Rail Vikas Nigam Limited — Primary Offer: On the right track

A play on the growing spends of the Railways in areas such as construction of new lines, gauge conversion and rail network electrification, Rail Vikas Nigam Limited (RVNL) may be a healthy bet for the long term.

RVNL earns its revenue by executing projects for the Ministry of Railways and has a successful track record of completing tasks efficiently.

A solid order book that gives it substantial revenue visibility, an asset light model for project execution and presence of fairly well-spread pan-India implementation teams are positives for the company. A fairly sound financial position is another beneficial factor for RVNL.

Investors with at least a two-year perspective can subscribe to the initial public offering (IPO) of shares of the company, in which the Government of India is diluting a little over 12 per cent of its stake.

At the upper end of the price band (₹17-19), the offer asks for less than eight times its annualised 1HFY19 per share earnings, making the issue very reasonably priced. Retail investors would get a discount of ₹0.5 on the offer price.

Between FY15 and FY18, RVNL’s revenue grew at a compounded annual rate of 33.7 per cent to ₹7,822 crore, while net profits expanded at 19.1 per cent over this period to ₹569 crore. In the first half of this fiscal, the company recorded ₹3,707 crore in revenue and ₹254 crore in profits.

Proven execution record

RVNL executes projects on behalf of the Ministry of Railways. Since its incorporation in 2003, the company has executed as many as 174 projects worth nearly ₹20,600 crore.

Two of the major tasks that RVNL accomplishes are ‘doubling’ or providing additional lines along existing tracks to ease traffic constraints and laying new lines for augmenting the rail network across the country.

These two activities generate more than three-fourth the total revenue of the company. RVNL has undertaken one-third of the projects commissioned annually for the last five years by the Railways.

Between FY14 and FY19, planned capital investment by the Government for railway infrastructure has more than doubled to ₹1,48,500 crore. In general, the Government has been able to achieve more than 90 per cent of its planned investment.

Investment in the construction of new lines has grown at a compounded annual rate of 34 per cent between FY17 and FY19 to ₹28,500 crore.

RVNL is also looking at securing rail-related projects from other public sector undertakings.

The company also executes tasks such as railway electrification, gauge conversion and metropolitan transport projects (setting up of metro lines and suburban network in Kolkata and Hyderabad).

Operational positives

The company has order book worth ₹77,504 crore as of December 2018. To put this value in perspective, it is more than 10 times RVNL’s FY18 revenue. Thus, the firm has substantial revenue visibility for the next several years.

The company works on the basis of an asset-light model. It requires the contractor to provide all the machinery, plants and stores for the execution of projects. The company also relies on the Ministry of Railways for deputation of manpower and supervision of tasks.

RVNL has a pan-India presence with 43 project implementation units (PIUs) as of December 31, 2018 to enable efficient implementation of projects at various locations.

Thus, the company is able to nimbly execute tasks without taking on assets and is also able to juggle its project team to accomplish works on time and in an efficient manner.

The company has a fairly healthy financial position. The debt-equity ratio as of 1HFY19 was just 0.5. It has cash and bank balance of ₹1,272 crore as of September 2019, which would be more than 30 per cent of the market cap of the company at the upper end of the price band.

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

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