Rites Ltd Q1 FY2024 Concall Summary

Key Takeaways

• A quarter of deliberate transition: Revenue streams that historically drove profit, export and QA inspection, took a combined ~INR 26 crores YoY profit hit, but domestic project consultancy grew 10% and overall consultancy margins held at 44%.
• The QA reset is structural and now live: Railway inspection rates dropped to roughly one-fifth of prior levels for 60% of the QA business, a change that began cutting in this quarter and will persist.
• Export is a pipeline story, not yet an order book story: The export order book stands at just INR 56 crores; management is hopeful that Zimbabwe and Mozambique tenders convert in coming months but declined to speculate on timing.
• The consultancy pivot is working on mix: Consultancy contributed 53% of total revenue for the first time in many quarters, aligning with the stated vision of a niche consultancy company.
• What to watch next quarter: Whether any of the hopeful export tenders convert into finite orders, the pace of new client additions in the QA stream to offset the railway rate cut, and the trajectory of the sustainability vertical's order intake.

The QA Inspection Reset

• Rate cut mechanics: Railways divided its entire QA business among 4 players, with RITES as one. The new slab-based fee structure translates to an average inspection rate roughly one-fifth of the earlier rate, impacting the railway portion that makes up 60% of RITES' total QA stream.
• Compounding effect: New orders at the reduced rates started cutting in this quarter, while old inspection calls at the old rates are nearly over, so the full impact is now flowing through.
• Mitigation in motion: Management built up a new client base beyond railways and rationalized costs to blunt the impact, actions it described as parallel and already underway.
• DNV partnership as optionality: An MOU with DNV, a Norwegian inspection agency present in 100-plus countries, aims to complement geographies and strengths to explore more QA opportunities, though management called any quantification premature.

Mithal: "Few months back, railways floated a tender and they divided the entire QA business between 4 players, and RITES is one of the 4 players. And in that tender, there is a slabs of fee rate for the different slabs of the orders. If you translate it to an average, the reduction in the rates is about 1/5 of the rate at which inspection was being done earlier."

Export: Pipeline Rich, Order Book Thin

• Current state: The export order book is just INR 56 crores, with no fresh orders, only execution of old ones. Export contribution has been decreasing sequentially.
• Zimbabwe (NRZ): An agreement was signed during the Indo-African CII Conference, but the formal LOA will be released only upon approval of NRZ's requisite funding. It is not counted in the order book.
• Mozambique (CFM): RITES emerged L1 in global tenders for 10 locomotives and 300 wagons. CFM would follow due process to finalize; management declined to speculate on a timeline.
• Bidding pipeline: RITES is bidding and entering MOUs across countries, including global tenders for different rolling stock types, to minimize the export revenue impact. Management declined to disclose the value of tenders participated in, calling it speculative until clarity emerges.
• Execution reality: Even if orders convert, wagons take 9-12 months to execute and locomotives or DMUs take 2-2.5 years, so revenue contribution would be back-end loaded.

Mithal: "So our order books at exports stands at INR56 crores. As far as the NRZ, National Railway of Zimbabwe order is concerned, this was an agreement signed between RITES and NRZ during the IndoAfrican CII Conference a few months back. And that had a condition, as we declared to the stock exchange that the formal LOA will get released on approvals of their requisite funding. So that's why we are not counting it in the order book, as of now."

Consultancy: The Core Engine

• Revenue mix milestone: Consultancy stream contribution reached 53% of total revenue, the first quarter in many where it crossed the halfway mark, in line with the stated direction.
• Domestic project consultancy growth: Excluding QA, domestic project consultancy revenues grew ~10% YoY with good margins, driven by aggressive pursuit and expediting of high-margin orders.
• Order wins in Q1: About 70 orders totalling more than INR 300 crores, with 60-plus for consultancy. Wins spanned metro consultancy (Hyderabad Airport line, Chandigarh DPR, Gurgaon expansion), city mobility plans (Kolkata), ropeway orders (~INR 10 crores), and 4 semi-high speed survey orders from railways (~INR 34 crores), all won competitively.
• Station development: Orders include Kollam station (turnkey mode), ongoing work on Ayodhya and Varanasi stations (iconic projects), PMC for various stations, and a consultancy order for Somnath station. Focus will remain on consultancy mode, with EPC limited within the 25% turnkey pie.
• International consultancy: Currently 12% of the consultancy pie; management wants this to grow in coming quarters.
• Sustainability vertical: Formed last year by grouping existing work; within months secured orders for Swachh Bharat Mission 2.0, air pollution, and solid waste management. Management sees large budget allocations from states and central government as a very good opportunity.

Margin & Profit Bridge

• Headwinds quantified: Export stream had a YoY profit impact of about INR 16 crores; the QA inspection stream had a YoY profit impact of about INR 10 crores.
• Offsetting levers: Increased profit of about INR 10 crores from subsidiary REMCL helped contain the EBITDA drop to about INR 19 crores. Overall consultancy margins (including QA) were sustained at about 44%.
• Competitive pressure on exports: Management acknowledged that as export tenders become increasingly competitive, it will be tough to maintain margins at earlier levels, but the aim is to keep overall margin as safe as possible by focusing on other revenue streams.
• REMCL tailwind: The subsidiary performed extremely well, became debt-free last financial year, and has been declaring very high dividends. Management expects the growth trend to continue.

Mithal: "And as far as margins are concerned in Expotech, obviously, as more and more, these are becoming competitive tenders, it will be tough to maintain margins at the levels, which have been earlier. But the aim will be to try and keep an overall margin as safe as possible by focusing on other streams of revenue."

Strategic Partnerships & Subsidiaries

• IRFC and PFC MOUs: Signed MOUs with both IRFC and PFC for consultancy on due diligence of their investment proposals in infrastructure areas, opening a new advisory revenue stream.
• SAIL-RITES JV: Already secured a wagon order from Gatex and is trying to get orders for about 900 wagons.
• Jupiter Wagons MOU: For export wagon orders, RITES will source from Jupiter Wagons, an RDSO-approved firm, until the SAIL-RITES JV expands its own capacity.
• ISA certification: Received independent safety assessment certification, adding a credential for future consultancy mandates.
• IRSDC closure: RITES held a 24% share in IRSDC; all due processes are being followed for its closure and no hit is expected.

Guidance & Commitments

Key Metrics