Jitendra Kumar Gupta
Moneycontrol News
Rail Vikas Nigam (RVNL), which operates under the Ministry of Railways, has come out an initial public offering (IPO). The issue could be a good investment as the company enjoys huge competitive advantages in the expanding rail market.
Over the last three years, RVNL has grown its revenue by 34 percent annually. Its future growth visibility is equally promising in light of the strong order book of close to Rs 77,500 crore, or 10 times its annual sales. Close to Rs 43,000 crore of orders are expected to be executed over the next two-to-three years.
All this is offered at a price of Rs 17-19 per share, valuing the company at an attractive valuation of 6.2 times its FY19 annualised earnings. This is without factoring in Rs 0.5 discount being offered to the retail investors and a five percent dividend yield at the offered price.
Quality of business RVNL, incorporated in 2003, plays a critical role for the Railways. Being an execution agency it undertakes projects from the Railways and get them executed externally or internally. Railways use its know-how and project execution capabilities, so that it can focus on its core activities of managing and efficiently running the Indian railways. The company charge a certain amount for this service, which forms a bulk of its revenue.
An efficient model The great thing about this model is that it does not require capital and yet it has a scalable business. The company achieved a sales turnover of Rs 7,600 crore on a gross asset base of merely Rs 285 crore. The company has used debt to fund its business. Considering that its debt is less than one-time its net worth and has an interest coverage ratio of almost 10 times, it is rather remunerative than risky.
Being a government agency, it passes on the risk to the developer and the Railways, which is a key area of concern for most project execution companies.
If the business is efficiently using capital, it should also generate remunerative returns for shareholders. The company’s reported a return on equity (RoE) is about 14.5 percent. However, it is worth noting that the company is sitting on a huge cash pile. If one adjusts for the surplus cash of about Rs 1,200 crore on a net worth of Rs 3,925 crore, the core RoE would be much higher and rightly reflect the true earnings potential of the business.
Growth visibility Over the years, the company has developed different capabilities and today is catering to almost all of Railways' engineering project requirements. In fact, the project size is gradually increasing. Execution of larger projects on a low base could propel growth higher in coming years. Projects pertaining to Golden Quadrilateral, Diamond Quadrilateral (high-speed train corridor), rail connectivity projects under Sagarmala, strategic rail lines, metro projects and many other upcoming rail projects could prove to be beneficial and fuel growth in years to come.
Investment risks The company earns very thin operating and net profit margins, which is a reflection of an agency business model. In the event of a reduction in margin as a result of government directives or because of delays in projects and pressure of working capital, earnings growth may suffer.
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Disclaimer: Moneycontrol Research analysts do not hold positions in the companies discussed here
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