In the recent past, two Indian Railway entities - IRCON International (IRCON) and RITES (RITES) - debuted at the bourses. Of these, only RITES is trading above the IPO price, while the former is trading at 16 per cent discount (as of Thursday's close) to the IPO price.
"RITES predominantly is a consulting arm of Indian Railways, while IRCON is normally into project execution and can execute projects across the spectrum. Though both IRCON and RITES are not perfect peers to RVNL but can be considered as proxy peers as they majorly cater to Indian Railways," wrote analysts at Choice Research in the IPO note.
RVNL, which is a project executing agency working for and behalf on Ministry of Railways, has an order book of Rs 77,500 crore. Of this, Rs 30,000 crore worth orders are long-gestation projects with execution timeline of five-seven years. Orders of nearly Rs 45,000 crore are related to doubling, new lines, etc, where execution timelines are two-three years.
Analysts at ICICI Securities believe the healthy order-book provides near-medium term revenue visibility for RVNL.
Between FY13-17, RVNL contributed more than 33 per cent of the doubling projects and more than 21 per cent of electrification projects of the total reported by Indian Railways (IR), a CARE Ratings note said.
In 2016, Indian Railways had announced a capex plan of around Rs 8.6 trillion stretched over five year period i.e. 2016-20. The proposed capex plan is 90 per cent more than the combined capital outlay in the previous 15 years.
Given the government's focus on building rail and road network going ahead, analysts at Centrum Wealth believe the company could be a key beneficiary of the upcoming opportunities in the railway infrastructure segment. The brokerage suggests investors 'subscribe' to the issue from a long-term perspective.
RVNL's 'asset-light model' is another reason why brokerages remain optimistic on the road ahead for the company. An asset-light business model is where a business owns relatively fewer capital assets compared to the value of its operations.
In RVNL’s case, contractors provide for the machinery, plants, and stores for the execution of works. The company also relies on the MoR for deputation of manpower to perform supervisory tasks, etc.
"Based on the higher price band, RVNL is demanding a P/E multiple of 7x (to its restated FY18 EPS of Rs 2.7), a discount to peer average of 11.9x. With respect to the projected FY19E and FY20E earnings, it is demanding a P/E valuation of 6x and 4.4x, respectively. Valuation seems attractive and investors can look for long-term investment in this PSU," the Choice Broking note adds.
RVNL is a financially sound company. Between FY15-18, its top line grew from Rs 3,146.5 crore in FY15 to Rs 7,597.4 crore in FY18, translating into a compounded annual growth rate (CAGR) of 34.2 per cent. Profit after tax (PAT) has grown at robust pace of 19.2 per cent (CAGR) during the same period i.e. from Rs 336.8 crore in FY15 to Rs 569.9 crore in FY18. One cause for concern, however, is the PAT margin, which has dipped 320 basis points (bps) over the period to 7.5 per cent in FY18.