Will find it difficult to maintain profit margin going forward: RITES CMD Rahul Mithal

(Representative image)

Rites (formerly known as Rail India Technical & Economic Service) will struggle to maintain its high operating profit margin in the upcoming quarters due to a fall in export orders, the company’s CMD Rahul Mithal told Moneycontrol in an interview.

Mithal said that while the company will try to maintain its operating profit margin at around 25 percent in the coming quarter, a combination of rising commodity prices and falling orders in the high-margin export segment will make things difficult.

He added that the fall in export orders seen in the last two quarters is likely to continue for another 2-3 quarters as the company was unable to win new orders during the pandemic.

Mithal also said that Rites has aggressively started bidding for new export orders in Bangladesh, Sri Lanka, and Mozambique in order to reverse the matter of falling orders.

Edited Excerpts:

Q. RITES’ order book has slightly shrunk in the September quarter to Rs 5,000 crore from Rs 5,200, furthermore your export orderbook has shrunk from Rs 1,000 crore to Rs 300 crore in the past six months.

Does this mean that RITES has missed out on any significant orders in the past few months?

A. Not really. Our order book as on 30th September stands at around Rs 5,000 crore, Rs 2,400 crore of which were consultancy orders, Rs 2,000 crore was orders for turnkey projects, and Rs 300 crore was export orders.

While our export orders took a hit due to Covid, we have already started aggressively bidding for new export orders over the past six months, and expect to win some of the bids.

Covid mostly impacted export orders for rolling stock. But we made up for that by increasing our share of turnkey orders. The revenues coming in from export orders at the moment are from projects we are now executing that we had won before the outbreak of Covid.

But because we could not pick up fresh orders during Covid, the execution of our current lot of orders will be done by the coming quarter that ends in March.

The fall in export orders that we have seen in the last two quarters is likely to continue for another 2-3 quarters.

Rites has started bidding aggressively for new export orders in Bangladesh, Sri Lanka, and Mozambique, and hopes to reverse the trend of falling export orders.

Q. Which major export markets and which projects are you targeting?

A. Globally, we do two kinds of projects. One is the export of rolling stock, which is declining. In this segment we are targeting orders from south east Asia and Africa including Bangladesh, Sri Lanka, and Mozambique.

The other part of my international revenue comes from consulting, which has seen a healthy growth, both sequentially and on-year.

Rites had done international consultancy projects worth Rs 110 crore in 2021-22, and in April-September of 2022-23, our revenues from this segment have crossed Rs 70 crore. We expect to do another Rs 70 crore in the second half of 2022-23.

Q. What is the topline and bottomline tagets you have set for 2022-23 and what are your expectations for next year?

A. Despite the dip in revenues from export projects, we have demonstrated strong growth in revenues in our turnkey segment. Going forward as well, we expect to show double-digit growth in both our top-line and bottom-line for 2022-23.

Q. RITES saw its operating profit margin expand to 26 percent in July-September, do you think you will be able to maintain your profit margin going forward?

A. Even though the revenues from our export segment, which is a higher margin segment, was lower, we still managed to report high margins in July-September.

However, going forward, it is going to be tough to maintain our operating margin at around 25 percent, because the contribution of the turnkey segment, which is a low margin segment (3-5 percent), is so high. In some turnkey projects the margins are as low as 3 percent.

But we will try and improve the operating margins in our consultancy projects and try to prevent a large fall in margins.

Q. What is the capital expenditure RITES is looking at in 2022-23?

A. Our capex has always been relatively low. We are looking at a capex of Rs 150 crore in 2022-23, and we have already spent around Rs 79 crore of the same.

In 2023-24 our capex is likely to be even lower, around Rs 100 crore, since we are an asset light company.

Q. How do you expect the revenue of your subsidiary Railway Energy Management Co (REMCL) to grow in the coming few years, since it has become the primary agency to execute all renewable energy projects for the Indian Railways?

A. There is a huge opportunity in the renewable energy segment for REMCL. REMCL has already shown good growth in the past year, and going forward too I expect REMCL’s revenues to grow in double digits in 2022-23.

REMCL’s revenues are growing along with the growing electrification of Indian Railways, and as its passenger and cargo traffic rises.

Having said that, as you correctly pointed out, REMCL is also the nodal agency for all renewable energy initiatives of the Indian Railways, whether it is solar or wind power.

However, REMCL doesn’t have to put in capex to develop RE projects for the Indian Railways. REMCL will be developing projects as a developer,  and will be coming out with pilot projects.

We have started a number of RE initiatives, and the coming quarters will tell us how these initiatives translate into revenues for the company.

Q. Global commodity prices and crude prices are expected to remain high for the next six months due to a global slowdown that is being witnessed, how will this affect your margins?

A. Commodity prices will impact the engineering, procurement, and construction (EPC) turnkey projects that we execute. In the cost-plus model of our turnkey projects, we can pass on any rise in commodity prices to the customer. But we will try to ensure that we execute the  EPC turnkey projects on time and ensure there are no cost overruns.

Q. Last year you had said that you will look to aggressively push for export orders for Vande Bharat trains, how are those negotiations coming panned out?

A. While we have pitched the product in many countries, at this stage there is no real lead which we can work on.

Q. Does this mean that going forward RITES will slow down in pushing for the export of Vande Bharat trains or is this still a key focus for your experts?

A. No, whenever we talk to prospective clients, we tell them about all our rolling stock products.

Q. After the announcement of 2022-23 Budget by the central government, you had said that RITES will see direct benefit of Rs 5 lakh crore because of allocations made to various ministries like road, railway, housing and urban development. 

How much of that benefit have you already started seeing coming?

A. Due to the allocations made in the 2022-2023 budget, Rites has started getting a number of consultancy projects, in the road segment, metro connectivity segment, and other segments.

We recently completed the detailed project report for the Gorakhpur Metrolite project. We have also been appointed the general engineering consultant for the Ahmedabad Metro Rail project, phase-ll.

Similarly, in the turnkey segment, we have recently won three major orders. For the redevelopment of the Kollam railway station, Rites, along with a JV partner, has secured an order from the Southern Railway worth Rs 361.18 crore.

Rites has also won a Rs 500 crore order from the Bangalore Metro Rail Corporation for the construction of a depot-cum-workshop.

From IIT, Delhi, Rites has won an order worth Rs 680 crore for the complete planning, design, and construction of a number of buildings.

Q. RITES is also a consultant in the National High Speed Rail Corp project, how is the project execution coming along for that project?

 A. We have completed the contract to shift an old railway workshop to a new location, so that it is not a hindrance for the execution of the high-speed rail corridor.

We have won a contract to design, construct, install, test, and commission the Sabarmati depot, comprising a workshop, inspection sheds, and maintenance facilities.

Q. The Ministry of Finance had last year recommended that the Ministry of Railways merger some of its public sector utilities, that do similar work, the merger of Braithwaite & Co with RITES was one such recommendation, any progress/roadmap decided on the same?

A. There have been discussions, but the ministry would be in a better position to answer this question.