The company¡¯s major client is the Indian Railways. The company executes orders mostly for and on behalf of MoR. The company receives projects based on assignment basis from MoR. The other clients include various central and state government ministries, departments, and public sector undertakings.

RVNL is in the business of executing all types of railway projects including new lines, doubling, gauge conversion, railway electrification, metro projects, workshops, major bridges, construction of cable stayed bridges and institution buildings.

Since inception in 2003, MoR has transferred 179 projects to RVNL of which 174 projects are sanctioned for execution. Out of these, 72 projects have been fully completed totalling to Rs.20567.28 crore and the balance are ongoing. RVNL has an order book of Rs.77504.28 crore as on December 31, 2018, which includes 102 ongoing projects. Of the total order book, around 36% of total order book is from Doubling, 40% come from new lines, 5% from railway electrification, 2% from gauge conversion, 12% from Metropolitan Transport Projects, 3% from workshops and rest 2% from other including building construction. The projects undertaken by RVNL are spread all over the country and for efficient implementation of projects, 43 Project Implementation Units (PIUs) as on December 31, 2018 have been established at different locations.

During FY 18, RVN has completed a total of 885.50 route kilometers (rkm) of project length which included 315.20 rkm of doubling and 425 rkm of railway electrification. For FY 2018, around 44.9% of total revenues came from doubling, 26.3% came from new lines, 9.9% from railway electrification, 6.5% from gauge conversion, 8.5% from Metropolitan Transport Projects, 2.3% from workshops and rest 1.8% from other including building construction.

RVN is allowed a consolidated management fee (by merging the direction and general charges i.e. supervision charges and management fee) on the annual expenses incurred for the execution of projects at the following margins: - 9.25% for the metro projects, 8.50% for other plan heads, and 10% for national projects. Borrowings on the book are a pass through entry where in interest and principal repayments are borne by MoR.

RVN has contributed to more than 33% of the doubling projects and more than 21% of electrification projects of the total reported by Indian Railways for the last five years (FY2013 to FY2017) (Source: CARE Report). With their 43 project implementation units as on December 31, 2018, across the country, RVNL operates as a client company to MoR, and work for and on behalf of the Ministry for execution of various nature of railway infrastructure projects.

Implementation of railway workshops and factory projects will be another major revenue contributor for RVN in future. The Indian Railways is planning to construct five additional workshops/ sheds across the country which can be undertaken by RVN on account of the experience gained by the company in executing these projects.

The MoR, vide their letter dated August 14, 2012, has delegated powers to RVN for sanctioning detailed/revised estimates for the projects entrusted to them upto 100% cost on account of price escalation and upto 20% cost on account of reasons other than price escalation on the original sanctioned cost of the projects. This provides an advantage over their competitors in railway sector. This enables RVNL to expedite their delivery timelines and reduce project delays resulting in controlling cost and time overruns.

RVN has set up a wholly owned subsidiary called High Speed Rail Corporation of India (HSRCL) which has the capacity to manage the implementation of high-speed rail corridor projects. The government has announced plans for a Diamond Quadrilateral of high speed rail corridors in India thereby connecting four metro cities in India, would comprise of six corridors connecting the metropolitan cities and also, the growth centres of the country. MoR has assigned the work of conducting the pre-feasibility studies for few sections to RVN.

The government priority in development of rail infrastructure is the reason RVN intends to focus on project with high value, especially in hilly terrains like in the difficult terrains of the Himalayas, Ladakh.

The Offer and the Objects

The offer comprises offer for sale by the government of India of 25.28 crore shares, which, at the lower price band of Rs 17 per share, works out to Rs 429.76 crore and, at the higher price band of Rs 19 per share, works out to Rs 480.32 crore.

The minimum bid lot is 780 equity shares and in multiples of 780 equity shares.

The objects of the issue is to carry out the divestment program of the government of India apart from the benefits of listing the equity shares on the BSE and the NSE and to enhance its visibility and brand image and provide liquidity to its existing shareholders.

Government of India will hold 87.9% of total paid up equity share capital of the company post listing.

Strengths

Indian Railways envisages a prospective investment of Rs 8,560 billion (US$ 130.8 billion) during FY 2016¨CFY 2020.

As per Vision 2020, Indian Railways plans to construct an average of 2,500 Kms. of New Lines per year. Investment in new line construction has increased significantly and projects worth Rs 173450 crore are expected to be completed till FY 2025

The Company works on a turnkey basis and undertakes the full cycle of project development from conceptualization to commissioning including stages of design, preparation of estimates, calling and award of contracts, project and contract management. and all stages of project execution upto the stage of commissioning of the new railway lines.

The Department of Public Enterprises, Ministry of Heavy Industries and Public Enterprises, the government of India has consistently awarded RVNL an ¡®Excellent¡¯ rating for the past 8 years. For FY 2018, RVN was awarded a score of 100/100 for the achievements against the targets set.

RVN contributes to around 21% of the total electrification work done by the Indian Railways. MoR has targeted to electrify 24,400 rkm of railway tracks during FY 2017 to FY 2021 which is nearly 3.5 times the achievement of previous 5 years (FY 2012 to FY 2016).

RVL has been contributing to approximately 1/3^rd of the total doubling being completed / commissioned on Indian Railways for the last 5 years. The Railways continue to increase its focus on doubling the lines and expects to achieve at least 1,200 km per year as per Vision Document 2020.

RVN works on an asset light model wherein in their contracts require the contractor to provide all the machinery, plants and stores for execution of works. RVNL also rely on the MoR for deputation of manpower to perform supervisory tasks.

The company has introduced certain standardized operating procedures to streamline and ensure faster decision making and reduction in overall timelines. These measures include preparation of standard bill of quantities for different nature of projects, standard bidding document etc. which are available on the Company¡¯s website at www.rvnl.org, ensuring easy access and transparency.

Projects are funded through loans from Indian Railway Finance Corporation (IRFC) as advised by MoR. MoR takes full responsibility towards any debt servicing for RVN. The debt servicing will pass through RVN¡¯s books

The revenues from operations has increased at a CAGR of 34% from Rs. 3146.54 crore in FY 2015 to Rs.7597.36 crore in FY 2018, and the Net Profit has increased at a CAGR of 19% from Rs.336.85 crore in FY 2016 to Rs.569.92 crore in FY 2018.

Weaknesses

Around 96.1% of total order book as on December 2018 is dependent upon MoR. The company receives all the orders from MoR on nomination basis. In future the Railway Board is considering in giving projects on bidding and competitive tender basis.

The company is also dependent on the MoR to allocate funds for it, which may at times get delayed due to non-availability of funds for infrastructure development with Indian Railways. It is dependent upon MoR and some state governments for financing the projects and any reduction in the budget allocation for projects to be funded through budgetary support, to that extent the company has to utilize its own funds as working capital for many projects. The shortfall in reimbursement on this account as on February 28, 2019, is around Rs 1417 crore. The government of Andhra and Telangana have not reimbursed Rs 267 crore and Rs 300 crore respectively which will affect the implementation of the projects.

The present powers delegated to RVN to sanction estimate with cost of a project more than project cost at the time of transferring the project, may be withdrawn as per recent meeting with MoR. Consequently, sanctioning of detailed estimates with costs more than advised project costs by Railway Board may require approval of Railway Board and zonal railways. In such a situation, there may be delay in sanctioning of detailed estimate and thereby delay in execution of the project or there are also chances that RVN may not get the approval.

Execution challenges like land acquisition, removal of encroachments, utility shifting can lead to lower billing and thus lower sales for the company. Further the company is totally dependent on contractors, sub contractors and outside consultants for execution and completion of projects.

27.6% of total order book is from 2 contracts which will be executed in difficult hilly regions which has its own execution challenges.

The government has significant influence over its operation, restricting the company¡¯s ability to manage its business. Increase in salary and allowances of government and public sector employees will increase the expenses. Further, the company has in the past not complied with the requirements of Companies Act, certain provisions of the Companies Act and/or SEBI Listing Regulations in relation to terms of reference of the Audit Committee and the Nomination and Remuneration Committee.

Valuation

For FY 2018, consolidated net sales were up 28% to Rs 7597.36 crore. The OPM stood at 5.1% as compared to 4.8% for FY 2017, resulting in OP of Rs 388.79 crore. Other income stood at Rs 224.93 crore, down by 9%. Interest cost stood at Rs 44.66 crore, up by 26%, while depreciation stood at Rs 4.84 crore down by 4%. Thus, PBT stood at Rs 564.23 crore, up by 15% YoY. After providing total tax of Rs 94.11 crore, down by 6% and share of profit of associates of Rs 99.81 crore, up by 84%, PAT for FY 2018 stood at Rs 569.92 crore, up by 29%.

For the half year ended September 2018, the company reported net sales of Rs 3622.88 crore with OPM of 4.5% and OP of Rs 161.50 crore. Other income stood at Rs 147.52 crore, Interest cost at Rs 20.56 crore and depreciation at Rs 2.71 crore rusting in PBT of Rs 285.75 crore. After providing for total tax of Rs 56.49 crore and share of profit of associates of Rs 24.35 crore, PAT for six months ended September 2018 stood at Rs 253.61 crore.

At higher price band of Rs 19, the offer is made at around 7 times its FY 2018 consolidated EPS of Rs 2.7 on a current equity share capital of Rs 2085 crore of face value of Rs 10 each.

RVN, Rites and Ircon international, all 3 are incorporated by MoR. Rites and Ircon are already listed.

For FY 2018, consolidated net sales of Ircon were up 31% to Rs 4027.51 crore and PAT stood at Rs 411.58 crore up by 24%. This gives an EPS of Rs 43.8 for FY 2018.

For FY 2018, consolidated net sales of Rites were up 11% to Rs 1439.43 crore and PAT stood at Rs 340.11 crore up by 3%. This gives an EPS of Rs 16.2 for FY 2018.

At current market price of Rs 255, Rites trades at 15.7 times its FY 2018 earnings. At the current market price of Rs 400, Ircon trades at 9.1 times its FY 2018 earnings.

Rites is more a de-risked play on transportation sector as it offers consultancy services to traditional railways, rail projects of power companies, metro rail projects, ports, and highways. Rites is also involved in leasing railway locomotives to domestic non©\railway customers and export locos. The company predominantly remains a consultancy organization with around 61% of the operation income coming from consultancy, 25% of revenues come from turnkey business and rest from leasing and exports business.

Ircon is an integrated engineering and construction company specializing in major infrastructure projects, including, railways, highways, bridges, flyovers, tunnels, aircraft maintenance hangars, runways, EHV sub-stations, electrical and mechanical works, commercial and residential properties. Around 95% of the company¡¯s business is from construction, which includes railway construction and construction of highway and roads and rest from infrastructure development. Railways account for around 69% of total revenues for FY 2018.

RVN is more of a project execution agency of MoR whose job is to monitor and ensure the execution. With 96.1% of orders from MoR on a nomination basis, the company acts as a nodal agency with fixed margins. It subcontracts and outsources the orders from MoR to various companies including Rites and Ircon.

Considering the comparative business models of Rites, Ircon and RVN, RVN should get lower P/E and the offer price factors in that.

Rail Vikas Nigam: Issue highlights

Offer for sale ( in Rs crore)
- On lower price band	429.76
- On upper price band	480.32
Total Issue size for fresh issue ( in no of shares in crore)	25.28
Price Band (Rs)	17-19*
Bid size ( in no of shares)	780.00
Post issue share capital (Rs crore)	2085.00
Post-issue Promoter & Group shareholding (%)	87.9%
Issue open date	29-03-2019
Issue closed date	03-04-2019
Listing	BSE, NSE
Rating	45/100
*Discount of Rs 0.5 to retail investors

Rail Vikas Nigam: Consolidated Financials

	1503(12)	1603(12)&	1703(12)&	1803(12)&	1809(06)&
Net Sales	3146.54	4539.85	5915.11	7597.36	3622.88
OPM (%)	4.6%	4.8%	4.8%	5.1%	4.5%
OP	145.60	217.36	281.79	388.79	161.50
Other in.	123.25	180.44	247.77	224.93	147.52
PBDIT	268.84	397.79	529.56	613.72	309.02
Interest	15.28	23.08	35.45	44.66	20.56
PBDT	253.56	374.71	494.11	569.06	288.46
Dep.	5.12	4.67	5.02	4.84	2.71
PBT	248.44	370.04	489.09	564.23	285.75
EO	0.00	0.00	0.00	0.00	0.00
PBT after EO	248.44	370.04	489.09	564.23	285.75
Tax (including Deferred Tax)	39.71	69.53	99.83	94.11	56.49
PAT	208.73	300.51	389.25	470.11	229.27
Share of Associates	128.11	128.93	54.21	99.81	24.35
PAT after MI and share of Associates	336.85	429.43	443.46	569.92	253.61
EPS (Rs)*	1.6	2.1	2.1	2.7	#
*EPS is on post issue equity capital of Rs 2085 crore of face value of Rs 10 each & FY 15 financials are as per Old Ind AS while FY 16, FY 17 and FY 18 financials and 6 mths ended Sep 18 financials are as per New Ind AS # EPS not annualised due to seasonality of business Figures in crore Source: Capitaline Database

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