Rites Ltd Q2 FY2025 Concall Summary

Key Takeaways

• A tough quarter, but the worst is over: Revenue fell ~7% YoY as the QA business absorbed a double hit from IR’s open tender, while export revenue remained absent. Management sees QA on an upward swing and expects sequential execution growth in H2.
• QA disruption is the core margin story: EBITDA margins dropped below 20% after a long period, driven by IR slashing QA volumes to ~30% and rates to ~20% of prior levels. Diversification into non-IR clients has now tipped the balance, but at substantially lower margins.
• Export business has been fundamentally reset: After a five-decade drought of global competitive wins, RITES has reengineered its export approach and built a ₹1,300+ crore order book. Margins will be better than turnkey but well below the traditional 25%, and revenue recognition begins only in FY26.
• FY25 is a year of consolidation, FY26 is the growth promise: Management calls this the toughest year and aims to get as close as possible to the previous FY’s top line. With export revenue kicking in next FY, it expects double-digit healthy growth.
• What to watch next quarter: Whether the promised H2 execution ramp materializes, the pace of QA revenue recovery toward pre-tender levels, and any movement on the Zimbabwe order’s funding clause.

Quality Assurance: The Margin Reset

• The IR double hit: Early last year, Indian Railways moved QA work to an open tender among four players. RITES’ volume dropped to about 30% and rates fell to about 20% of previous nomination-based rates, a compounding blow that began hitting in the latter part of last FY.
• Diversification has flipped the mix: Non-IR clients now account for 60%+ of QA revenue and order book, up from a minority share early last year. IR as a client fell to about 40% in Q2. New assignments include PM Vishwakarma, GEM, Jal Jeevan, solar energy, and municipal infra inspection.
• The margin trade-off is structural: Non-IR QA work carries substantially lower margins than the legacy IR nomination work. Management stated that margins of 40%+ on a competitive mode are “definitely not possible to be maintained.”
• Recovery trajectory: QA revenue is on an upward swing starting this quarter, and management aims to return to pre-tender total revenue levels in coming quarters. The first international QA revenue came from Sri Lanka this quarter.

Rahul Mithal: “Early last year, the work was divided for the first time through an open tender between four players, so the volume went down to about 30% and the rates came down to about 20% of the rate. So, you can see a double hit...”

Export Business: The FY26 Growth Engine

• A five-decade breakthrough: RITES reengineered its export business to compete on global competitive tenders after lines of credit dried up completely over the last three to four years. The company has now won orders in Bangladesh (~₹900 crore), South Africa (two orders of ₹30-40 crore each), and others, building a ₹1,300+ crore order book.
• Revenue timing is locked to manufacturing lead times: Revenue is recognized only when a sizable lot is manufactured, shipped, and a bill of lading is obtained. Average lead time for locomotives and coaches is 18 to 20+ months, so substantial revenue will book in FY26, with first revenue expected by Q1 FY26.
• Margins: better than turnkey, not the old 25%: Competitive global tenders make traditional 25% export margins impossible. Management expects export margins to be better than the turnkey segment but declined to give a single figure, citing variation across orders.
• Order flow ambition: Management aspires to win at least one export order every quarter and expects export order flow to grow on a steady basis in coming years.
• Zimbabwe order contingent on funding: An agreement of ~₹700 crore signed last year has not entered the order book due to a funding clause requiring AFREXIM bank approval. Deliberations are ongoing with some in-principle approvals in place; management is hopeful it matures in coming months.

Rahul Mithal: “I'm glad you asked this question. A very favorite pet area of mine because it required huge lot of effort to do business re-engineering to be able to compete in the global market and get orders for the first time in five decades on a global tender basis and having broken that and now tasted blood, we are moving forward and trying to get orders, whether big or small, in every quarter.”

Turnkey & Consultancy: Mixed Margins

• Turnkey margins at a trough: H1 turnkey margins ran at 1-1.1% because many projects, especially IR electrification, are in final execution stages where most material has arrived and revenue is booked, compressing margins. As older projects finish and new orders begin execution, margins should creep up slowly to about 2% on average.
• Consultancy profit fell faster than revenue: Consultancy revenue declined ~7.4% but profit dropped ~20%, because the QA drag sits inside consultancy. Deployment for inspection across the country remained largely unchanged, hitting the bottom line.
• Employee cost rose strategically: The company added ~300+ people (net ~200 after superannuation) including engineers, graduates, and postgraduates in design, architecture, and town planning, based on order visibility to build execution strength.

New Initiatives & Order Diversification

• Vistar AI for rail inspection: Launched an AI-based inspection initiative at SAIL’s Bhilai plant, targeting safety-related rail products. Management sees a first-mover advantage when combined with four to five decades of technical experience, with potential to capitalize domestically and internationally.
• Etihad Rail MOU: A five-year MOU covering consultancy in rail infra networks and export of rolling stock as Etihad Rail expands across the UAE and Middle East, including cross-border rail projects in Jordan, Qatar, and Oman.
• DMRC retrofitting win: Won a ~₹36 crore order for midlife refurbishment of ~22 rakes (1,176 coaches) that are ~20 years old, requiring upgradation to latest technology. Management sees this as a recurring opportunity as more aging rolling stock across India’s metro systems requires rehabilitation.
• REMC continues to deliver: The REMC business generated ~₹20 crore profit this quarter and is paying good dividends to RITES and Indian Railways. Tenders for 900 MW and 600 MW were finalized, with a 695 MW tender under review.
• MoU pipeline: Signed MoUs with NHAI, NBCC, NMDC, DMRC, SAIL, and HUDCO across the board.

Rahul Mithal: “AI based inspection coupled with our technical experience of four to five decades, whether it is rails or wheels or many such safety products, this definitely gives us an edge.”

Margin & Competitive Dynamics

• The new margin reality: Management set aspirational targets of EBITDA around 20% and PAT around 15% on a consolidated basis, calling these realistic levels with current visibility. It did not provide a timeline for any return to previous margin figures.
• Competitive share is rising: The ratio of competitive to nomination orders is increasing toward 70%+, a structural shift that caps margin upside. Management did not directly address whether nomination orders going up would cause further margin pressure.
• Domestic consultancy margins structurally lower: Margins of 40%+ on competitive mode are “definitely not possible to be maintained,” per management, when asked if the drop below 35% was a one-off.

Guidance & Commitments

Key Metrics