated by the Indian Railways (in its role as deemed distribution licensee) to undertake power procurement and facilitate contracts between power producers and Indian Railways, including renewable‐energy and energy‐efficiency projects.

• SAIL‐RITES Bengal Wagon Industry Private Ltd (SAIL‐RITES) is a 50:50 joint venture between RITES and SAIL. It manufactures railway wagons from a facility located within the premises of SAIL Growth Works, Kulti, West Bengal. It has entered into an assured off‐take agreement with the MoR (Ministry of Railways) for procuring 1,200 wagons and rehabilitation of a minimum of 300 wagons annually.

• BNV Gujarat Rail Private Ltd (BNV) is joint venture between RITES (26%), Shapoorji Pallonji Road (67.5%), and PCM Cement (6.5%). It is formed for the implementation of the Bhuj‐Naliya‐Vayor Rail‐Connectivity Project in Gujarat on a BOOT (build‐own‐operate‐transfer) basis for a concession period of 30 years.

RITES: Business profile


RITES LTD

Consultancy& quality assurance

services

RailwaysMetro railsRoads Ports Inland waterwaysAirportsRopeways

Turnkey construction services

RailwaysBuildings

Exports

Locomotives & rolling stock to countries other than Malaysia, Indonesia and Thailand

Leasing services

Locomtives to domestic as wellas overseas customers

REMCL (51%)

Renewable power generation & power supply for Indian Railways

SAIL‐RITES Bengal Wagon Industry

(50%)

Wagon manufacturing

BNV Gujarat Rail (26%)

Bhuj‐Naliya‐Vayor rail connectivity project


RITES LTD IPO NOTE

Key management profile

Name Designation Age

(years) Qualification Mr. Rajeev Mehrotra

Chairman & Managing Director

56 • Associated with RITES since October 2007 and appointed as CMD on October 2012. • Previously, he has worked with NHPC and PFC. • Bachelor’s Honors degree in Accountancy and Business Statistics from Rajasthan University. • Member of the Institute of Cost Accountants of India.

Mr. Arbind Kumar Director (Projects)

59 • With RITES since January 2001. • Previously worked with the Indian Railways, a private company in Malaysia through RITES, and for the

Sultanate of Oman. • Bachelor’s degree in Civil Engineering from Muzaffarpur Institute of Technology. Diploma in Management

from the IGNOU. • Life Fellow of the Institution of Permanent Way Engineers (India).

Mr. Ajay Kumar Gaur

Director (Finance)

58 • With RITES since January 1985. Previously worked the Container Corporation of India. • Member of the Institute of Chartered Accountants of India.

Mr. Mukesh Rathore

Director (Technical)

58 • With RITES since April 2000. • Bachelor’s degree in Mechanical Engineering from the University of Jabalpur. • Fellow Member of the Institution of Engineers (India)



RITES LTD IPO NOTE

Key strengths Diverse sectoral reach in the transport infrastructure RITES provides a comprehensive range of consultancy services across all sub‐segments of the transport infrastructure sector including railways, urban transport, roads and highways, ports, inland waterways, airports and ropeways. In the past three years the company has also been nominated by the Indian Railways to undertake turnkey execution of railways projects in new line laying, doubling, and gauge conversion. Based on our estimates Indian Railways contributed ~35% of RITES FY18E revenues the balance being supported by other sectors, making it truly diversified. RITES should benefit from growing railways capex, new metro projects, development of airports in tier 2 and 3 cities and infrastructure investments in countries wherein India’s EXIM Bank has provided funding. RITES: Order book mix across key segments and sectors

Source: RHP, PhillipCapital India Research Railways capex has been more than doubled to over Rs 1tn Physical targets of the Indian Railways

FY14 FY15 FY16 FY17 FY18RE FY19BENew lines (km) 450 313 813 953 402 1,000Doubling (km) 708 705 972 882 945 2,100Gauge conversion (km) 404 527 1,043 1,020 574 1,000Electrification (km) 1,350 1,375 1,730 1,646 4,000 6,000Track Renewals (km) 2,886 2,424 2,794 2,487 3,600 3,900Rolling Stock Locomotives (nos) 687 605 621 658 642 695Coaches (nos) 3,887 3,731 4,099 4,321 4,659 5,160Wagons (nos) 9,326 11,151 13,412 12,323 7,120 12,000

Source: RHP, MoR, PhillipCapital India Research

Railway Infra 28%

Urban Infra 8%

Building & airports 9%

Highway & ports 3%Others 6%

Turnkey 29%

Exports 14%

Leasing 3%

Consultancy 53%

Order book mix

‐

200

400

600

800

1,000

1,200

1,400

1,600

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18RE

FY19BE

Railway capex (Rs bn)


RITES LTD IPO NOTE

432km of metro rail projects are expected to be completed by FY22... Metro project Length (km) Estimated cost (Rs bn)Mumbai Metro Line 2A 18.6 64.1 Mumbai Metro Line 2B 23.6 109.9 Mumbai Metro Line 3 32.5 231.4 Mumbai Metro Line 4 32.3 145.5 Mumbai 107.0 550.8 Bangalore Metro Phase 2 72.1 264.1 Kanpur Metro 25.0 132.2 Chandigarh Metro 37.6 136.0 Pune Metro Rail Project Phase 1 31.3 114.2 Ahmedabad Metro Rail Phase 1 36.0 107.7 Nagpur Metro Rail Project 38.2 86.8 Jaipur Metro Phase 2 23.1 65.8 Ludhiana Metro 28.8 66.0 Chennai Metro Phase 1 Extension 9.1 37.7 Thane Bhiwandi Kalyan Mono Rail 23.8 31.7 Total 432.0 1,593.0

...and 525kms of metro rail projects are at various stages of planning and appraisal Metro project Length (km) Chennai Phase II 107.5 Delhi Metro Phase IV 103.9 Guwahati 61.0 Visakhapatnam 42.6 Thiruvananthapuram & Kozhikode (light rail) 35.1 Indore 31.6 Varanasi 29.2 Patna 27.9 Bhopal 27.9 Vijayawada 26.0 Delhi & NCR 21.1 Kochi Metro Phase II 11.2 Total 525.0

Source: RHP, PhillipCapital India Research NHAI plans to award 20700km of road projects over FY19‐21...

...an overall Rs 9.8tn of investment is expected in roads sector over FY17‐21

Source: RHP, PhillipCapital India Research Proposed greenfield airports Airport location State Estimated cost (Rs bn)Navi Mumbai Maharashtra 167.0Mopa Goa 31.0Bhogapuram Andhra Pradesh 22.6Kannur Kerala 18.9Dholera Gujarat 17.1Durgapur West Bengal 6.7Hassan Karnataka 5.9Pakyong Sikkim 5.5Sindhudurg Maharashtra 5.2Kushinagar Uttar Pradesh 4.5Shirdi Maharashtra 3.2Dagadarthi Mandal Andhra Pradesh 2.9Dabra Madhya Pradesh 2.0Oravakallu Andhra Pradesh 2.0Karaikal Puducherry 1.7Bijapur Karnataka 1.5Shimoga Karnataka 0.4Gulbarga Karnataka 0.1Total 298.4


0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

FY18 FY19 FY20 FY21

(km)Awarded (km) Constructed (km)

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

National highway State roads Rural roads Total

(Rs bn)FY12‐16 FY17‐21E


RITES LTD IPO NOTE

Decent domestic and export mix RITES has undertaken projects in 50+ countries and it is one of the only companies under the Indian Railways permitted to export rolling stock. In the past three years export contribution has averaged 25% of sales and typically rises in contribution when there are supplies of locomotives to overseas clients.

A large part of RITES’ export business is dependent on bilateral relations between India and other countries. In the international markets, it exports locomotives and rolling stock through line of credit (LoC) given by the GoI. EXIM Bank has till date extended 209 LOCs covering 59 countries with credit commitments of over US$ 15.7bn, of which US$15.5bn were extended over the last five years (FY13‐17). LoCs have seen significant growth over the last few years, but the disbursement has been very low because in a majority of cases, the LOC was not signed by the recipient country with EXIM Bank. India has extended US$ 15.5bn of LOC over FY13‐17

Bangladesh, Nepal, and Mongolia have been beneficiaries of EXIM funding

Source: RHP, PhillipCapital India Research Sector‐wise LOC and disbursements over FY13‐17 (US$ mn) LOC extended Value of contracts LOC disbursed Roads 2,439.7 3.9 1.7 Railways 1,704.3 32.8 3.6 Power 1,652.0 146.6 14.5 Water supply 1,075.8 67.3 41.2 Agriculture 600.7 95.9 23.0 Defence equipments 518.0 18.0 18.0 Irrigation 288.5 59.0 21.6 Transport 171.9 109.7 43.6 Ports 137.3 ‐ ‐

Total 8,588.2 533.2 167.2

Source: RHP, PhillipCapital India Research Steady historical growth along with healthy return ratios Over the past 10 years (FY07‐17), RITES has maintained stable growth. In the past ten years, its revenue/EBITDA/PAT has grown at 9%/9%/10%, average ROE has been 20%, fixed asset turn was 3.2x, and it has been free cash positive in all but one year.

RITES’ ten‐years historical performance (Rs mn) FY07 FY17 CAGR (%)

Revenues 5,336 13,034 9.3% EBITDA 1,545 3,499 8.5% Recurring PAT 1,204 3,044 9.7% Reported PAT 1,182 3,308 10.8% EBITDA margin (%) 29.0% 26.8% RoCE (%) 29.6% 15.9% RoE (%) 28.4% 15.6%

Source: RHP, Annual Report, PhillipCapital India Research

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

FY13 FY14 FY15 FY16 FY17

(US$ mn)Line of credit by India (US$ mn)

0

2,000

4,000

6,000

8,000

Banglade

sh Nep

al

Mon

golia

Tanzania

Mauritius

Vietnam

Myanm

ar

Sri Lanka

Etho

pia

D.R.

Congo

Others

(US$ mn) Line of credit extended by India over FY13‐17 (US$ mn)


RITES LTD IPO NOTE

Favourably placed compared to other railways subsidiaries planning IPOs Based on recent filings of two other railway companies, viz. IRCON and RVNL, we believe that although RITES ranks lower in term of growth parameters, it ranks higher in terms of longevity of business model due to exposure to multiple end markets, higher margins, and higher returns profile. Competitive matrix Particulars RITES IRCON RVNL

Basic Info

Incorporated in 1974 1976 2003

Offerings Consultancy and turnkey services Turnkey services Turnkey services Loco exports (ex ‐ Thailand,

Malaysia, Indonesia) Loco exports (Thailand, Malaysia,

Indonesia) ‐

Loco leasing Loco leasing ‐

Sectoral presence Railways, metros, roads, airports, ports and buildings

Railways, roads, airports, buildings and T&D

Railways and metros

Longetivity

outlook

Growth prospects in end markets

‐ Railways

‐ Metros

‐ Roads

‐ Airports

‐ Ports

‐ Buildings

‐ Exports Order book mix (%) ‐ Consultancy 53 ‐ ‐ ‐ Turnkey 29 100 100 ‐ Others 17 ‐ ‐Sales mix (%) ‐ Consultancy 62 ‐ ‐ ‐ Turnkey 2 100 100 ‐ Others 36 ‐ ‐Geographical presence Global Global Domestic ‐ Dom : Overseas Sales (FY17) 67 : 33 89 : 11 100 : 0 ‐ Dom : Overseas Sales (FY13‐17) 70 : 30 66 : 34 100 : 0Order book to Sales (x) 3.7 7.7 11.6

Historic

al Finan

cial param

eters

CAGR (FY13‐17) Revenue 8% ‐9% 29%EBITDA 12% ‐25% 36%PAT 10% ‐23% 29%EBITDA margin (%) ‐ FY17 26.9% 9.2% 4.8%Segment margins (%) Consultancy ‐ 38.5%

Turnkey ‐ losses Exports (locos) ‐ 17.4%

Leasing ‐ 39.5%

Domestic ‐ 7.1%Overseas ‐ 6.5%

na

NWC to Sales (%) ‐ve ‐ve 44%

Return Ratios FY17

RoE (%) 16.9% 8.1% 12.8%RoCE (%) 17.2% 9.7% 7.0%RoIC (%) nm nm 8.9%

Dividend payout (%) 37% 52% 40%

SPVs

/ JV

s

Number of SPVs & JVs 3 11 6 Equity invested 597 6920 6047 Equity required to be invested 1000* 100** * Equity requirement of new projects yet to be finalised ** Some projects may see cost escalation as they are under construction for a long time

Source: RHP of respective companies, PhillipCapital India Research


RITES LTD IPO NOTE

Key risks / monitorables Growing share of turnkey business to impact margins Growing share of turnkey projects would lead to lower consolidated EBITDA margins. Management expects project revenues to yield EBITDA margins of 2‐3% against its consultancy, exports, and leasing segment margins of 15‐50%. We expect share of turnkey revenues to increase to 19% in FY21 from 2% in FY17; any further increase that is higher than our estimates could lead to lower‐than‐expected margins. Expect turnkey segment revenues to contribute 19% of FY21 revenues (vs. 2% in FY17)…

...which will result in contraction in margins

Source: RHP, PhillipCapital India Research Risk of delay in award of new projects / execution of existing projects due to general elections in India With the general elections due in 2019, any delay in awarding new projects / execution of existing projects could have an adverse impact on the financials of the company. Foreign currency risk Overseas revenues accounted for 33% of its total revenues. Any unfavourable change in exchange rate may have an adverse impact on its profitability.

0%10%20%30%40%50%60%70%80%90%100%

FY16

FY17

FY18E

FY19E

FY20E

FY21E

(Rs mn)Consultancy Leasing Exports Turnkey

15%

18%

21%

24%

27%

30%

33%

36%

0

1,000

2,000

3,000

4,000

5,000

6,000

FY16

FY17

FY18E

FY19E

FY20E

FY21E

(Rs mn)EBITDA EBITDA margin (%)

CAGR 16.8%


RITES LTD IPO NOTE

Historical financial performance in charts Order inflows CAGR at 13% led by large turnkey orders from railways in FY17...

... resulting in healthy order book of 2.9x book‐to‐bill

Source: RHP, Annual report, PhillipCapital India Research Revenues CAGR of 9% aided by strong growth in leasing, along with consultancy segments revenues…

...while EBITDA growth was in sync with revenue growth

Source: RHP, Annual report, PhillipCapital India Research Trend in recurring earnings Return ratios in mid teens

Source: RHP, Annual report, PhillipCapital India Research

‐20%

‐10%

0%

10%

20%

30%

40%

50%

60%

70%

0

5,000

10,000

15,000

20,000

25,000

30,000

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

(Rs mn)Order inflows % YoY

CAGR 12.6%

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

0

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10,000

15,000

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35,000

40,000

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

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FY16

FY17

(Rs mn)Order book Book‐to‐bill (x)

CAGR 16.3%

‐10%‐5%0%5%10%15%20%25%30%35%40%

0

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4,000

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14,000

FY07

FY08

FY09

FY10

FY11

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FY13

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FY16

FY17

(Rs mn)Revenues % YoY

CAGR 9.3%

15%

18%

21%

24%

27%

30%

33%

36%

0

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2,500

3,000

3,500

4,000

FY07

FY08

FY09

FY10

FY11

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FY13

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FY16

FY17


CAGR 8.5%

0

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1,000

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FY07

FY08

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(Rs mn)Recurring PAT

CAGR 9.7%

0%

5%

10%

15%

20%

25%

30%

35%

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

RoE (%) RoCE (%)


RITES LTD IPO NOTE

FCF positive in all but one year Consultancy segment revenues and margins

Source: RHP, Annual report, PhillipCapital India Research Turnkey revenues and margins Exports revenues and margins

Source: RHP, Annual report, PhillipCapital India Research Leasing revenues and margins


‐3,000

‐2,000

‐1,000

0

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FY07

FY08

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FY16

FY17

(Rs mn)Free cash flow

15%

19%

23%

27%

31%

35%

39%

43%

47%

0

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9,000

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

(Rs mn)Consultancy Margins

CAGR 11.6%

‐25%

‐20%

‐15%

‐10%

‐5%

0%

5%

10%

15%

0

200

400

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FY09

FY10

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(Rs mn)Turnkey Margins

0%

5%

10%

15%

20%

25%

30%

35%

40%

0

500

1,000

1,500

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2,500

3,000

3,500

4,000

4,500FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

(Rs mn)Exports Margins

CAGR 4.1%

0%

10%

20%

30%

40%

50%

60%

70%

0

200

400

600

800

1,000

1,200

FY07

FY08

FY09

FY10

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FY12

FY13

FY14

FY15

FY16

FY17

(Rs mn)Leasing Margins

CAGR 22.0%


RITES LTD IPO NOTE

Financial outlook in charts We estimate flat order inflows over FY17‐21 Book‐to‐bill would still be above 2.5x

Source: RHP, Annual report, PhillipCapital India Research Revenues to see 15% CAGR over FY17‐21 led by execution of the turnkey order book...

...which will result in change in sales mix, with higher share of low‐margin turnkey revenues

Source: RHP, Annual report, PhillipCapital India Research Consequently, we expect contraction in EBITDA margins Recurring PAT to see 10% CAGR over FY17‐21


‐30%

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0%

10%

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30%

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50%

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70%

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FY16 FY17 FY18E FY19E FY20E FY21E

(Rs mn)Order inflows % YoY

CAGR 1.6%

2.0

2.5

3.0

3.5

4.0

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000


(Rs mn)Order book Book‐to‐bill (x)

CAGR 14.5%

0%

5%

10%

15%

20%

25%

30%

35%

0

5,000

10,000

15,000

20,000

25,000


(Rs mn)Revenues % YoY

CAGR 14.8%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%


(Rs mn)Consultancy Leasing Exports Turnkey

15%

18%

21%

24%

27%

30%

33%

36%

0

1,000

2,000

3,000

4,000

5,000

6,000



CAGR 11.7%

0

1,000

2,000

3,000

4,000

5,000

FY15 FY16 FY17 FY18E FY19E FY20E FY21E

(Rs mn)Recurring PAT

CAGR 10.2%


RITES LTD IPO NOTE

ROEs should be range‐bound on higher capex and lower margins

Expect robust FCF generation

Source: RHP, PhillipCapital India Research Stable growth in consultancy revenues Turnkey to see sharp increase in execution on a healthy

orderbook

Source: RHP, Annual report, PhillipCapital India Research Exports to be driven by demand for locos in Sri Lanka Expect a net accretion (p.a.) of 3 locos to RITES’ asset base


0%

5%

10%

15%

20%

25%


RoE (%) RoCE (%)

0

1,000

2,000

3,000

4,000

5,000

6,000


(Rs mn)Free cash flow

30%

33%

36%

39%

42%

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000


(Rs mn)Consultancy Margins

CAGR 12.9%

‐25%

‐20%

‐15%

‐10%

‐5%

0%

5%

0

1,000

2,000

3,000

4,000

5,000


(Rs mn)Turnkey Margins

CAGR 93.8%

0%

5%

10%

15%

20%

25%

30%

0

1,000

2,000

3,000

4,000

5,000


(Rs mn)Exports Margins

CAGR 2.4%

30%

35%

40%

45%

50%

55%

60%

65%

0

200

400

600

800

1,000

1,200


(Rs mn)Leasing Margins

CAGR 3.7%


RITES LTD IPO NOTE

Our view: SUBSCRIBE Diversified business model = lack of overdependence RITES is present across the entire transport infrastructure value chain and offers varied services right from concept to commissioning. Its business is not overly dependent on a single sector. In terms of client spread, Indian Railways accounted for ~35% of FY18 revenues while the rest came from other sub segments in the transportation sector. Stable growth outlook without a material leap of faith Our estimates bake in flat order inflows between FY18 and FY21. Meanwhile, a healthy orderbook of Rs 48bn (3.5x FY18 sales) should drive execution. We estimate RITES’ FY17‐21 revenue/EBITDA/PAT CAGR at 15%/12%/10%. We assume 280bps margin erosion as the share of turnkey revenues rises (from 2% in FY17 to 19% in FY21). We also build in capex of Rs 3bn over this period, resulting in free‐cash generation every year. IPO valuations are attractive compared to listed peers At its IPO price of Rs 185, RITES trades at 12x FY18 PE and 10x FY19 PE, based on our estimates. RITES’ current valuations are half of listed project consultancy companies such as Engineers India (22x FY19 PE) and NBCC (31x FY19 PE). RITES is smaller (in revenue terms) compared to EIL and NBCC. It will also have lower earnings growth vs. EIL (13% FY18‐20 CAGR) and NBCC (37% CAGR). Even so, such a steep discount is unwarranted, in our view, given RITES’ diversified multi‐sector business model. Valuation comparison

Sales (LC bn) EBITDA (LC bn) EBITDA margin (%) PAT (LC bn) Company name FY18E FY19E FY20E FY18E FY19E FY20E FY18E FY19E FY20E FY18E FY19E FY20E RITES 13.8 18.1 19.8 3.4 4.4 4.6 24.7 24.5 23.3 3.1 3.8 3.9 Engineers India 16.8 23.2 30.7 3.5 4.2 5.0 20.9 18.3 16.4 3.4 3.8 4.4 NBCC* 65.2 84.7 124.6 4.0 5.6 8.6 6.2 6.6 6.9 3.6 4.8 7.0

Price Shares Mkt cap PE (x) EV/EBITDA RoE (%)

Company name (LC) O/s (mn) (USD mn) FY18E FY19E FY20E FY18E FY19E FY20E FY18E FY19E FY20E RITES 185 200 544 12.0 9.9 9.5 0.9 nm nm 14.7 16.7 15.9 Engineers India 130 632 1,210 24.1 21.7 18.8 16.3 12.7 10.5 13.5 16.4 18.0 NBCC* 86 1,800 2,284 41.1 31.1 22.0 31.7 20.9 12.6 20.7 24.8 30.4

Source: RHP, Bloomberg Consensus, PhillipCapital India Research; * standalone estimates


RITES LTD IPO NOTE

SOTP‐based target price Rs 275 We value RITES on sum‐of‐parts basis, standalone operations on PE, and power generation/trading business on DCF. We also back our PE‐based valuation approach with DCF for its standalone operations. We ascribe 13x PE to our FY20 earnings estimates for the standalone entity, translating into a per‐share value of Rs 253. We add Rs 22 as value of its power‐trading company. RITES: SOTP Business Valuation method Multiple /WACC Value (Rs/share)

RITES (standalone business) PE ‐ FY20E 13.0 253 REMCL (Power business) DCF ‐ FY20‐24E 12.0% 22

Total 275

Round off 275

Source: PhillipCapital India Research RITES (standalone business) ‐ FCFF valuation (Rs bn) FCFF working (Rs bn) FY20E FY21E FY22E FY23E FY24E

WACC 13.8% EBIT 4.27 5.02 4.95 5.33 6.30 Terminal growth (%) 5.0% Less: Taxes (1.45) (1.71) (1.68) (1.81) (2.14) NPV (FY20‐24E) 14.5 NOPAT 2.82 3.31 3.27 3.52 4.16 Terminal value 27.9 Add: Depreciation 0.33 0.43 0.53 0.55 0.57 Total value 42.4 Changes in WC 0.20 0.04 3.13 1.62 (0.06) Add: Net cash (own) ‐ FY19E 15.1 Less: capex (1.00) (0.75) (0.25) (0.25) (0.25) Equity value 57.4 FCFF 2.35 3.03 6.68 5.44 4.42

DCF based Target price (Rs) 287 Discounted FCFF 2.06 2.34 4.54 3.25 2.32

Source: PhillipCapital India Research REMCL (Power business) ‐ FCFF valuation (Rs bn) FCFF working (Rs bn) FY20E FY21E FY22E FY23E FY24E

WACC 12.0% EBIT 0.42 0.64 0.91 0.91 0.91 Terminal growth (%) 5.0% Less: Taxes (0.15) (0.22) (0.32) (0.32) (0.32) NPV (FY20‐24E) 0.19 NOPAT 0.27 0.41 0.59 0.59 0.59 Terminal value 4.62 Add: Depreciation 0.06 0.08 0.13 0.15 0.15 Total value 4.81 Changes in WC (0.09) (0.18) (0.24) (0.19) (0.20) Add: Net cash / (debt) ‐ FY19E (0.49) Less: capex (0.65) (0.86) ‐ ‐ ‐ Equity value 4.32 FCFF (0.41) (0.55) 0.47 0.55 0.54

DCF based Target price (Rs) 22 Discounted FCFF (0.36) (0.44) 0.34 0.35 0.31

Source: PhillipCapital India Research


RITES LTD IPO NOTE

Annexure RITES Business Division and units S. No. Business divisions & units Description 1 Rail Infrastructure division Provides consultancy services in railway transportation and economics, electrical engineering, signal and

telecommunications, dedicated freight corridors, track and survey, geo‐technology and civil engineering design through conceptualization and project management consultancy in respect of rail based transportation systems.

Transport and Economics Unit Transportation system designing, planning of rail infrastructure and transport economics Track and Survey Unit Studies and surveys for various stages of railway infrastructure development comprising of pre‐feasibility

studies, feasibility studies, preliminary engineering studies, final location surveys, detailed project reports and detailed design engineering

Geo‐Technology Unit Provides consultancy services in engineering geology, soil and rock mechanics, foundation engineering, geophysical survey, diamond core drilling of exploratory bore – holes, survey of ground water reserves and in–situ /laboratory testing of soil and rock structures.

Dedicated Freight Corridor Unit Provides project management consultancy services for the construction of double line electrified railway tracks and other related infrastructure for the Dedicated Freight Corridor Project for DFCCIL.

Civil Engineering Design Unit Provides engineering services involving planning, design support and preparation of bidding documents and tender documents for the construction and development of rail bridges, rail – cum – road bridges, road over / under bridge, approach structures and rail / road viaducts amongst others.

Electrical Engineering Unit Provides project management consultancy services, turnkey services, quality services and surveillance inspections in the field of railway electrification and electric substations.

Signalling and Telecommunications Unit

Provides consultancy and construction management services for the development of S&T infrastructure related to rail connectivity projects for the railways, power, steel, refineries, ports and coal sectors among others

Regional Project Offices (Lucknow, Delhi, Nagpur, Secunderabad, Bhubaneshwar, Kolkata and Raigarh)

Provide consultancy services inter alia for detailed engineering and PMC including the planning and design of projects of railway infrastructure, construction of railway sidings, flyovers, roads, inland containers depots and buildings. Provide a comprehensive spectrum of services from concept to commissioning of projects including preparation of DPR, feasibility studies, estimation studies, bidding process assistance, execution of projects, budgetary management support and quality assurance.

2 Buildings and Airports division Provides consultancy services for construction of buildings and airports (included associated infrastructure) Construction Project

Management Unit Provides PMC services in construction of institutional, commercial, residential buildings and inland container depots along with third party inspection of such infrastructure projects.

Airports Unit Provides consultancy services for planning and construction management of greenfield and brownfield airports, cargo complexes, taxi ways, airport terminals and integrated check posts.

3 Highways and Ports division Provides consultancy services for ports and harbours, water resources engineering, inland water transport, roads and highways.

Ports and Water Resources Unit Provides various consultancy services for ports and harbours, water resources engineering and inland water transport

Highways Unit Consultancy services for all aspects of roads and highways which cover conceptual and detailed design, construction supervision, O&M, planning and management of highway networks, improvement and up gradation works and safety audits

4 Urban Infrastructure division Provides consultancy services for various urban and regional transport infrastructure Urban Transport Unit

Comprehensive consultancy services for various urban/regional transport infrastructure including conducting transport studies and developing transport sector master plans including traffic engineering and management, transport demand modelling, comprehensive mobility plans, traffic and transportation plans, bus system planning and detailed project reports for rail – based mass rapid transit systems.

Urban Transport (General Consultancy) Unit

Consultancy services for construction of metro railways including detailed design of stations/depots and quality assurance

Urban Engineering Unit Provides consultancy services in the fields of environmental impact assessment, environmental management plan, social impact assessment, design of water supply, sewerage and drainage system, solid waste management, ecology and biodiversity.

5 Expotech division

Provides integrated export packages for railway locomotives and rolling stock including, rehabilitation, maintenance and spare part support. It also provides technical consultancy for workshop modernization, facility planning for rolling stock maintenance, training of maintenance personnel and related technology transfer. Export services also include leasing of locomotives, consultancy in O&M of rolling stock and after sale services.

6 Quality Assurance division (Delhi, Chennai, Kolkata, Bhilai and Mumbai & 37 sub‐regional offices)

Provides third party inspection and vendor assessment to various clients and also laboratory testing services in India.


RITES LTD IPO NOTE

7 Technical Services Provides consultancy for design and development of rolling stock, procurement and logistics management as well as consultancy for aerial ropeway systems

Rolling Stock Design Provides research and development and carries out design and development of rolling stock using advanced technologies and specialized design software for modelling, strength analysis, crash analysis and other simulation methodologies.

Materials System Management Provides consultancy for comprehensive procurement and logistics management in compliance with the guidelines, regulations, norms and procedures of international funding organizations, GOI, Indian Railways and DG of Supplies & Disposal (DGS&D).

Ropeways and Industrial Engineering

Provides consultancy including feasibility studies, preparation of DPR and PMC for passenger and material aerial ropeways and funicular railway projects.

Railway Equipment Services Provides O&M services of railway sidings for various clients in power, steel, mining, cement and port sector. It provides locomotive leasing services, operation of railway systems and maintenance of rolling stock for clients.

8 Privatisation and Concession

Provides transaction advisory services for various PPP projects in the infrastructure sector, project appraisal and legal advisory for procurement contracts. Consultancy in the field of information technologies including conducting feasibility studies, system analysis, system design, software development, implementation support and user training programmes. Value assessment services for revenue enhancement of the assets of the Indian Railways through advertising. Support for business development, coordination at corporate level, representation at industry forums.

9 Corporate Services Human resource, administration and employees’ training functions

Source: RHP


RITES LTD IPO NOTE

Financials Income Statement Y/E Mar, Rs mn FY17 FY18e FY19e FY20eNet sales 13,034 13,848 18,133 19,774Growth, % 20.0 6.3 30.9 9.1Raw material expenses (4,673) (4,818) (7,707) (8,083)Employee expenses (3,811) (4,518) (4,852) (5,094)Other Operating expenses (1,051) (1,093) (1,126) (1,999)EBITDA (Core) 3,499 3,420 4,449 4,599Growth, % (1.7) (2.3) 30.1 3.4Margin, % 26.8 24.7 24.5 23.3Depreciation (321) (318) (325) (332)EBIT 3,178 3,102 4,124 4,267Growth, % (1.9) (2.4) 33.0 3.5Margin, % 24.4 22.4 22.7 21.6Interest paid ‐ ‐ ‐ ‐Other Income 1,338 1,573 1,559 1,629Pre‐tax profit 4,515 4,675 5,683 5,896Tax provided (1,471) (1,590) (1,932) (2,005)Net Profit (recurring) 3,044 3,086 3,751 3,891Growth, % (10) 1 22 4Net Profit (reported) 3,308 3,086 3,751 3,891Unadj. shares (m) 200 200 200 200Wtd avg shares (m) 200 200 200 200 Balance Sheet Y/E Mar, Rs mn FY17 FY18e FY19e FY20eCash & bank 28,941 29,097 33,327 34,861 Debtors 4,576 4,932 6,458 7,043 Inventory 466 480 768 806 Loans & advances Other current assets 5,772 5,394 5,710 5,610 Total current assets 39,755 39,904 46,263 48,320 Investments 3,741 4,302 4,552 4,802 Gross fixed assets 4,492 4,592 4,692 4,792 Less: Depreciation (1,883) (2,201) (2,526) (2,858)Add: Capital WIP 58 558 1,258 2,158 Net fixed assets 2,666 2,948 3,423 4,091 Total assets 46,162 47,154 54,239 57,213 Current liabilities 23,595 23,532 28,661 29,218 Provisions 2,632 2,379 2,684 2,847 Total current liabilities 26,227 25,911 31,345 32,065 Non‐current liabilities (401) (401) (401) (401)Total liabilities 25,826 25,510 30,944 31,663 Paid‐up capital 2,000 2,000 2,000 2,000 Reserves & surplus 18,337 19,645 21,295 23,550 Shareholders’ equity 20,337 21,645 23,295 25,550 Total equity & liabilities 46,162 47,154 54,239 57,213 Source: Company, PhillipCapital India Research Estimates

Cash Flow Y/E Mar, Rs mn FY17 FY18e FY19e FY20ePre‐tax profit 4,880 4,675 5,683 5,896Depreciation 321 318 325 332Chg in working capital 3,068 (308) 3,304 198Total tax paid (1,642) (1,590) (1,932) (2,005)Cash flow from operating activities 5,247 1,522 5,820 2,792Capital expenditure (219) (600) (800) (1,000)Chg in investments 381 (561) (250) (250)Cash flow from investing activities (772) 412 509 379Free cash flow 5,028 922 5,020 1,792Equity raised/(repaid) ‐ ‐ ‐ ‐Debt raised/(repaid) ‐ ‐ ‐ ‐Dividend (incl. tax) (1,757) (1,777) (2,100) (1,637)Other financing activities (45) ‐ ‐ 0Cash flow from financing activities (1,802) (1,777) (2,100) (1,637)Net chg in cash 2,673 156 4,229 1,535 Valuation Ratios

FY17 FY18e FY19e FY20ePer Share data EPS (INR) 15.2 15.4 18.8 19.5Growth, % (10.3) 1.4 21.6 3.8Book NAV/share (INR) 101.7 108.2 116.5 127.7FDEPS (INR) 15.2 15.4 18.8 19.5CEPS (INR) 16.9 17.0 20.4 21.1DPS (INR) 6.7 5.9 6.3 6.8Return ratios Return on assets (%) 6.9 6.6 7.4 7.0Return on equity (%) 15.6 14.7 16.7 15.9Return on capital employed (%) 15.9 15.0 17.0 16.2Turnover ratios Asset turnover (x) (1.1) (1.0) (1.2) (1.3)Sales/Total assets (x) 0.3 0.3 0.4 0.4Sales/Net FA (x) 5.0 5.5 8.0 9.6Working capital/Sales (x) (1.3) (1.2) (1.1) (1.0)Working capital days (459.6) (424.4) (390.6) (361.9)Liquidity ratios Current ratio (x) 1.5 1.5 1.5 1.5Quick ratio (x) 1.5 1.5 1.5 1.5Interest cover (x) na na na naDividend cover (x) 2.3 2.6 3.0 2.9Total debt/Equity (%) ‐ ‐ ‐ ‐Net debt/Equity (%) (1.6) (1.6) (1.6) (1.5)Valuation PER (x) 12.2 12.0 9.9 9.5PEG (x) ‐ y‐o‐y growth nm 8.7 0.5 2.5Price/Book (x) 1.8 1.7 1.6 1.4Yield (%) 3.6 3.2 3.4 3.7EV/Net sales (x) 0.3 0.2 nm nmEV/EBITDA (x) 1.1 0.9 nm nm


RITES LTD IPO NOTE

Rating Methodology We rate stock on absolute return basis. Our target price for the stocks has an investment horizon of one year. Rating Criteria Definition

BUY >= +15% Target price is equal to or more than 15% of current market price

NEUTRAL ‐15% > to < +15% Target price is less than +15% but more than ‐15%

SELL <= ‐15% Target price is less than or equal to ‐15%.

MANAGEMENT

Vineet Bhatnagar (Managing Director) Kinshuk Bharti Tiwari (Head – Institutional Equity)

Jignesh Shah (Head – Equity Derivatives)

REGIONAL MEMBER COMPANIES INDIA

PhillipCapital (India) Private Limited www.phillipcapital.in

SINGAPORE

Phillip Securities Pte Ltd www.phillip.com.sg

JAPAN

Phillip Securities Japan, Ltd www.phillip.co.jp

THAILAND

Phillip Securities (Thailand) Public Co. Ltd. www.phillip.co.th

UNITED STATES

Phillip Futures Inc.

MALAYSIA Phillip Capital Management Sdn Bhd

www.poems.com.my

INDONESIA PT Phillip Securities Indonesia

www.phillip.co.id

FRANCE King & Shaxson Capital Ltd.

www.kingandshaxson.com

AUSTRALIA PhillipCapital Australia

www.phillipcapital.com.au

HONG KONG Phillip Securities (HK) Ltd

www.phillip.com.hk

CHINA Phillip Financial Advisory (Shanghai) Co. Ltd.

www.phillip.com.cn

UNITED KINGDOM King & Shaxson Ltd.

www.kingandshaxson.com

SRI LANKA Asha Phillip Securities Limited www.ashaphillip.net/home.htm

RESEARCH Automobiles Dhawal Doshi Nitesh Sharma, CFA Agro Chemicals Varun Vijayan Banking, NBFCs Manish Agarwalla Pradeep Agrawal, Sujal Kumar Consumer Naveen Kulkarni, CFA, FRM Preeyam Tolia, Vishal Gutka Cement Vaibhav Agarwal Engineering, Capital Goods Jonas Bhutta Vikram Rawat Economics Anjali Verma Raag Haria IT Services Vibhor Singhal Shyamal Dhruve Infrastructure Vibhor Singhal Logistics, Transportation & Midcap Vikram Suryavanshi Media Naveen Kulkarni, CFA, FRM Vishal Gutka Metals Dhawal Doshi Vipul Agrawal Midcaps Deepak Agarwal Akshay Mokashe

Pharma & Specialty Chem Surya Patra Mehul Sheth, Rishita Raja Retail & Real Estate Vishal Gutka Dhaval Somaiya Strategy Naveen Kulkarni, CFA, FRM Neeraj Chadawar Telecom Naveen Kulkarni, CFA, FRM Technicals Subodh Gupta, CMT Production Manager Ganesh Deorukhkar Editor Roshan Sony Sr. Manager – Equities Support Rosie Ferns SALES & DISTRIBUTION Kishor Binwal Ashvin Patil Bhavin Shah Ashka Gulati Archan Vyas Asia Sales Dhawal Shah Sales Trader Dilesh Doshi Execution Mayur Shah CORPORATE COMMUNICATIONS Zarine Damania


RITES LTD IPO NOTE

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research report. 4. The Research Analyst, PCIL, and its associates have not received compensation for investment banking or merchant banking or brokerage services or for

any other products or services from the company(ies) covered in this report, in the past twelve months. 5. The Research Analyst, PCIL or its associates have not managed or co‐managed in the previous twelve months, a private or public offering of securities for

the company (ies) covered in this report. 6. PCIL or its associates have not received compensation or other benefits from the company(ies) covered in this report or from any third party, in

connection with the research report. 7. The Research Analyst has not served as an Officer, Director, or employee of the company (ies) covered in the Research report. 8. The Research Analyst and PCIL has not been engaged in market making activity for the company(ies) covered in the Research report. 9. Details of PCIL, Research Analyst and its associates pertaining to the companies covered in the Research report: Sr. no. Particulars Yes/No

1 Whether compensation has been received from the company(ies) covered in the Research report in the past 12 months for investment banking transaction by PCIL

No

2 Whether Research Analyst, PCIL or its associates or relatives of the Research Analyst affiliates collectively hold more than 1% of the company(ies) covered in the Research report

No

3 Whether compensation has been received by PCIL or its associates from the company(ies) covered in the Research report No4 PCIL or its affiliates have managed or co‐managed in the previous twelve months a private or public offering of securities for the

company(ies) covered in the Research report No

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No

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RITES LTD IPO NOTE

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