Nahar's Biopsy on RITES Ltd.

MULTIBAGGER 15 POINTER FORMULA SCORE = 11(Good Investment opportunity)😊
(Score of 12 and above means a possible multibagger (great investment opportunity), 
Score of 10 & 11 (good investment opportunity)
Score of 8 & 9  (Should not be a part of portfolio unless firm company specific outcome expected)
Score below 8 is Avoid Risk is too high.)

ABOUT THE COMPANY:
RITES Limited is a wholly owned Government Company, a Miniratna enterprise. It is a leading player in the transport consultancy and engineering sector in India with diversified services and geographical reach. Rites operates through four segments namely Consultancy services, Leasing services, Export & Turnkey projects.

Consultancy Services:
Consultancy Services include conducting techno-economic and feasibility studies and preparation of detailed project reports, Design engineering services, project management, consultancy services, inspection fee etc. Rites has received projects for Airports and Waterways as well apart from major chunk for Railway.Contribution to overall revenue 55% for 2018-19.

Turnkey Projects:
Rites undertake construction projects such as railway line enhancement works for railway systems, modernization of railway workshops and building works at cost plus basis.Rites undertake such turnkey construction projects on engineering, procurement and construction basis.Contribution to overall revenue 29% for 2018-19.

Exports:
Rites export railway locomotives, passenger coaches, wagons equipment and spare parts.Export offerings consist of integrated project export packages for railway locomotives and rolling stock along with providing technical support for operation and maintenance.Contribution to overall revenue 11% for 2018-19.

Leasing:
Rites lease locomotives to domestic and foreign client and operate and maintain railway system of domestic clients.Contribution to overall revenue 5% for 2018-19.

SHAREHOLDING PATTERN:
87.4% of shares are currently being held by Government.Government has also considered to disinvest 15% of its stake through OFS. Recent proposal by Honorable FM to reduce the Promoters holding further to a cap of 65%  may put some overhung selling pressure but the time period allotted will matter the most which is likely to be comfortable. As on 31st May 2019 4% is being held by MF and 1.28% by FII.

MINI RATNA TO NAVRATNA:
RITES Ltd holds the status of MINI RATNA .Thus they enjoy enhanced autonomy and to get that tag they are subject to certain eligibility conditions and guidelines to make them efficient and competitive. So companies  have to prove their efficiency and effectiveness to get that status.

Criteria for Navratna status: http://pib.nic.in/newsite/PrintRelease.aspx?relid=107091

Particular/Year	2015	2016	2017	2018	2019
Navratna Criteria
Net Profit	310.84	339.44	330.93	336.81	444.65
Net Worth	1628	1878	2035	2199	2384
ROE	19%	18%	16%	15%	19%
Manpower cost	324.05	340.2	416.24	457.17	483.59
Total cost	689.24	762.06	1018.7	1109.09	1487.45
Employee cost/Total cost	47%	45%	41%	41%	33%
EBITDA	492.87	547.46	520.21	523.67	711.94
Capital Employed	1871	2196	2342	2481	2649
EBITDA/Capital Employed	26%	25%	22%	21%	27%
EBIT	466.75	515.55	488.1	493.49	679.76
Turnover	1166	1278	1507	1602	2164
Operating profit as OI ex.	40%	40%	32%	31%	31%
EPS	15.54	16.97	16.55	16.84	22.23
		9%	-2%	2%	32%
Inter sectoral performance	CAGR Growth RITES,IRCON &RVNL is 14.57%
Rating Received from Gov.	Excellent			Excellent	Excellent

As could be seen Maintained its NP/NW, Performed well in reducing manpower cost,EBITDA/CE is maintained, Operating margin although reduced yet remained at higher level, EPS growth has been considerable while Inter sectorial performance has been Descent. 

Company got Excellent rating from government for both 2017-18 & 2018-19.

Although status has been reviewed on Aug 2018 that means next review will be in 2021-2022 and seeing the performance of RITES ltd the company MAY have the possibility to be promoted to NAVRATNA from MINIRATNA which will provide enhanced autonomy.

(NOTE: DATA for when next review is due could not be found clearly as a result base has been taken as year 2018-19 when NPCC was awarded MINIRATNA status and  Sectoral  performance has not been defined clearly ).


MANAGEMENT:
(75% of its Revenue orders comes from government thus Top management association with government so that contacts are Backed and Business in which Rites operates needs lot of expertise for providing consultancy,Turnkey and major competitors are Foreign players hence a brief about TOP management)

RAJEEV MEHROTRA(Chairman,MD & CEO)

• Associated with government since Dec 1989.
• Additional General Manager for 18 years than became Director finance of RITES ltd for 5 years.
• Promoted to Current position in Oct 2012.
• Thus vast experience of association with government and the sector.

MUKESH RATHORE(Director-Technical)

• Joined India Railway way back in 1982 as IRSME porbationer.
• Handled many tasks, operations including diesel locomotives.
• Planning and development of maintenance.
• Held several positions as in charge of diesel locomotive maintenance department.
• Thus vast experience of association with government and the sector.

V GOPI SURESH KUMAR(Director-Projects)

• Recently appointed after term period expired for Mr. Arbind Kumar.
• Served for 7 years in EPIL who's business included turnkey execution of projects.
• Regional head to conduct business affairs for Southern Region and Srilanka.
• Served for 26 years in IRCON International ltd and worked at various capacities.
• Awarded twice for exemplary achievement by Minister of Railway awards 

AJAY KUMAR GAUR(Director-Finance)

• CA by profession and has 28 years of vast experience at various capacities in public sector.

Although both Mr. Arbind Kumar and Mr. V Gopi have vast experience in wide arena related to sector but Mr.V Gopi has more specific specialization for Turnkey projects while Mr. Arbind has more specific specialisation for consultancy hence company realizing the contribution Turnkey segment can play in future.

CONSULTANCY SEGMENT(Included Inspection Fee):😇😟

• Consultancy business contributed 70% of Total revenue in 14-15 which got reduced to 55% in 2018-19.

• Consultancy business has grown at CAGR at 9% in last five years.

• Operating margin for consultancy has been as high as in range of 41% to 44% is last 5 Years ending at 2018-19, while clocked highest margin of 44% for 2018-19.

• Inspection fee as % total  revenue has been growth YOY from 2014-15 to 2018-2019 from just 16.21% to 30.34% which also helped in improving operating margin from 41% to 44% during the same time.

• Order Book of Consultancy business got reduced from 2553 cr as on 31^st March 2018 to 2317Cr as on 31^st March 2019 mainly due to the election season which resulted in slowing down. Also company backed order recently for 150 Cr which management revealed in earnings call.

• Capital Investment in Railways has grown with a CAGR of 10.30% in 4 years from 15-16 to 16-17 and Honorable  FM hinted that government is set to launch massive programme for railway modernization coupled with positive management outlook future of the company in next term of MODI 2.0 seems attractive.

• Exports have been around 6% over the years thus consultancy business is predominantly dependent on Domestic consumption.

• Management although seems optimistic but also told consultancy business is very competitive were they compete with foreign players hence growth of 10-15% is good if achieved.However, points discussed above and Future outlook coming ahead seems comfortably positive.

TURNKEY SEGMENT:😍😔

• Overall contribution to total revenue has been very volatile over the period from 2014-15 to 2018-19 which was 9% in 2014-15 which reduced to just 2% in 16-17 and rose to mammoth of 29% in 2018-19.

• Order Book has seen a significant growth of 82% in 2018-19 from 2017-18 and we have also seen appointment of Mr V Gopi Suresh Kumar who has specialization in Turnkey projects replacing Arbind Kumar who has specialization in consultancy business.

• Although The project do not require additional employee , management sees it as an opportunity to add top line and with extra 3% margin overall.

• Projects are fully domestic and given at fixed are i.e. 8.5% execution fee to the company and company is left with 3% margin. 

• High growth will pump the Top line but will provide a dent to Bottom line if superseded the consultancy business in long term.

EXPORTS SEGMENT:😇😉

• Overall contribution to revenue has been reduced from 15% in 2014-15 to 11% in 2018-19

• Operating margin during the same time have reduced from 36% in 2014-15 to 31% in 2018-19, However in the last 3 years it has improved from 17% to 31%.

• Exports provide operating margin which is less compared to consultancy but very high compared to Turnkey.

• Order book for exports seen a significant rise of 50% which provides greater diversification as marginally reducing dependency on domestic consumption, also shows competency of company & provide much better margin than turnkey

LEASING SEGMENT:😍😑

• Overall contribution of leasing has been reduced from 7% in 2014-15 to 5% in 2018-19.

• Leasing offers high operating margin as high as 43% for F.Y. 2018-19 which was 49% in 2014-15.

• Order book for leasing as on 31^st March 2019 has shown a marginal growth of 4.8% from a year before so nothing major turnaround is expected from this segment also taking into account management commentary.

• Exports were 7.15% for the year 2016-17 which rose to around 10% in 2017-18 but turned 0% for 2018-19 thus fully dependent domestic consumption.

Both Consultancy and leasing contribution to total revenue reduced from 77% in 2014-15 to 60% in 2018-19 and thus seem overall operating margin reducing from 37% to 31% during the same time. However overall margin seems sustainable at the range of 25 to 30% in coming years.

RITES have also commenced wagon manufacturing, renewable energy generation and power procurement for Indian Railways. Contribution of power generation in overall revenue was less than 1% with operating margin of 20% for 2018-19.

ORDER BOOK:😇😖

Companies order book has grown with a CAGR of 24% over 4 years from 2015-16 to 2018-19 and revenue has grown with a CAGR of 14% thus gives an idea that longer term projects have come lately.

Order Book	15-16	16-17	17-18	18-19
	2613	3731	4818	6097
Revenue for year	2017	2018	2019	2020E
	1140	1353	1833	2032
Revenue % Order Book	44%	36%	38%	33%A

NOTE: Revenue for the year do not include inspection fee as Order book also excludes majority of the inspection fee based on the information from earnings call.

• We see conversation ratio of order book of P.Y. to revenue for current year comes to 36% and 38% for Year 2018 and 2019 which is also commensurate with the management statement in RHP that majority of its project have life of 3 years.

• On a conservative basis taken 33% as the conversation ratio I am looking at Revenue of 2032cr excluding inspection fees.

• Overtime Inspection fee as % of consulting has been on rise from just 21.55% in 2015-16 to as high as 43.56% in 2018-19 which is very positive as it get executed within a year and also provides high operating margin.

• Even if assumed inspection fee as same as for 2018-19 which is 331cr we are looking at Revenue of 2363 cr which is growth of around 19%.

• Also about 75% of its revenue is from Government although not from one ministry alone but significantly from Ministry from railways. However currently unable to comment on diversification as bifurcation of Total revenue into Government and Non  Government could not be found but 25% is also good.

Other scenarios of revenue for 2019-2020 as in table.😃

Particulars	Order book	Revenue		Order book	Revenue	Revenue	Revenue
Segments/year	2017-18	2018-19	CR	2018-19	2019-20E	2019-20E	2019-20E
Consultancy	2553	760.4	30%	2317	690.1	772.3	1185
Inspection fee		331.0	100%		#380	#380
Exports	723	206.8	29%	1086	310.6	362.0	450
Lease	145	103.6	71%	152	108.6	108.6	110
Turnkey	1397	567.1	41%	2542	1031.8	847.3	570
TOTAL	4818	1968.8		6097.0	2521.1	2470.3	2315.0
					*	**	***

*Based on the CR(Conversation ratio) of order book to revenue as same.

**Based on taking execution life as 3 years for Consultancy, Exports & Turnkey while CR same as 71% for leasing.

***Based on the Guidance given by the company.

# Based on the Guidance given by the company which seems very much achievable owing to considerable growth already shown and point discussed above for inspection.

RAILWAY CAPEX BUDGET:😍

Capital Investment Budget in Railways
Year	15-16	16-17	17-18	18-19	19-20E
Amount	100000	117000	131000	148000	160100
Order Book	2613	3731	4818	6097
Share of Rites	2.6%	3.2%	3.7%	4.1%

Thus railways Capex budget has been at all time high and with every increase Rites order book is growing at faster pace year after year.

DEEP DIVING:😇😍

• Bank balance from clients i.e. Advance received from customers accounted for 42%-43% of total assets for all years 2015-16 to 2018-19 and it also forms part of Current liabilities as other client deposits which was in range of 41%-38% during the same time.

• % of other income in total income has been high but reduced from 2015-16 to 2018-19.It was 15% in 2015-16 and reduced to 9% 2018-19.And interest  earned on deposits forms 67% in 2015-16 and 56% in 2018-19 which is due to previous point i.e Clients balance deposited in Bank and earned interest on them.  Interest  earned comes to around 5% which is the interest rate for savings account which range into 4-6%.

• Company always has high cash balance which was 43 per share in 2016-17 which rose to 81 per share in 2018-19 also if bank balance from clients are included together they account for 61% of total Assets in 2016-17 and as high as 71% in 2018-19 and Cash and Bank balance of clients per equity share comes to 143 Rs which rose to as high as 190 Rs during the same time.

• Cash cost for the C.Y. and Client deposit at the close of P.Y. accounted for 57% in 2016-17 and 73.52% in 2018-19 thus all the cost they incur are already been financed comfortably a year before.

• Other Client deposits which is the part of other financial liabilities of the P.Y and conversation of it into revenue for the C.Y accounted for 87% in 2016-17 which rose to 109% in 2018-19.Other Client Deposit as on 31^st March 2019 is 1998.03Cr.

• CCC has been reduced from 106 days in 2015-16 to 75 days in 2018-19 .Inventory forms just 2% of total assets as on 31^st March 2019 which is commensurate with the business the company is operating to owing to consultancy business which don’t require any inventory per se and Debtor days have been reduced from 128 days in for 2015-16 to around 90 days for 2018-19.Thus already a cash rich and reducing CCC further.

• No of employees  have remained same over the term of 5 years which was 3227 in 2014-15 and rose very marginally just to 3233, salary per employee got increased from around 7 lakhs per employee to 11 lakhs per employee while revenue during the same time rose from just 36 lakh per employee to 67 lakh during the same time. Thus it shows high quality of employees as high average salary per employee with higher efficiency which would be expected in consulting business and highly technical business the company operates where main assets are predominantly employees.

• Total provisions for impairment, Bad debts and commitments together accounted for just 0.5% in 2014-15 which although rose to 1.74% in 2018-19 but still remained very low. However for the year 2017-18 provision for impairment rose to 78.72 cr registering 4.91% and was also made to the extent of 18.78 cr in 2018-19.In the Annual report management stated that it is the provision against Trade receivable for export sales which needs clarification of management about kind of Trade receivables although company told that they have prudently recognized as mostly Receivable are either government and government undertaking which needs clarification from management.

• Also here to be pointed out is reversal of provision(Included in Other Income) every years which was as high as 25cr in 2017-18 and if I remove reversal of provision for 2017-18 PAT would come as 320 Cr instead 336 cr which will be (3.03%) YoY instead 1.81% YoY.

• Companies other income guidance is around 150-200 and interest on deposits from deposit in clients accounts comes to around 110 cr @ 5% based on past trends so are we going to see comparatively high provision reversal for the year 2019-20 will be interesting to be seen

• Company is virtually debt free which is also visible from the fact that it has NCAV(Including client deposits) as high as 190rs per share and also 72% of total assets is Cash and cash equivalents and client deposits.

• Rites has been paying healthy dividend which was 77% (FV=10) in 2015-16 and rose to around 127% in 2018-19.Thus an attractive spot for investors.

FUTURE BUSINESS POSSIBILITIES:😎

Ø  14 Metro projects are expected to be completed by FY 22 covering 433 km.

Ø  Redevelopment of 600 Major railway station

Ø  INR 100 trillion is expected to be invested in infrastructure development over next  5  years.

Ø  30000Km of route to have double/multiple lines by 2020.

Ø  38000 RKM(Route Kilometers) identified for electrification by 2021 with estimated expenditure of 600-700 cr in 3 years.

Ø  GOI has granted “in principal “ approval for setting up 19 Greenfield airports-7 of which will be developed on PPP model

Ø  Under the National  Perspective plan for Sagarmala, six new mega ports will be developed in the country 

Ø  189 projects worth 2200 Cr envisioned for modernization of ports.

.

VALUATION:😇

Particular/year	2017	2018	2019
EV/EBITDA	3.8	5.5	5.0
PE	8.6	12.6	11.7
PB	1.4	1.9	2.1
PS	2.2	2.8	2.5
ROCE %	14.1	13.6	16.8
ROE%	16	15	19

Taking all into considerations Rites ltd is providing good investment opportunity having good order book, government projects in future, Debt Free better valuation.A good book for long term view for your shelf.

Price target :335   Tenure: 12 to 18 months.

DISCLAIMER:Research has been done purely out of authors passion for equity research with the information available at public domain not representing any view of any organisation in any way. Analyst is not responsible for any losses and every investor is advised to invest only after careful research of his/her own or seek professional help for the same