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Last Updated : Mar 29, 2019 04:30 PM IST | Source: Moneycontrol.com

Rail Vikas Nigam IPO opens: Should you subscribe?

Given its strong orderbook, attractive valuations, strong execution capabilities, robust balance sheet, brokerages advised subscribing the issue.

Sunil Shankar Matkar

Public sector enterprise Rail Vikas Nigam (RVNL) has launched its initial public offering for subscription on March 29 at a price band of Rs 17-19 per share.

It is an offer for sale of 25,34,57,280 equity shares by the Government of India which is expected to Rs 481 crore, at upper end of price band, through this public issue.

The issue, which includes a reservation of 6,57,280 equity shares for eligible employees, will close on April 3, 2019. Retail investors as well as eligible employee bidders will get shares at a discount of 50 paise per share on final issue price.

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It is a wholly-owned government company, a miniratna central public sector enterprise, incorporated by the Ministry of Railways.

RVNL is in the business of executing all types of railway projects, including new lines, doubling, gauge conversion, railway electrification, metro projects, workshops, major bridges, construction of cable stayed bridges, institution buildings.  As on December 2018, RVNL has an order book of | 77,504 crore.

Given its the government focus on rail infrastructure spends, strong orderbook, attractive valuations, strong execution capabilities, robust balance sheet, all brokerages advised subscribing the issue.

However, while subscribing the issue, one should take into consideration some risks which are company's huge dependency on the Ministry of Railways, contracts to third party, hill railway projects constitute a substantial portion of its order book, current order book may not be indicative of its future growth and any delay in major long gestation projects.

Check out what brokerages say about the issue:

ICICI Direct

At the IPO price band of Rs 17-19, the stock is available at a price to earnings multiple of 7x while comparable peers are trading at an average multiple of 6.6-12.7x.

The company has a robust balance sheet and is available at an attractive dividend yield of around 4 percent. Backed by a solid order backlog and strong execution capabilities, we recommend subscribe to the issue at the offer price.

Canara Bank Securities

Rail Vikas Nigam Limited is having a very strong order book with proven execution record. The company is expected to finish approximately Rs 30,000 orderbook in the next 2 to 3 years as per the management guidance. However, there is uncertainty with regard to change in the Government policy to reconsider the practice of giving railway projects/works on nomination basis to RVNL or to give projects/works to CPSUs through limited competitive tenders.

The outcome may have bearing on size of the future order flow and margins. Nevertheless, RVNL commands better bidding prospects due to the proven past record.

As of 31st March, 2018, the company had an EPS of Rs 2.73 and NAV of Rs 18.83. The company would trade at 6.96x P/E and P/B of 1.01x for FY18 earnings. We believe that the stock is fairly priced. One may subscribe to the IPO for long term gains.

Centrum Research

We believe the issue is reasonable as compared to closely listed peer IRCON International that trades at P/E of 9.1x on FY18 basis.

Over FY15P-18, RVNL has reported decent growth with revenue and PAT CAGR of 34.2 percent and 19.2 percent, respectively. RVNL executes projects by raising funds via SPV route on project specific basis (reducing dependence on budgetary allocations) and strategic stakeholders

(keeping the business asset light).

RVNL’s entire borrowing on books (from the Indian Railway Finance Corporation - IRFC) is a pass through entry, where MoR services the entire debt. Given the government focus on rail infrastructure spends (Metro, Port-Rail Connectivity, electrification etc), healthy order book, asset light model and reasonable valuation, we suggest that investors can Subscribe to the issue from a long term perspective.

Choice Broking

Based on the higher price band, RVNL is demanding a P/E multiple of 7x (to its restated FY18 EPS of Rs. 2.7), which is discount to peer average of 11.9x. With respect to the projected FY19E and FY20E earnings, it is demanding a P/E valuation of 6x and 4.4x, respectively. Thus, we feel that the demand valuation is attractive and investors can look for long term investment in this PSU.

Thus considering the above observations and demanded valuation, we feel that concerns like erratic government policies and performance of PSU IPOs seems to have been factored in the price. Thus, we assign a subscribe rating for the issue.

SMC

The revenue of the company has shown good improvement in the last 4 years. This is a direct function of improved investments in the railway segment. The railway segment is poised to see growth due to ongoing and the expansion plan. On the pricing front, it is reasonably priced. Along term investors may opt the issue. We have 2-1/2 rating out of 5.

Risk Factors

One should consider following risk factors while subscribing the issue:

Huge dependency on the Ministry of Railways

The company majorly depend on the MoR for sourcing of its projects. Recently, there have been reconsideration by the MoR regarding the

modalities of its project assignments. Also it is completely depended on the project sponsoring authorities like MoR and state governments, etc. for financing of their projects.

Third party Risk

The company depends on the performance of contractors, sub-contractors and consultants engaged for adhering to the conditions of quality and other obligations. Any failure by the contractors, sub-contractors and consultants in performance of their respective obligations could result in delay or failure in timely execution or delivery of projects

Hill railway projects constitute a substantial portion of its order book

Two of its projects viz. the hill railway projects of Rishikesh Karnprayag new line project and Bhanupalli- Bilaspur Beri new line project constitute a substantial portion of its order book.

Any delay of these projects or delay in timely and adequate financing of these projects by MoR, may adversely affect its business, financial condition and results of operations.

If metro project gets delay

Its metro projects currently ongoing in Kolkata have been facing delays. Any further delay/review of these projects may adversely affect its business,

revenues and results of operations.

Its current order book may not be indicative of its future growth

The growth rate growth rate, the number of projects it has been assigned in the past by MoR and its current order book may not be indicative of its future growth rate or the number of orders it will receive in the future

Further delay in major long gestation projects

The company has two projects viz. Rishikesh Karnprayag new line project
and Bhanupalli- Bilaspur Beri new line project worth Rs 15,001 crore and

Rs 6,413 crore, respectively, and constitute 27.6 percent of the order book.

Any delay on account of land acquisition, forest & environmental clearance issues, etc, or delay in adequate financing of these projects by MoR, could adversely affect RVNL. In addition, four metro projects currently ongoing in Kolkata are also facing delays, timely resolution. Execution of these works remain critical to the performance of RVNL.

Disclaimer: The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

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First Published on Mar 29, 2019 10:11 am
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