Rail Vikas Nigam Limited(RVNL) IPO – Should you subscribe to this Rail PSU?

Rail Vikas Nigam Limited(RVNL) is all set to become the 3rd Rail PSU to come to the Indian Primary markets to raise capital. So does this rail company offer any value to the investors or are you just going to help the Government exceed its divestment target? Lets find out!

About RVNL

RVNL (Rail Vikas Nigam Limited) is a wholly owned government company, a Miniratna (Category – I) Schedule ‘A’ Central Public Sector Enterprise, incorporated by the Ministry of Railways (“MoR”) under the Companies Act, 1956 on January 24,2003, as a project executing agency working for and on behalf of MoR.

Their activities under the various plan heads can be classified as under:

1. New lines

2. Doubling

3. Gauge conversion: This includes conversion of meter gauge lines to broad gauge railway lines.

4. Railway electrification

5. Metropolitan transport projects: Setting up of metro lines and suburban network in metropolitan cities

6. Workshops: This includes workshops for repairing rolling stock and other repairs.

7. Others: This includes but is not limited to the construction of car sheds, construction of bridges including rail over bridges, building of subways in lieu of crossings etc.

Since their inception in 2003, Ministry of Railways has transferred 172 projects to them of which 166 projects are sanctioned for execution. Out of these, 60 projects have been fully completed totaling to ₹167,777.00 million and the balance is ongoing. They have an order book of ₹686,836.20 million as on February 28, 2018, which includes 106 ongoing projects.

Issue Details –

Price band: Rs 17- 19
Min Lot – 780 Shares
Dates – 29th March 2019 to 03rd April 2019

Risks –

As of February 28, 2018, their order book from MoR was ₹ 658,641.60 million or 95.90% of their total order book.

They largely depend on MoR for funds and manpower supply which may lead to a delay in the execution of projects and limit the number of projects undertaken by them.

They are allotted rails and sleepers for laying of tracks for their projects viz., new line, gauge conversion and doubling by the MoR. However, in the recent past, there have been instances where MoR has not allotted rails to the Company as per requirements, which has resulted in delays in execution of projects.

The Contingent Liabilities of the Company is approximately equal to the potential market cap of the Company.

Delay in land acquisition, forest/wildlife related clearances and approvals of plans and drawings, granting of power and traffic blocks for projects may lead to time and cost overruns

The company will not receive any proceeds from the Offer. (as it is a complete offer for sale)

Valuations –

Debt to equity as of FY18 is 1.14

The company reported an EPS of Rs 2.73 as of March 31, 2018. Therefore the issue is priced at price to earnings ratio of 6.9 times. 

18.82 Rs is the book value as per march 31, 2018 (no of shares is 2085020100 and shareholder equity is Rs 3924 Cr). Therefore , at the upper price band issue is priced at 1.05 times its book value.

Peer Comparison – 

Conclusion –

RVNL is solely dependent on MoR for its projects and finance. Even though its issue is priced favorably and a few percentage points of listing gains seem probable, this issue should be “Avoided”. IRCON and RITES are into project consultancy as well which earns them better margins and unlike RVNL they are not heavily dependent on one client.

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Some more facts about Railways –

Railways:

In 2016, Indian Railways has announced a Rs  856,020 crores capex plan for 2016-20 (five years), 90% more than the combined capital outlay in the previous 15 years. The railway transport infrastructure services industry isexpected to witness project commissioning worth Rs 87,590 crores during 2017-19

Railways in India:

India has the fourth largest railway network in the world with a total network of 67,368 route kilometer (rkm), out of which 25,367 route kilometer (rkm) are electrified lines and with 7,349 stations as of March 2017. It runs nearly 21,000 trains daily; i.e. approximately 13,313 passenger trains that carry more than 2.3 crore passengers and approximately 8,000 freight trains that carry around 3 million tonnes of freight per day

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