Rites Ltd Q2 FY2023 Concall Summary

Key Takeaways

• Resilient quarter, multi-stream offset: Export revenue dipped as orders wound down, but Turnkey surged ~30% QoQ and high-margin consultancy held firm, keeping core EBITDA margin at 25%+.
• Export transition gap is the near-term overhang: With ~₹300 crore of export order book remaining and new wins still in the pipeline, management sees a 2–3 quarter revenue gap it is trying to compress to 1–2 quarters.
• Order book replenishment underway: 70 orders worth ~₹440 crore booked in Q2, mostly consultancy, plus a ~₹250 crore Bangalore Metro depot Turnkey win and a ~₹160 crore Kolam station EPC order.
• QA business faces structural headwind: Indian Railways’ move to a competitive panel of 4 QA agencies will compress both RITES’ top-line share and margins from that client, prompting a push into non-IR and international QA.
• What to watch next quarter: Whether the export order pipeline converts in time to narrow the transition gap, the pace of Turnkey execution to sustain the offset, and any further clarity on the QA panel’s revenue impact.

Export: The Transition Gap

• The dip: Export revenue fell in Q2 because the balance portion of existing orders was evening out while efforts for new orders were still in the pipeline.
• The remaining book: FY23 began with a ~₹450 crore export order book; ~₹150 crore executed by Q2, leaving ~₹300 crore, of which ~₹200 crore in shipments is maturing primarily in Q3 and partly in Q4, and ~₹100 crore is ongoing O&M.
• The gap: Management foresees a gap of 2 to 3 quarters between current export orders finishing and fresh export revenue starting.
• The pipeline: Targeting 3–4 countries across traditional clients in Southeast Asia and Africa, plus new clients in Latin America and Central Asia; management is confident of getting an order but calls the timing speculative and declined to provide an order inflow target.
• The ambition: Compress the transition gap to 1 or 2 quarters so export revenue follows a flatter, growth-like curve rather than a sinusoidal one.
• The margin context: Export is a high-margin business (commissioning and O&M) and will continue as a major part of revenue, so the gap matters for profitability mix.

Rahul Mithal: "Our effort is to reduce this to maybe 1 or 2 quarters so that as we transition rather than a sinusoidal curve, it should be as much as a flat or a growth curve in terms of export revenue."

Turnkey: The Offset Engine

• Sequential surge: All Turnkey projects are in full swing, with ~30% sequential growth from Q1 to Q2.
• Revenue mix role: Turnkey contributed to offsetting the export shortfall in Q2, and the current run rate is expected to continue with a push to increase it further in the coming 2–3 quarters.
• Order book execution: Median execution time is ~3 years, with a range of 2 to 4 years depending on land acquisition issues.
• Recent wins: Kolam station Turnkey order (~₹160 crore) received recently in EPC mode; Bangalore Metro depot Turnkey order (~₹250 crore RITES share) declared to the exchange.
• Railway capex tailwind: Electrification work is moving fast, with IR targeting most electrification by the later part of next financial year; new line and doubling orders are in good execution stage; station development is just beginning, so Turnkey inflow from rail infra is expected to continue with growth targeted.
• Margin caution: Turnkey margins are lower than consultancy, and the shift to EPC mode tendering (e.g., Kolam station) raises time and cost overrun risk, so timely execution is critical to maintain originally envisaged margins.
• Selective approach: The company has been doing Turnkey for about 5 years, takes it selectively, and targets it at ~25% of the revenue mix on an average year-on-year basis.

Consultancy & Margins: The Core Anchor

• Margin defence: Despite export (a good-margin stream) dipping in Q2, margins held steady; core EBITDA margin was 25%+ in both Q1 and Q2 and maintained year-on-year.
• How it worked: Shortfall in export revenue was made good by increased Turnkey revenue and by concentrating on key consultancy, high-margin areas to maintain margin.
• Revenue mix target: Consultancy contribution to top line to remain 50%+; Turnkey ~25% on an average year-on-year basis; export of rolling stock also targeted at 20–25% of revenue.
• Consultancy pipeline: Number of orders in the pipeline across metros, buildings, highways, and smart cities; the trend is good and management hopes to build further.
• Competitive pressure in highways: Smaller consultancy firms are entering and undercutting margins.
• Identity anchored: Management is explicit that the company will remain primarily a consultancy company and will not chase a ₹7,000–8,000 crore top line by loading up on Turnkey at the expense of margins.

Rahul Mithal: "We are primarily a consultancy agency, and we would look at watching the bottom line carefully also rather than just aspiring to be Rs. 7,000-8,000 crore by taking Turnkey order and sacrificing our margins."

Quality Assurance: Structural Headwind

• The policy change: Indian Railways has taken a policy decision to move to a panel of QA agencies; once implemented, RITES’ percentage of QA work from IR as a client will reduce.
• The margin hit: Competitive price bidding among 4 empanelled agencies is expected to hit both top-line share and margins from the IR QA business.
• The offset strategy: The company is working to expand non-IR QA clients domestically and internationally, across railway and non-railway systems, to offset the dent.
• H1 performance: QA revenue grew ~30% YoY in H1 FY23 (₹187 crore vs ₹144 crore), so the headwind is forward-looking, not yet in the numbers.
• Disclosure gap: Management declined to give a specific client-wise revenue number for IR’s share of total QA, calling it “not fair.”

Rahul Mithal: “Definitely, in terms of since there would be a competitive price bid between the 4 empanelled agencies. So yes, the top line share as well as the margins would also take a hit in terms of the IR QA business.”

Leasing, REMCL & Adjacent Streams

• Leasing: A good revenue and margin source, with 65+ locomotives leased with O&M and continuous orders from new clients; the company also does O&M for siding owners’ locos and wagons. Recent orders include ₹6 crore for locomotive leasing and ₹19 crore for O&M of leased rolling stock. Expected to see healthy growth in both top line and bottom line.
• REMCL traction power: REMCL handles about 70%+ of Indian Railways’ traction requirements; efforts are on to increase this to 100%.
• REMCL renewable growth: REMCL will see growth as solar initiatives fructify in coming quarters, though management would not speculate on the quantum.
• REMCL asset model: A conscious decision has been taken that REMCL will work on a developer model for renewable energy (solar/wind) and will not invest capex in owning any renewable energy asset going forward.
• Wagon JV (SAIL, Kulti): Scope exists to leverage existing capacity for more wagon manufacturing for IR and export wagons, and possibly to explore passenger stock in due course.
• RITES Videsh & sustainability: New aggressive endeavors targeting international consultancy and sustainable pollution control initiatives; expected to contribute more to top and bottom line. MOUs signed with academic institutions (IITs) and business companies (TCS, other PSUs) to complement in-house strengths in areas like sustainability, clean air, and solid waste management.

Balance Sheet & Capital Allocation

• Debtors: A temporary spurt in debtors occurred; export order debtors are mostly getting cleared, with ~₹100 crore of ~₹118 crore Sri Lanka outstanding received recently; efforts are on to reduce the balance from Mozambique.
• CWIP increase: The increase is due to building projects contributing temporarily.
• Capex: On track to maintain ~₹150-odd crore for FY23.
• Dividend: A second interim dividend of ₹4.5 per share was declared, taking the cumulative to ₹8.5 per share; the company is on track versus last year’s ₹17 per share.

Guidance & Commitments

Key Metrics