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RITES IPO opens today, should you subscribe to Rs 466-crore issue?

The RITES stock is available at a price band of Rs 180-185 per share. The IPO closes on June 22.

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RITES IPO opens today, should you subscribe to Rs 466-crore issue?

The initial public offer of railways consultancy firm RITES opens today with the government eyeing about Rs 466 crore via sale of 12% stake or 2.52 crore equity shares. The Miniratna firm, which is a leading player in the transport consultancy and engineering sector, will be the first state-owned company to hit the IPO market in the current fiscal.

The RITES stock is available at a price band of Rs 180-185 per share. The RITES IPO closes on June 22.

The paid-up share capital of RITES currently stands at Rs 200 crore. The government holds 100 per cent stake in the company.

The shares are available in a market lot of 80. Around 2.52 crore equity shares of Rs 10 (face value) are being offered for sale.

The book running lead managers for the issue are Elara Capital (India) Ltd, IDBI Capital Markets & Securities Ltd, IDFC Bank Ltd and SBI Capital Markets Ltd.

Discount of Rs 6 per share is being offered to retail investors and employees. 12 lakh shares in the issue will be offered to employees.

The government has set a target of raising Rs 80,000 crore through PSU disinvestment in the current fiscal. This is lower than Rs 1.03 lakh crore raised in last fiscal.

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Strong order book & financial performance: The firm's revenue from operations has increased at a compounded annual growth rate (CAGR) of 15.60% from Rs 1,012.68 crore in the financial year 2015 to Rs 1,353.35 crore in the financial year 2017, and its profit after tax has increased at a CAGR of 7.63% from Rs 3,12.21 crore in financial year 2015 to Rs 3,61.66 crore in the Financial Year 2017. On standalone basis, the firm has an order book of Rs 4,818.67 crore as on March 31, 2018 which includes 353 ongoing projects of value over Rs 10 million each.

The firm is bringing the issue at price to earnings multiple of approximately 11 on annualized 9MFY18 earnings per share at price band of Rs 180-185/share. The firm being the preferred consultancy organization agency of the Government of India including the Indian Railways has a healthy order book with strong and diversified clientele base across sectors. Looking after valuations we find issue to be reasonably priced. Hence, we recommend "Subscribe" on issue.

Arihant Capital: 3.5 stars

The company has no direct domestic competition; however a few companies offer some competition in certain segments. There are no comparable listed companies in India engaged in the similar line of business as this company; hence comparison with industry peers is not applicable.

The company has negligible borrowings. The aim is to maintain a similar level of debt in the next 3-5 years. The component of debt is restricted only to the energy business.

Over the years, the company has followed a trend where its revenue is always higher in the last two quarters of the year as compared to the previous two. A similar trend is expected to continue in the coming years. This trend is mainly because of exports.

The company expects a growth in the following businesses in the coming years.

1. Energy

2. Turnkey Projects

3. Over the years, the consulting business has been the main contributor of revenue (roughly 60-70%), and this business enjoys has a high profit margin

The issue has been offered at a price band of Rs 180-185 per equity share. At the upper price band of Rs 185, the stock is available at price-to-earnings multiple of 13.5 (attractively priced) to its FY18 annualized EPS of Rs 13.54. There are no comparable listed companies in India engaged in the same line of business and hence the threat of competitors is low. Considering these factors, we have a "3.5 star" rating for the issue.

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RITES' order book stood at Rs 4,800 crore as of March 2018 (3.5 times of FY17 top-line). The company receives orders on nomination/single tender basis on regular intervals from its clients such as national government, governmental instrumentalities and public sector enterprises.

In terms of valuations, pre-issue PE works out to 12 times of annualized FY18 EPS `17 (at the upper end of the issue price band), which is reasonably priced considering

(a) 3.5 times of order book with execution capability and experienced management

(b) Maintaining the return on equity level in the range of 17-18%

(c) Diversified client base

(d) Increasing opportunity of revenue from Railways due to new investment in electrification and infrastructure.

Given that the RITES is a preferred consultant of Indian Railways along with other government authorities with exposure in international operation and fair valuation of issue, we recommend SUBSCRIBE to issue.

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