In the past couple years when the company’s export income has declined, it made up for it by engaging in another line of business i.e. Turnkey projects.
Turnkey projects, unlike consulting projects actually involves building things. While the company has mostly restricted itself to railway development work till now, it aims to expand into airways and metros going forward. The only reason we mention this is because there was a rather interesting development recently.
The company was approached by the Indian Railway Stations Development Corporation Limited to contribute up to 250 Cr. by buying out 25% of its equity share capital. This proposal is in its preliminary phase and yet to be proposed for risk assessment and investment decision by the Company. However, Indian Railways Stations Development Corporation, doesn’t have a lot to show in terms of financials. It has a total net worth of 40 Cr. and last year made losses of 4 Cr. on a top line of about 2 Cr. So, this investment, if it goes through, will have some repercussions on the financials of RITES Limited.
But don’t you worry, because RITES seemingly has a ridiculous looking cash balance (includes other liquid investments) standing at about 1380 Cr. Maybe all that cash can be put to some good use
So, all in all, the company has shown consistent growth in its top line, maintained high margins, largely remained asset light, has very little debt on its books and continues to declare consistent dividends as mandated by the CPSE Capital Restructuring Guidelines, i.e. the Company is required to pay a minimal annual dividend of 30% of its PAT or 5% of its net worth, whichever is higher, unless an exemption is provided. So, it’s a pretty good company all things considered?
Alas, there is a catch. While we don’t have the numbers for this year, it is likely that the company’s revenues will look flat based on the 9-month performance in the fiscal year 2018 (Rs. 936 Cr.). Also, while the company has maintained healthy net profit margins, a significant chunk of its profits (almost 20%) come from non-operating sources. And PSU’s haven’t really come out of the listing scene with flying colours recently.
So, the only question we can then ask is if it is priced fairly. Based on our calculations on FY18 earnings and issue price of 185, the PE equates to about 10.5. Also, there is a retail discount of Rs. 6 per share and we think its fair value.
The company plans to raise ~Rs. 430 crores as part of the government's divestment plan. So, none of the money will go towards funding the business.