As railway capex skyrocket, here's why RITES may be right pick after Budget

Railway capital expenditure (capex) has seen exponential growth in recent years. According to data compiled by Elara Capital, cumulative capex over FY15-19 stood at Rs 5.1 lakh crore compared to Rs 46,000 crore over FY09-14.

There has been an increased focus of the government on improving railway infrastructure lately. In the Interim Budget 2019, then Finance Minister Piyush Goyal had announced Indian Railways' capex at Rs 1.58 lakh crore, more than three times the cumulative capex during five years of UPA II.

In the upcoming Budget, Nirmala Sitharaman is expected to keep the allocation same, if not increase it. And, one of the biggest beneficiary of such high capex for Railways could be RITES Ltd.

RITES is a leading transport consultancy and engineering firm with over 40 years of expertise as a consultant to Indian Railways. They are also the exclusive exporting arm of the Railways providing rolling stocks to countries such as Thailand, Malaysia and Indonesia.

Since debuting on the bourses on July 2, 2018, RITES has seen 40 percent rise in its share price; and with the Union Budget in the fray, analysts are expecting the scrip to rally further 34 percent in the medium to longer-term.

According to brokerages, RITES has multiple moats including its robust railway consultancy business, strong order book, bountiful export opportunities and stable footing in leasing.

Elara Capital expects a consultancy revenue CAGR of 10 percent over FY19-22E, with export and leasing business potentially returning 31 percent and 18 percent CAGR, respectively, in the same period.

Antique Broking expects that the company to scale up its consultancy revenue by 30 percent on the back of avenues for infrastructure spending such as metros/high-speed rail and conventional railway capex plans.

"The company's exports revenue could grow at CAGR of 31 percent over FY19-22E on the back of an order book of Rs 10,800 crore. Meanwhile, leasing business would be driven by higher demand from the in-plant movement of goods by non-railway domestic sectors (power, steel, cement and ports) and locomotives leased from 1 in 2009 to 56 in FY19," said Elara in a report.

Over the last few years, RITES has become a major player in turnkey solutions offering construction solutions on railway projects. The company posted a turnkey revenue CAGR of 145 percent over FY16-19 to Rs 5,700 crore in FY19, contributing 28 percent of total sales in FY19, against 4 percent in FY16.

"We expect a turnkey revenue at Rs 5,700 in FY22E, as the Ministry of Railways (MoR) is likely to award turnkey projects on a nomination basis where RITE can be a key beneficiary," said Elara.

The company's order book across segments has grown 27 percent in FY19 from Rs 4,818 crore in FY18. It has secured more than 300 projects, including an extension in scope of projects during FY19.

"We expect growth in the order book to continue across all segments as projects are expected to pick rapid pace post announcement of Final Budget in July 2020," added Axis Direct.

The company also enjoys a stable financial position that enables it to satisfy the minimum financial eligibility criteria for bidding in the projects.

Asset light business model ensures healthy return ratios with return on equity (RoE) at 19 percent and the return on capital employed (RoCE) at 27 percent for FY19, said Axis.

Axis estimates revenue to grow at a CAGR of 18.5 percent over FY19-21E and profit to grow marginally lower at CAGR of 16 percent over FY19-21E.

Brokerage calls

Elara Capital: Buy | Target price: Rs 335 | Upside: 13 percent

Axis Direct: Buy | Target Price: Rs 379 | Upside: 28 percent

Arcadia Research: Buy | Target Price: Rs 321 | Upside: 8 percent

Quantum Securities: Buy | Target Price: Rs 397 | Upside: 34 percent

Antique Broking: Buy | Target Price: Rs 343 | Upside:  16 percent