Rites Ltd Q3 FY2023 Concall Summary

Key Takeaways

• Profits over topline, delivered: Core EBITDA margin rose to 26% and PAT margin to 20%, driven by selective order targeting and a 6% YoY drop in employee cost from a deliberate mix shift toward contract staff.
• Turnkey is the swing factor, now in EPC mode: Turnkey revenue more than doubled YoY and margins swung from ~0% to ~5%, but the structural shift from cost-plus to EPC tenders makes this a tougher game to sustain.
• Consultancy identity is non-negotiable: Management was explicit that RITES is "primarily a consultancy company" and will keep consultancy at 50%+ of revenue, even as the order book tilts toward longer-duration Turnkey projects.
• QA margin reset is coming, and it is temporary: The new empanelment order splits IR inspection work four ways; management flagged a near-term margin hit in QA and is racing to backfill with non-IR clients.
• What to watch next quarter: Whether the flagged QA margin dip materializes and how quickly non-IR inspection wins offset it, plus any concrete export order beyond the small Bangladesh locomotive deal.

Profitability & Cost Structure

• Margin expansion levers working: Core EBITDA margin improved 300 bps YoY to 26% because the company selectively targeted key orders and key projects, while PAT margin moved from 18% to 20%.
• Employee cost engineered down: A 6% YoY reduction in employee cost came from tweaking the mix of regular and contractual employees for better effectiveness based on project profitability, a lever that directly supported margin maintenance.
• Turnkey margin turnaround: Q3 Turnkey margins improved to ~5% from ~0% YoY, and 9-month Turnkey margins rose to 4.2% from 1.3% YoY, driven by effective and timely execution plus pulling margin from both man and material.
• The Turnkey margin ceiling is real: Management cautioned that normally it is very difficult to bring Turnkey margins above 2–3%, so maintaining the 4–5% range is a tough exercise; the endeavor is to keep it as high as possible.
• Growth strategy is profit-led, not revenue-led: Management stated they never targeted double-digit revenue growth; the strategy is healthy growth in PAT and core EBITDA while maintaining a steady core EBITDA margin, with substantial dividends to shareholders.

Mithal: "We have never said that we are targeting a double-digit growth in the revenue. We are very, very clear that our taking of orders and our revenue will all stem from our core strategy and vision of having a healthy growth in the profits, the healthy growth in the EBITDA and maintaining a margin -- a steady core EBITDA margin in spite of the changed ecosystem of competition in all our 4 segments of revenue."

Revenue Mix & the Consultancy Anchor

• Consultancy grew 16% YoY but share dipped: Consultancy revenue share sat at 46–47% this quarter, below the 50%+ target, solely because export contribution was down; management expects the mix to even out as exports recover.
• Turnkey more than doubled, skewing the mix: Turnkey revenue grew 115% YoY, and because Turnkey projects take 3–4 years to execute, a larger percentage of the order book will be Turnkey going forward.
• Turnkey revenue capped at ~25%: The constant endeavor is to keep Turnkey contribution at not more than ~25% of revenue on a steady basis, though it may vary quarter-to-quarter.
• Leasing grew 10% YoY, rounding out the four-segment revenue base.
• REMCL delivered 27% revenue growth and 37% PAT growth YoY, driven by increased electrification in Indian Railways and substantial traffic growth; REMCL is the nodal agency for traction power procurement.

Mithal: "We are and will remain primarily a consultancy company. We are not primarily a construction company."

Order Book & Sectoral Wins

• Order book grew 10% QoQ: 65 orders totaling INR 1,200 crores were booked between September and December, of which 60-plus were consultancy orders spanning highways, buildings, metros, city planning, airports, ports, waterways, and rail infra, all at good margins.
• Station development is scaling: RITES is already executing three major stations as Turnkey EPC (Varanasi, Ayodhya, Kollam) and recently won a PMC order for Somnath station on competitive bidding mode.
• Northeast highway push: ~10 orders totaling ~INR 23 crore were received in a span of a few days.
• City planning orders booked: A logistic plan, a pilgrim management plan order from Ayodhya, and a mobility plan for Kolkata.
• Rail connectivity pipeline active: RITES is pitching aggressively, both competitive and nomination basis, for IR rail connectivity to coal fields, ports, power plants, and cement plants, with clients including Coal India subsidiaries, NTPC, ports, and private players.
• Diversified bidding underway: The company is pitching for bids across metros (Tier 1, 2, 3 cities), highways (UP, Kerala, Northeast), airports, DFC, and high-speed rail corridors.

Quality Assurance: The Margin Overhang

• QA contributed INR 99 crore this quarter, described as a good contribution, and includes both IR and non-IR work.
• The empanelment reset is the risk: An order of empanelment has been placed for four agencies including RITES for QA work; the revenue seen in Q3 and part of Q4 is from before the new order kicks in, because inspection calls happen when the product gets ready, creating a 2–3 month lag.
• Margin impact is flagged and temporary: Management confirmed that in the coming months there will temporarily be an impact on margins in the QA stream as the new empanelment order takes effect; the effort is to minimize the IR impact by winning non-IR clients and bring margins back to original levels in the coming quarters.
• Non-IR offset in motion: The company is pushing hard to increase the non-IR contribution ratio every quarter to negate the impact of the IR portion opening to four players in the shortest possible time, described as a few quarters.

Mithal: "While there -- yes, you're correct, in the coming months, you will temporarily see an impact on the margins in the QA stream of revenue. But I'm sure in the coming quarters, we are -- I thought it'll bring it back to the original levels."

Exports & New Business Development

• Export score opened after a long hiatus: A small export order of two locomotives for Bangladesh worth about INR 10 crores was received, ending a 2.5–3 year dry spell.
• Pipeline is at advanced stages: Across prospective clients, discussions are at quite advanced stages, whether at bidding or negotiation stage; management is pushing very hard to convert into finite orders and expects visible results in the coming months.
• Funding is the bottleneck: Export orders take time because of funding arrangements; negotiations are at final stages of trying to get funding tied up.
• ISA certification unlocks new inspection avenues: RITES became ISA-certified, the only PSU and only the second company in India to get this certification, opening up inspection opportunities in the metro sector and other prospective clients.
• Sustainability business seeded: An MoU with IIT Kanpur's sustainability department makes them the technology partner for all RITES sustainability initiatives including clean air, solid waste management, and net zero; the company foresees this maturing into orders and revenue in the coming quarters.
• REMCL net zero opportunity: REMCL is mandated for net zero emission initiatives; various tenders, RFPs, and RFQs have been floated for solar, wind, and combination projects in RTC/developer mode, expected to fructify in coming months, with RITES gaining as consultant.
• Israel rail JV: RITES has been shortlisted as a consortium and will be submitting a bid; management declined to elaborate further, stating they will inform exchanges if anything matures.
• MoU with Ministry of Defence: Signed for certain sectors where RITES can do inspections; management declined to provide details on quantum or specific areas.

Mithal: "The trend has started. We have already opened our score, which maybe a small order of only 2 locomotives of about INR 10 crores, for Bangladesh export. But yes, it encourages us that after a high test of about 2.5, 3 years, the trend has started."

Guidance & Commitments

Key Metrics