RITES Limited (RITES) Earnings Call Transcript

Ladies and gentlemen, good day, and welcome to the Q4 FY '23 Earnings Conference Call of RITES Limited, hosted by Elara Securities Private Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Harshit Kapadia from Elara Securities Private Limited. Thank you, and over to you, Mr. Kapadia.

Thank you, Michelle. Good morning, everyone. On behalf of Elara Securities, we welcome you all for the Q4 FY '23 and FY '23 Conference Call of RITES Limited. I take this opportunity to welcome the management of RITES Limited represented by Shri Rahul Mithal, Chairman and Managing Director; Shri BP Nayak, Director of Finance Shri AK Singh Director of Projects; and should Shri Deepak Tripathi, Director, Technical. We will begin the call with a brief overview by the management, followed by a Q&A session. I'll now hand over the call to Rahul sir, for his opening remarks. Over to you, sir.

Good morning, morning, everybody. Let me begin with the safe harbor statement. The presentation, which we uploaded on our website yesterday, and all discussions during the call today may have some forward-looking statements. These statements consider the environment we see as of today and obviously, carry a risk in terms of uncertainty because of which the actual results could be different, and we do not take undertake to update those statements periodically. So we at the outset also introduced the latest addition to our Board, Mr. Deepak Tripathi, our Director, Technical. He is from the 1990 batch of Indian Railway Service of Mechanical Engineers. He have a wide experience across various portfolios in the Railways, in Konkan Railway. And then he's a graduate in mechanical engineering with doctorate and post graduation from [ NITI ], specializing in operations, quality and lead management. So we have functional Board our Directors of the functional Board here. Let me at the outset break down the numbers for you in brief before I take the questions. As you see the revenue quarter-on-quarter, if you compare has been down by about 11%. If you see FY to FY, it's been flat, primarily, the export of rolling stock has been the reason for this. There is about a 70% to 80% drop in the contribution of this stream of revenue. And this being a high top line, high bottom line contributor, the key point is that in spite of this drop, let's see where the profits and the margins have gone. So my consultancy stream of revenue has seen an all-time highest ever consultancy revenue of about INR 1,189 crores, which is about an 18% jump year-on-year. And further to this, international consultancy, which I've been saying in the previous interactions under the RITES Videsh initiatives saw a 50% jump year-on-year, which is a high-margin contributor. So because of this, in spite of about 70% to 80% drop in the contribution from the export of rolling stock stream of revenue, the profits have gone up, the EBITDA has gone up by about 6% to 7%. And the margins also have gone up on an average by about 1%. So the core EBITDA margins have gone up by about 1%, they are safe in the range of about 27%. The PAT margins have also gone up by about more than 1%, so we are about 21%. So moving forward, this is the building up on this core consultancy stream of revenue and getting more export of rolling stock orders in the coming FY. So those are the opening backdrop, and I'm open to questions now.

[Operator Instructions] The first question is from the line of Shreyans Mehta from Equirus.

Congratulations for strong operating performance Sir. First question from my side is primarily, what is the revenue growth that we are targeting for this year? And also in terms of exports, when can we see traction in the export orders?

So the first part of your question is regarding the growth. You see, we are -- as we have been reiterating the bottom line growth-driven company, we will definitely target growth over the previous year's performance. You have seen a growth of about 6% to 7% in our bottom line. And that has been in spite of such a muted contribution from export of rolling stock. so with this trend of growth in the consultancy stream, which is a good margin area, we will build up in this growth in the profit line -- bottom line. And by latter part of the year, this contribution from export of rolling stock should also add to this. So it will only -- we are aiming to better this growth of 6% to 7% in the bottom line. As far as finite orders from export of rolling stock is concerned, we are in very close now in a number of prospective clients. You see there is a lot of pent-up demand in a number of prospective clients across Africa and Southeast Asia for export of rolling stocks. However, they -- post COVID, they are taking time to get their funding mechanisms in place because the economy is also recovering. But the stage at which we are in now, we are very confident that very soon in aiming to at least maybe in this quarter itself try and get some finite orders so that my latter part of this FY, the revenue from these orders start contributing.

Got it. And if you could quantify the order size or individual order size of your exports.

[Operator Instructions] The next question is from the line of Yash Gupta from Thinksight Advisory.

So this quarter, we have seen a margin dip across all of our verticals, whether it's consultancy, export or [turnkey]. How you are looking at this? And what are the trajectory we can expect going forward?

So, I think -- no, Yash, let me correct you. There has been an improvement in margins in all my streams of revenue. In fact, if you see the consultancy itself year-on-year also and that is a key point. My consultancy there is an improvement almost 3% in the margin. There is an improvement in the turnkey, which is in any case a low margin area that also has improved from about 3% to 4%. My QA, which is also an important area, has also improved in margin. So except the contribution from export of rolling stock there has been an improvement in margin from my other streams of revenue. And that's the very reason why you see a growth in the improvement in the margins by about 1%, 1.5%, whereas the EBITDA margin, which in the range of about 27% now or the PAT margins, which are in the range of about 21% now.

The next question is from the line of Rohit Natarajan from Antique Stockbroking.

Yes. Sir, my question is on -- to continue on the earlier point that you made on the export orders. Can you give us a time line as in before, what time will you be looking at these export order inflows to flow in? And the part of the question will be will it not have the spillover effect in FY '25 too?

Yes, for sure. You see first part regarding the time line we are aiming to get it as early as possible. Our expectations is maybe very soon, maybe in this quarter itself. I mean until we have a finite order in hand, it will not be correct for me to speculate. However, as I very clearly reiterated that we are in very advanced negotiations with a number of prospective clients, and I'm sure that we should be able to convert it into a finite order very soon and export of rolling stock by its very nature are long lead orders they take some time for manufacture and then shipment and the revenue starts maturing only when the shipment happens. So the aim is to get the some orders in this first quarter itself, so that the latter part of FY, the revenue starts coming in from these orders, and they will definitely spill over to the next FY. And the aim is that this gap of about 2, 2.5 years, unfortunately, because of the COVID period where there were no fresh orders has resulted in the gap in contribution from the stream of revenue. So moving forward, we are aiming to have a mix of a number of rolling stock export orders so that there is a steady stream of revenue contribution, which continues starting from latter part of this FY.

The next question is from the line of Sanjay Doshi from Nippon India Mutual Fund.

Congratulation on a very robust year despite all the challenges that you keep on highlighting. Sir, my only question is on the overseas consultancy business, which is getting very strong traction now in the last 12 months that we have seen. If you can just help us appreciate what has been RITES doing it right to be able to make good of this opportunity. And if you can help us understand this opportunity from a 3, 5-year perspective?

Thank you so much. In fact, you've asked a question very close to the heart of our entire company. We have made very aggressive forays under the RITES Videsh initiative in the last FY across areas of consultancy, across continents. And as post COVID, the world has opened up, we have been getting orders and leads and revenue realization across sectors. So whether it is a highway project in Guana, the metro in Mauritius, we are doing a rail infra and a highway project in Bangladesh. ICT project, airport project. So across that, we are -- that has made it possible to see a 50% growth in the international consultancy revenue. Moving forward, we are confident that this trend will continue, the kind of traction, the kind of mileage and the kind of lead -- and we are getting across countries. We are sure that we will be able to capitalize and build up on this trend. And you'll see in this FY and moving forward also, this is going to continue to grow.

The next question is from the line of Gautam V, an individual Investor.

Congratulations on the good results. Earlier, there was some process around expanding the project portfolio for the export business. I believe we were targeting new countries with different gauge of railways. Could you please throw some light on the [indiscernible] in that space?

Yes. In fact, that is our core focus area. You see -- just a bit more forward, we got this very interesting order of export of rolling stock to Mozambique, locomotive, coaches and DMUs. And this was case gauge order, which is unique. It is 1,067 mm, a little more than the meter gauge. And there are about 11 countries in Africa, neighboring countries across Africa, which have this gauge. So with this order as this order matured and we did the shipment in the last '21, '22 and part of it in '22, '23, this has got a lot of mileage, and that is the reason why a number of countries in Africa have reached out to us to get similar kind of stock in cape gauge. We are more than equipped for it. And this is what, as I said, we have been targeting very aggressively. These countries are getting their funding mechanisms in place as I said, post COVID, they are taking time, a little time to recover. But I said I'm confident that we should be able to translate this into orders very soon.

We have the next question from the line of Ankur Sanwal, an Individual Investor.

Sir, my question got answered by Mr. Sanjay but thankyou sir.

The next question is from the line of [indiscernible] from Alpha Invesco.

I wanted to ask, in last quarter, you had guided that there will be some non-railway orders in the QA business. can you just give us a breakup of what it was last year and this year?

See, on an average, we have both kinds of clients. Whether this is IR, Indian Railways as a client and non-India Railways across various sectors. So as I said, this -- as I said in the last interaction, as the Indian railway stream of revenue has now opened up to three other players, our aim is to continue to tap more and more further clients so that the overall stream of revenue from the stream remains intact. And this quarter itself, you would have seen that there is a growth in this stream of revenue. There is a contribution of growth in an about 10% growth. So this has been possible because in spite of the competition from Indian Railways as a client we have been able to tap a number of non-Indian railway clients also. And this is a trend that is going to continue. But overall, you should be able to see a steady stream of revenue from the QA sector.

The next question is from the line of Vishal Periwal from IDBI Capital.

Yes. And one question on the consultancy side. We have order book which is like [ INR 27-odd ] billion. What is the export side contribution in this? And if you have the same numbers for FY '22 also?

Yes. So you correctly said the out of the total INR 5,870 crores order book, the turnkey is about INR 2,850 crores; the consultancy is about INR 2,700 crores; export is only about INR 100 crores balanced, export of rolling stock. And leasing is INR 150 crores and balance about INR 100 crores is RMC. So the....

In consultancy, because there is a line item in consultancy, every line item of domestic and export. So within this order book of INR 2,000 crores -- sorry, INR 27-odd billion, what is the export side order book of consultancy?

No. Export is a separate -- export line item is for export of rolling stock. That is INR 100 crores. The market the revenue streams and export of rolling stock, consultancy is INR 2,700 crores, which includes all sectors, whether some of them are the domestic, some are international consultancy, which is the total consultancy pipe. Export of rolling stock is over and about INR 2,700 crores, which is pure export of rolling stock, which is INR 100 crores balance.

If I may ask one last question. So I think the pie of this export side, consultancy has increased in this year to around 13-odd %. So it looks like there is a benefit of operating leverage in this particular line item. Can you guide like on how this number could be in FY '24 or '25, maybe a ballpark will be helpful.

So you see, INR 1,189 crores is the total revenue from my consultancy stream, which is a growth of about 18%. Out of that INR 1,189 crores, there is an international consultancy element also. This is non-export of rolling. So pure international consultancy, which has seen a growth of about 50%. so that is what I've mentioned some time back that this is an area moving forward, this trend is definitely going to continue because within the consultancy pipe itself, between domestic consultancy and international consultancy. International consultancy gives me a slightly better margin -- so overall -- and that is the reason why in the overall consultancy pie, the margins have gone up by about 3%. That is primarily that in spite of competition in the domestic sector of consultancy because of my growth in international consultancy, I have been able to have a growth in margins of about 3%.

The next question is from the line of Dixit Doshi from Whitestone Financial Advisors.

In terms of consultancy, if we see the consolidated numbers, the revenue is slightly higher, I think, approx INR 1,300 crores. And there, our margins are almost like 50%. So do you feel that such margins are sustainable? And secondly, on the export of rolling stock business. So I understand that you cannot guide for any exact number for the future orders. But let's say, in FY '23, we did INR 300 crores top line, a year before that was almost INR 1,000 crores. So can it be like INR 400 crore, INR 500 crore consistently every year, let's say, once the cycle of starts.

Yes. Very correct. In fact, you've got complete right details and you hit the nail on the head. In fact, consultancy, the total consultancy is INR 1,190 crores, INR 1,189 crores, which includes domestic consultancy, international consultancy. It includes the QA, the inspection QA wing also. So this has overall seen a growth of about 18%. Yes, this has seen very good margins, and that has been primarily because, as I said, some good growth in our international consultancy. There was a good growth in our QA business. So moving forward, while the stress on margins due to conventional areas of domestic consultancy will be there. And that was there in the last FY also. But in spite of that, the consultancy itself saw a good growth in margins, not only in number but also growth in margin. So moving forward, our focus in consultancy would be as far as domestic sector is concerned, focus more and more on high-margin skilled area of consultancy, which is our core niche strength, it's metros, bridges, tunnels, urban engineering, city planning. And in terms of international consultancy to grow further aggressively, so that overall, you see a growth in the margins of consultancy also or at least be able to sustain margins to the extent possible, if not grow, but at least grow in terms of the top line and bottom line in consultancy. As far as export or rolling stock is concerned, you made a very good assessment of the kind of steady basis revenue on an annual basis, which we are aiming at. As you see, INR 966 crores was in '21, '22 and about INR 300 crores in '22, 23 which is primarily these two orders of Mozambique and Sri Lanka. So going by the past trend in the past few years that RITES has been exporting rolling stock to a country and the average size of the orders that we get plus the lead time that it takes to manufacture and export them. I think a fair enough assessment or at least a target on a steady basis of about INR 400 crores to INR 500 crores on an annual basis would be a good target to aim at.

[Operator Instructions] The next question is from the line of Uttam Kumar Srimal from Axis Securities Limited.

So last year, we did a turnkey revenue of around INR [ 915 ] crores. So what kind of revenue growth we are expecting in currently this year?

So you see turnkey has grown quite a lot, as you see from the numbers, and that has primarily up because of the, what, 70%, 80% drop in the revenue contribution from export of rolling stock. So the top line has been -- and that's why the overall revenue is about flat on a year-on-year basis. And that's basically because of a substantial growth in the contribution from the turnkey segment. However, having said that, as we have been very clearly saying that we are a consultant company, our key focus is -- continues to be on the high-margin consultancy area. Moving forward, as we mature -- some export of rolling stock orders mature, the contribution of the Turnkey segment to our overall revenue is going to gradually taper off. So our main focus will and has been and will remain on consultancy as well as export of rolling stock.

The next question is from the line of Naysar Parik from Native Capital.

I just want to ask on the consultancy side, right, the order book that we have, can you give us split of out of that, how much is nomination versus competition base that we've won? Overall, it seems like it's 50-50, but is it different on the consultancy side?

So you see the trend has been that in the last year all my clients across sectors, across states, across PSUs, across private entities, across the Indian Railways as a client has now started moving on a monthly or a quarterly basis from nomination to the competitor bases. And you put it correctly that overall, in fact, it has now moved to about 50% on a competitive basis. So it would be very difficult to -- because we operate in about 8, 9 key sectors, about 10 sectors across various sectors. So every sector has a different percentage of the competitive versus nomination. For example, in the metro sector, I would say it is all 100% on competitiveness. It is 0 on nomination. So it is primarily varies from sector to sector. And recently, we have got a number of projects on ropeways in the DPRs for the port connectivities for the IMS from NHLML, all these are all on competitive bidding basis. So this is again 100 to 0. Yes, certain clients like some PSUs or certain stages, which gives some orders may be in rail connectivity, rail infra on nomination basis. But we extent of variation from sector to sector is very large.

And just another INR 2,700 crore order book that you have, out of that, how much is executable in this year, FY '24 and how much beyond? And secondly, I think this was asked earlier, but what is the mix between how much what percentage is international in this INR 2,700 crores.

So first part of your question, you see, the consultancy, as you would appreciate that very nature has orders varying from time lines of about 3 to 6 months to order varying from about 3 to 4 years. So that's a wide mix depending on the nature of the order. You could be doing a PFR or a DPR which you have to do in 3 to 6 months. You could be doing PMC or general consultancy of a CapEx infra project, which will last in construction for about 3 years. So it's the range varies very large. so two points. One, that INR 1,189 crores saw, was the consultancy revenue, an 18% growth year-on-year. So this year also, -- this is a trend that we are aiming at from a mix of the short-lead, medium-lead and long orders. And in terms of international consultancy, the revenue growth, which you saw in 50% growth year-on-year, that trend would definitely aim to be continued in this FY from this INR 2,700 crores part.

So broadly looking at overall growth and within that you see this for international, right?

Yes.

The next question is from the line of Rohit Natarajan from Antique Stockbroking.

Sir, if you could guide us what is the initial feel about export EBIT margins that you're currently negotiating with? I'm given to understand, I mean, the last -- in the last calls, you have indicated somewhere like 15% to 20%, but historically, we have clocked even much higher number. Is there any translation gains you expect or something of that sort?

So if you're talking about export of rolling stock, traditionally...

EBIT margins for that.

Yes. So export of rolling stock margins have been traditionally over the last 4, 5 years that if you see our stream-wise margins analysis, export of rolling stock has been in the range of about 20-odd percent. Now these would vary from order to order and not be possible for me to review the negotiations of the margins on each individual orders. I mean they would vary from order to order. But yes, that has been the trend of margins, and that is what would be the aim. However, as I mentioned with every passing year, this sector also becoming more and more competitive. And post COVID, all the prospective client countries in Africa and Southeast Asia, they are also a little cash strapped. So they are also looking at trying to optimize the order values because of their funding issues. So obviously, these margins will also be difficult to sustain. But yes, they have been traditionally in the range of about 20-odd %.

[Operator Instructions] We have the next question from the line of Gautam B, an Individual Investor.

Just wanted to understand the longer-term perspective. So are there any new business verticals or new products which are being developed. Just earlier, the previous Chairman had mentioned also some thought process around getting to road construction, et cetera. Maybe that is not you going forward, but if there are any other plans on business expansion. If you could please share some thought process for a 3- to 5-year view. That will be great.

Right. So coming to the second part of the question first, we are not construction company, and we will not foray into any kind of major diversification or any kind of even aggressive growth in being a construction company. We are a consultancy company. And as you have seen in the results of this year also, that has been the growth area. As I said, about 18% growth in the revenue and that is what has made it possible for the margins also to not only remain secure but grow and also the PAT to grow from more 6% to 7% in spite of muted contribution from export of rolling stock. So having said that, consultancy, both domestic and international across sectors will remain our focus area. And as far as diversification is concerned, one very besides tapping on the new areas of we announced in the budget last year and this year, Jal Jeevan Mission. Now that's another very important area which was announced here that is large budget allocation for that. We recently got an order from the Rajasthan Jal Jeevan Mission about INR 148 crores. And we hope to be able to capitalize on this, and we are aiming to drive that opportunities across it. Another very major area, which I've been mentioning in my past few interactions was that last year, we formed a new vertical called sustainability. And we were very confident that by latter part of the year, we would be able to tap the various opportunities across states and get some orders. And we are very happy that within a short period of less than a year, the newly formed vertical, we have been able to get orders from the Ministry of Housing and Urban Development in -- as a consultant for the solid waste management and used water management, we have been able to get orders in Bangalore for air pollution and solid waste management. And there's a lot of potential across states in sustainability. So that's an area, which is a new age area. It has a lot of scope that we are going to aggressively further grow in.

Understood. Sir, just one thing. On the cash balances, could you please throw some idea on what the balance looks like and what your plans is to be, utilization of cash.

You see, we got a cash balance of about INR 800 crores, and We are a low CapEx company. Our CapEx has been in the range traditionally of about INR 100-odd crores. This year also, we are aiming for about INR 100-odd crores. Moving forward, we don't see any major CapEx investment, and that's the very reason we like to give what we earn to our investors. And as you see with the final installment recommended by Board about INR 6 per share, makes it a total of INR 20.5 a share, which is about 92.8% of our profit we are giving back to the shareholders as a dividend. So that's going to be the trend that we are aiming for in the coming years also.

How much of this is the working capital requirement?

Our working capital requirements are very minimal, as I said, and we are a debt-free company, very minimal working capital requirements and a very low CapEx.