Rites Ltd Q2 FY2024 Concall Summary

Key Takeaways

• A tough quarter, a tougher new normal: Revenue declined across exports and turnkey, while QA took a ~INR25 cr YoY hit. Management was explicit that margins across all four revenue streams are now under structural, not cyclical, pressure.
• The export pipeline is full, but revenue is distant: Three large export orders (Zimbabwe, Mozambique, Bangladesh) worth over INR2,200 cr are in advanced stages, yet none have entered the order book. Revenue from these is not expected before Q1 FY25.
• FY24 is a year of consolidation, not growth: Management aims to hold revenue and PAT near last year's levels, but concedes matching FY23's margins is "a tough call" given the irreversible shift to competitive bidding.
• The dividend story remains intact: A 90-93% payout ratio was reaffirmed, with management framing RITES as a consultancy, not a capex-heavy company, so there is no reason to retain earnings.
• What to watch next quarter: Conversion of the three export orders into formal LOAs, the pace of QA's sequential recovery toward the INR90-100 cr target, and any quantification of the blended margin floor management currently declines to provide.

The Margin Reset: From Nomination to Competition

• The core structural shift: All four revenue streams (exports, inspection, project consultancy, turnkey) are moving from a historical nomination-based model to competitive bidding. Management corrected the premise that "all" future work is competitive, but stated the trend is definitively toward more competition across every stream.
• Export margins compress: The Bangladesh coaches tender, an EIB-funded open global tender, marks a departure from past line-of-credit or G2G contracts. Management confirmed export margins "will be definitely comparatively lesser" than the historical 24-25% range.
• Consultancy margins held at ~40% this quarter, but only by shifting mix toward higher-margin project consultancy. Inspection, a sub-segment of consultancy, has also taken a margin hit. Maintaining this blended level is acknowledged as tough.
• Turnkey margins are inherently lumpy, fluctuating quarter-to-quarter based on milestone achievement, but average out to just 2-3% annually. Turnkey is not the main revenue driver and will be limited to strategic railway, metro, and station opportunities.
• Management declined to provide any margin guidance, calling the mix an "evolving situation" with wide ranges across the four streams. No ballpark number on sustainable EBITDA margins was offered.

Rahul Mithal: "Overall, also on a blended mix, the margins maintaining at the previous levels is going to be a tough call."

Export Orders: A Promise Deferred

• Three large orders in limbo: Zimbabwe (INR850 cr, agreement signed ~4 months ago, pending funding agency approvals), Mozambique (INR500 cr, L1, TEC proceedings ongoing), and Bangladesh (INR900 cr, L1, TEC proceedings ongoing). None are in the order book yet.
• Conversion timeline is a best-effort forecast: Management expects LOAs for Mozambique and Bangladesh in "coming weeks," Zimbabwe in "coming months," and all three "definitely sometime in this quarter" (Q3 FY24). Revenue generation is targeted to start "latest by Q1 of the coming FY" (Q1 FY25), with a 6-9 month lag from formal LOA.
• A new export strategy is being built: The company is moving beyond reliance on G2G and line-of-credit tenders to bid aggressively on global tenders on a weekly and monthly basis across Southeast Asia, Africa, and Latin America. The Bangladesh EIB-funded tender is cited as the live example of this pivot.
• Top-line degrowth in H1 was driven by the absence of these large export contributions compared to last year. Even if contracts fructify soon, revenue will only begin in FY25, leaving FY24 to be compensated by growth in project consultancy (up 20% YoY in Q2).

Rahul Mithal: "We are now bidding aggressively literally on a week or a month basis, not only in LOC G2G type contracts. But global tenders of export. So with this, to my mind, is just the beginning..."

Quality Assurance: A Business Resetting

• The INR25 cr YoY dent came from a structural change: RITES is now one among four competitors for Indian Railways QA work, with reduced rates. The hit is both in volume and pricing.
• Sequential recovery is underway: QA revenue improved from INR73 cr in Q1 to INR78 cr in Q2, a ~7% QoQ rise, driven by diversification to non-IR clients, new prospects from ISA certification (including metros), and a joint venture with international companies for global QA opportunities.
• The target is a return to INR90-100 cr per quarter, but management called this "a tough challenge" and placed the timeline in "the quarters of next FY" (FY25). A partnership with IIT Roorkee for AI application in QA is also in early stages.
• The margin pressure in QA is permanent, not transitional, because the competitive dynamic and reduced rates are the new baseline.

Rahul Mithal: "It's a tough challenge to come back to those levels, especially since the IR business, now you are 1 among 4, including the reduced rate. So the hit is both in terms of the quantum as well as the rate."

FY24 Consolidation, FY25 Growth Promise

• FY24 is about holding the line: Management aims to reach FY23 levels of revenue and EBITDA/PAT, but concedes comparable margins are unlikely due to the mix shift. The strategy is to compensate for export and QA weakness via project consultancy growth (20% YoY in Q2) and REMCL's steady expansion.
• FY25 is positioned for substantial growth, with management expecting both top and bottom line to grow off the FY24 base, driven by export orders beginning to generate revenue from Q1. However, management declined to provide any ballpark percentage for that growth, calling it premature.
• REMCL is a bright spot: The renewable energy subsidiary is on track to "definitely exceed" last year's revenue and profits, driven by increasing railway electrification and traffic. Growth is expected to be steady and sustained.
• Turnkey revenue dipped 6% in Q2 with no major underlying reason; projects are at stages that have not reached revenue-booking thresholds. Management expects a substantial pick-up in Q3 and Q4 as construction activity accelerates seasonally.
• The order book ambition is to become a "1 order a day" company, up from 0.85 orders per day in Q2. Management feels this is reachable in coming quarters, though it declined to comment on the associated ticket size when asked.

Capital Allocation & Structure

• The 90-93% dividend payout is a structural commitment, not a cyclical choice. Management reiterated that RITES is a consultancy company, not a construction or infrastructure capex company, and sees no reason to hold back earnings. The company remains debt-free with minimal working capital needs.
• The shift to competitive bidding does not increase working capital requirements, per management. The company's asset-light, debt-free balance sheet is expected to remain intact.
• Capex is modest and declining: Full-year FY24 capex is expected around INR145-150 cr, with future years trending to INR100 cr or less.
• IRSDC investment of INR48 cr is safe and in the process of being wound up; management expects no hit or impact. On RLDA, management declined to comment on future plans or any further equity participation.
• Navratna status was accorded a few weeks back, in the company's 50th year, which may expand operational flexibility going forward.

Rahul Mithal: "It is a reiteration that we are a consultancy company, we are not a construction company. We are not an infrastructure capex company. With that clarity... we don't see any reason of holding back on dividend and that is why we are flowing back the earnings that we get to our stakeholders and that's why you are seeing a steady dividend payout ratio of 90% to 93%."

Guidance & Commitments

Key Metrics