Every week, we recommend a well researched fundamental equity investment as our ‘Pick of the Week’. Handpicked after a thorough analysis of the business, industry, and economy, this recommendation has a higher potential of earning good returns over a horizon of 6 - 9 months.

INVESTING RATIONALE

→ Broad based performance continue: RITES has continued its growth journey in Q2FY20, registering its highest ever quarterly and half yearly revenues and profits. Almost all the segments have shown continuous growth with healthy and sustainable margins. Turnkey business increased substantially, growing 54%/40% YoY/QoQ showing increased pace of execution. Exports that contributed Rs 1 Cr. in base year has contributed Rs 263 Cr., growth led by continued exports of DMUs and Locomotives to Sri Lanka. Leasing business has shown a growth of 24% YoY with revenue of Rs 29 Cr. Consultancy revenue is lower, largely due to prolonged monsoon affecting project management consultancy fee, and some projects not reaching their billing stages. However, with projects in the pipeline, management is confident of achieving ~10-11% growth in FY20.

→ Order book provides strong visibility: RITES' standalone order book stand at Rs 5,833 Cr. (~3x FY19 revenue). Management expect pickup in H2 which would help them end FY20 with over Rs 8,000 Cr. order book. Order book is expected to grow by +17 % in FY20 over FY19 which provides strong revenue visibility for the next 2-3 years. Railways' projects have started to roll out and RITES would be the key beneficiary across the whole transportation sector. Order book is well diversified with high margin consultancy and low margin Turnkey business contributing 41% each. 16% pertains to exports order whereas leasing business contributes 2.5%.

→ High sustainable margins: EBIDTA margin in Q2FY20 at 26.3% rose by 130 bps on quarterly basis due to strong execution, while increasing Turnkey contribution resulted in fall in margins on yearly basis. Operating margin for consultancy is 48% for Q2FY20 while Turnkey business generated 4.2% operating margin. Turnkey order book is witnessing strong traction and stands similar to that of consultancy, however, execution period of Turnkey projects is higher than consultancy. Consultancy business contribution in total revenue would remain stable in near term. Management has also guided for 25%-30% contribution from Turnkey business in revenue for full year FY20, hence, incremental order book within Turnkey segment does not signify margin dilution of more than 50-100 bps.

→ Government investment has witnessed steep rise over the last few years. With continuation of policies within the transportation infrastructure, the sector is set to open up large addressable market for RITES Ltd.

* Note: Stock Investment horizon approx. 6-9 months. CMP as on 20th December, 2019.