RITES IPO Review: Should you Invest in the PSU IPO?

Rail India Technical and Economic Services (RITES), a government owned railway consultancy firm and a Miniratna (Category – I) Schedule ‘A’ Public Sector Enterprise, has planned to raise INR 466 crore through an IPO. RITES IPO is a part of the disinvestment by the government and the government intends to divest 12.6 per cent of the stake in the company.

The Government for FY 19 is targeting INR 80,000 crore through the disinvestment route. Other railway firms that are expected to come up with an IPO include Rail Vikas Nigam (RVNL), Indian Railway Finance and IRCON International. RITES IPO’s book running lead managers are Elara Capital, IDBI Capital, IDFC Bank and SBI Capital Markets while Link Intime India is the registrar of the offer.

President of India is the promoter of the company, acting through the MoR. He currently holds, directly and indirectly, 100% of the pre-offer paid-up Equity Share capital of the company.

RITES IPO Investment Rationale

• The company has planned to grow their operations in the transport infrastructure space (expansion into turnkey railway, airport, metro projects etc.) and also strengthen its international operations. The company is the only export arm of Indian Railways for providing rolling stock overseas (apart from Thailand, Malaysia and Indonesia).
• The company has rich expertise in consultancy and has a diversified sector portfolio in consultancy services in the transport infrastructure sector. This enables the company to access sectors with growth potential and enables them to expand operations in the sectors in which it already have significant presence.
• RITES Ltd. has the experience and expertise to collaborate and work jointly through alliances, joint ventures, subsidiaries and consortium arrangements. This helps the company to develop technical expertise and domain knowledge through collaboration with their partners in comparatively newer market segments.

Purpose of the issue

The company will not receive any proceeds from the Offer for Sale. The objects of the IPO are:

• To carry out the disinvestment of 24,000,000 Equity Shares held by the Selling Shareholder in the Company, equivalent to 12% of the issued, subscribed and paid up Equity Share capital of the Company as part of the Net Offer, and such Equity Shares that may be reserved for Employee Reservation Portion, if any, subject to necessary approvals
• To achieve the benefits of listing the Equity Shares on the Stock Exchanges.

Other IPO Details

• Issue Open: Jun 20, 2018 – Jun 22, 2018
• Issue Type: Book Built Issue IPO
• Issue Size: 25,200,000 Equity Shares of Rs 10 aggregating up to Rs 466.20 Cr
• Issue Price: Rs 180 – Rs 185 Per Equity Share (discount of Rs 6 per share for retail shareholders and employees)
• Market Lot: 80 Shares
• Minimum Order Quantity: 80 Shares
• Listing At: NSE, BSE

Valuation: Should you Invest?

During FY13- FY17, RITES has reported the revenue and profit CAGR of 9% and 11%, respectively. The average EBITDA margins and return on equity (RoE) over the period stood at 28% and 18%, respectively. RITES is a almost debt free company and has few borrowings.

At the higher end of the price band of ₹185, the issue is priced at P/E of 10.4x (post dilution) on FY17 and 11.3x on 9MFY18 (annualized) basis. This is an attractive valuation. Further, the company has no listed peer. The RITES IPO is expected to list at premium, therefore the investors may “subscribe” to the issue.