IPO Analysis: RAIL VIKAS NIGAM LIMITED

IPO Rating - 50 (Invest with limited exposure)*

About the Issue

The government-owned Rail Vikas Nigam Limited (RVNL), a Mini Ratna Category I CPSE, is entering the capital market to raise around Rs. 481 crore at upper band and at lower band it will raise around Rs. 430 crore. The price band is fixed at Rs. 17-19. A discount of Rs. 0.50 per equity share would be offered to the retail and eligible employee bidders. The total number of shares for sale is 25.34 crore, which is entirely offered for sale by the government of India and the entire proceeds will go to the government. The company has reserved 6,57,280 equity shares for allocation and allotment to eligible employees. The issue constitutes 12.16 per cent of company's post-offer paid-up equity share capital.

About the company

RVNL was incorporated in the year 2003 by the Ministry of Railways (MoR), as a project executing agency working for and on behalf of MoR. The company was incorporated with the objective to undertake rail project development, mobilization of financial resources and implementation of rail projects pertaining to strengthening of golden quadrilateral and port connectivity and rising of extra-budgetary resources for project execution.

Since the inception of the company, MoR has transferred 179 projects to the company out of which 174 projects are sanctioned for execution. Out of these, 72 projects have been fully completed totalling to Rs 20,567.28 crore and the balance is on-going. The order book of RVNL stood at Rs. 77,504.28 crore as on December 31, 2018 which is almost 10 times its FY18 revenue.

The MoR has allowed RVNL to collect a consolidated management fee (by merging the D&G charges i.e. supervision charges and management fee) on the annual expenditure incurred for the execution of projects, being:

1. · 9.25 per cent for the metro projects;
2. · 8.50 per cent for other plan heads; and
3. · 10.00 per cent for national projects.

The company operates under the following heads.

1. New lines: This includes augmenting the rail network by laying new lines.

2. Doubling: Doubling involves the provision of additional lines by way of doubling the existing routes to enable the Indian Railways to ease out traffic constraints of a single line or construction of 3rd/4th line to increase the charted capacity.

3. Gauge conversion: This includes conversion of meter gauge lines to broad gauge railway lines.

4. Railway electrification: This includes electrification of the current un-electrified rail network and electrification on the new rail network.

5. Metropolitan transport projects: This includes setting up of metro lines and suburban network in metropolitan cities.

6. Workshops: This includes manufacturing facilities and workshops for repairing and manufacturing rolling stock.

7. Others: This includes but is not limited to construction of traffic facilities, railway safety works (building of subways in lieu of crossings), other electrification works, training works, surveys, construction of bridges including rail over bridges, etc.

 Following table shows the trend in revenue for different heads of the company (Rs in Crore)

Financials

For the financial year ending March 2018, the company's total turnover stood at Rs. 7,822.29 crore compared to Rs. 3,269.78 crore posted in FY15, it increased at a CAGR of 33.74 per cent. Doubling of the line contributes almost 50 per cent of the revenue for the company. It is followed by New Line which contributes 25 per cent of total revenue. Rest all segments contribute less than 10 per cent of the revenue.

The profit of the company in the same period has increased at a CAGR of 19 per cent, however, the growth was not as smooth as revenue. RVNL has a strong balance sheet with cash & bank balance stands at Rs. 1,272 crore at the end of September 18 with debt to equity at 0.5x.

Financials of RVNL

Valuation and recommendation

At the upper end of the price band, the issue is asking for a market cap to sales (FY18) of 0.5 times, which looks attractive especially looking at revenue growth of the company in last three years. The price to earnings (FY18) of the company comes at 7.8 times after annualising H1FY19 profit. This again is lower compared to some of its peers and growth that is visible in its bottomline. What is also good is that the company is consistently paying dividends to shareholders (Dividend Yield – 4.2 per cent in FY18). Therefore, we tell readers to subscribe to the issue with long term investment horizon looking at the company's strong order book, balance sheet along with reasonable valuation.

*40 or lower – Avoid Investment, 41 to 45 – Risky, 46 to 50 – Invest with limited exposure, 51 to 55 – Investment recommended, 56 & above – Excellent Investment