Recommendation from Miscellaneous Sector

This section gives a recommendation of a stock having a stock price below Rs 150 with sound fundamentals and expected to give handsome returns over a one-year time horizon.

RAIL VIKAS NIGAM: TOUCHING NEW HORIZONS

HERE IS WHY
✓ Strong order pipeline
✓ Healthy cash generation
✓ Attractive valuation

In the post-pandemic period, Indian Railways has witnessed a huge revival in its operations due to normalisation in travel and cargo movement. As such, the PSUs attached to the railway sector are gaining a lot. One such company in this category is Rail Vikas Nigam Ltd. (RVNL). It was incorporated in 2003 by the Government of India and is engaged in the business of implementing various types of railway infrastructure projects assigned by the Ministry of Railways, including doubling, gauge conversion, new lines, railway electrification, construction and repair of major bridges, workshops, production units and sharing of freight revenue with Indian Railways as per the concession agreement entered into with the ministry.

The company’s current ‘Mini Ratna’ status will soon be upgraded by the government to ‘Navratna’. Under its new lines segment, it includes augmenting the railway network by laying new railway lines to achieve a seamless bi-modal transportation network while the doubling segment involves the provision of additional lines by way of doubling the existing routes to enable the Indian Railways to ease out traffic constraints. The company is also engaged in the RT electrification of current un-electrified rail network and electrification on the new rail network.

An additional line of work is that the company takes up projects to set up metro lines and suburban networks in metropolitan cities. Some other operations undertaken by the company include the construction of traffic facilities, railway safety works, other electrification works, training works, surveys, construction of bridges including rail over bridges, etc. RVNL had 121 commissioned railway projects as on September 30, 2022 and the current order book stands at ₹55,000 crore (USD 6.64 billion) which includes 66 projects assigned by the Ministry of Railways and 13 projects acquired through bidding. For FY 2022-23, Indian Railway’s capital expenditure is projected at ₹245,800 crore, an increase of 14 per cent over the revised estimates of FY 2021-22. 

This augurs augurs well for RVNL. The company exhibits a favourable financial risk profile on account of its project management capability, allowing the company to scale up its operations to ensure healthy cash generation. RVNL’s total operating income reported a CAGR of 27 per cent for the past five fiscals and stood at ₹19,381.71 crore for the fiscal year ended March 31, 2022. RVNL operates through the mode of subcontracting and has a track record to subcontract the projects to marquee contractors. The top-line in Q2FY23 grew YoY by 22 per cent and sequentially by 6 per cent to ₹4,909 crore. The net profit in the quarter increased by 37 per cent QoQ and 28 per cent on sequential quarter basis to ₹381 crore.

The liquidity position of RVNL is well-supported by strong cash generation from its own operations. It generated ₹4,800 crore of cash from its operations in FY22, posting a ten-fold increase on a yearly basis. It includes other income of ₹1,003 crore which may not be repetitive. The debt-to-equity ratio of the company was around 1x at the end of H1FY23, which has improved sequentially. In FY22 the average return on equity was 19.7 per cent and average return on capital employed was 16.8 per cent. Currently the company is trading at a PE of 12.4 times. Due to improving margins, attractive valuations and future outlook, we recommend BUY.