RITES Limited (RITES) Earnings Call Transcript

Ladies and gentlemen, good day. This is Melissa, the moderator for your conference. Welcome to the conference call of RITES Limited, arranged by Concept Investor Relations to discuss its Q1 FY '22 results. We have with us today Shri Gopi Sureshkumar Varadarajan, Director of Projects and Chairman and Managing Director; and Shri Bibhu Prasad, Director of Finance. [Operator Instructions] Please note that this conference is being recorded. I would now like to hand the floor over to Shri Gopi Sureshkumar Varadarajan, Chairman and Managing Director. Thank you, and over to you, sir.

Thank you. First of all, good afternoon, and greetings to all of you. I, V.G. Sureshkumar, Chairman and Managing Director, RITES Limited, welcome you all to investor conference call on RITES Limited's financial results for Q1 FY '22. Hope all of you are keeping safe along with your families. I have with me our Director of Finance, Shri BP Nayak. RITES Limited is a Miniratna (Category – I) Schedule 'A' public sector enterprises and a leading player in the transport consultancy and engineering sector in India. Having diversified services and geographical reach, RITES Limited is the only export arm to the Indian Railways for providing rolling stock overseas other than Thailand, Malaysia and Indonesia. The financial result presentation and press release have been uploaded on our website as well as the stock exchange yesterday. Hope all of you have been able to examine the same. Let me begin with the safe harbor statement. The presentation, which we have uploaded on our website yesterday and discussions during the call today may have some forward-looking statements. These statements are considering the environment we see as of today and obviously carry a risk in terms of uncertainty because of which, the actual results could be different, and we do not undertake to update those statements periodically. Now I'm going to talk about the highlights of company's results for F -- Q1 FY '22. And then we can open the forum for question and answers. We are pretty much back to pre-COVID level until March till second wave hit us in April, affecting not only business but employees' health as well. Now I will briefly talk about the consolidated finance first quarter 2022 results. And as you all know, almost 95% of our income is coming from stand-alone numbers as a part of the consolidation. So whichever I'm -- whenever -- sorry, whatever I'm talking about consolidated number is relevant to standard also. The company's revenue from operations is up by 5.7% at INR 355 crores in Q1 FY '22 as against INR 335 crores in Q1 FY '21. Revenue growth softened mainly because of disruption costs with second wave of COVID, spillover of export shipments and first lot of turnkey projects getting substantially completed. The company's total revenue on consolidated basis has remained flat at INR 377 crores as against INR 379 crores in Q1 FY '21. Flat total revenue can be attributed to decrease in other income on account of decrease in interest income and reversal of provisions in Q1 FY '21. Core EBITDA stands at INR 97 crores against INR 60 crores, up by 61.6% on account of consultancy and leasing growth. PAT Stands at INR 78 crores against INR 65 crores by -- up by 19.8%. Core EBITDA and PAT margins were sustained at 27.3% and at 20.6%. The earnings per share stands at INR 3 as compared to last year's to INR 2.51. Coming to segment now, consultancy. Consultancy achieved a revenue of INR 204 crores against INR 185 crores in Q1 FY '21, up by 10.6% with sustained margin of 40.8%. Consultancy improved mainly due to increase in foreign income. However, growth in domestic consultancy business was softened by the second wave of COVID and less procurement by clients impacted the quality assurance business. Leasing. Company's leasing business has attained the pre-COVID level growth and Q1 FY '22 revenue stands at INR 32 crores as against INR 24 crores in Q1 FY '21. Leasing business margin has remained healthy at 41.5%. Exports. Export revenue has spilled over to Q2 FY '22. 32 -- 30 coaches, which were exports as on 30 June '21 has been shipped out in Q2 FY '22 and has already reached the destination. Out of the remaining export orders, 2 locomotives for Mozambique and 40 coaches to Sri Lanka are ready for shipment. Turnkey construction. The revenue from turnkey construction projects stands at INR 95 crores in Q1 FY '22 against INR 114 crores in Q1 FY '21. Turnkey revenue was impacted due to COVID disruption and first phase of turnkey projects getting substantially completed. However, revenue from recently secured electrification and new line projects to start reflecting in coming quarters. Coming to REMC Ltd. The revenue and profit of REMC Ltd has reached a pre-COVID level and the revenue standing at INR 25 crores against INR 15 crores in Q1 FY '21. And profit after tax at INR 12 crores against INR 5 crores in Q1 FY '21. Dividend. Board of Directors have declared INR 2 per share of dividend. Order book. The company's consolidated order book now stands at INR 6,925 crores as of 30/06/2021, which is the highest ever of the -- for the company. During the quarter, company secured new extension of orders of about INR 1,000 crores. We are continuously adding on to our order book and confident of achieving steady growth on account of efficient order aggregation. With this now, we can open the forum for question and answers, please. Thank you.

[Operator Instructions] We have the first question from the line of Arafat Saiyed from Reliance Securities.

My first question is on the revenue part. I just want to understand what kind of growth you are looking for FY '22? And what could be the major segment that drives the growth?

As I pointed out, the major segment for driving the growth would be exports. The exports are spilled over from the previous year. And contractually, we are to complete our export orders, which is of the tune of around INR 1,300 crores. We are focused on getting this order executed. So we expect that at least 80% of this export order will be executed and we'll make a revenue share, which will be substantial as a driving factor. Our consultancy segment is growing, and we have enough orders to execute the consultancy segment is also on. The QA has also reached a pre-COVID level. So we find that the QA will also contribute adding up the Consultancy revenue. Our leasing is also in line. But our turnkey segment, which has -- the first phase of turnkey segment is almost closing. And the new orders which we have secured recently will be taking up from the third quarter. So I feel that there will be a reduction in the Turnkey segment. But overall, we find that the position would be a little greater than the pre-COVID situation, will be slightly higher than the pre-COVID financial numbers. Am I clear, it's okay?

Yes, yes. And sir, my second question is on the railway concerning the CapEx on a railway side on the Government of India. So if you can throw some light on that, what kind of CapEx we're looking and if you can guide on that and where it would be spending that will be great, sir.

Railways have made a very ambitious CapEx plan, even for this financial year around 2 -- a little above INR 2 lakh -- crore. Basically, it is for electrification, signal and telecommunication, doubling of -- doubling and new lines. And also this time, there is a big amount of target given for the production units to produce around 750 locos and combination of coaches. So -- and there's an effective follow-up on this target. So I think that this target, RITES, has an element to shipping, particularly for the QA. We have already got the electrification order for around INR 2,000 crores, and our turnkey for new lines is around INR 4,000 crores. With this, we should be able to take it forward and sustain this turnkey business for 3 to 4 years as well as the QA would give us some amount of comfort in the bottom line.

[Operator Instructions]. We have the next question from the line of Chintan Sheth from Sameeksha Capital.

Am I audible?

Yes, please.

Yes, very much.

Yes. So sir, one on the new turnkey project you have got which are new lines project, INR 4,000-odd crores. Those are the new line of business, which we haven't received or executed earlier. And typically, new lines have high gestation projects, which requires more than 5 years of time line to complete it. Can you elaborate on the time line of this new project execution, how long we have to -- for how long we will require to execute that? And second, you mentioned that 80% of the export order will be executed this year. So suffice to say that the entire Sri Lankan project and a large part of the Mozambique project is like executed and small portion of Mozambique will get executed sooner in the next year.

Yes. The new railway projects are new lines. I mean these are green projects, not brownfield projects, greenfield projects. There is some amount of land acquisition also involved. And it has been awarded recently. There's some amount of modification of or retaking of the estimates and sanction of the estimates. So these new projects will take off, it will take at least 6 months' time to take off. And this will get completed in, as you rightly said, 4 to 5 years' time. The first phase of turnkey project, which we are having which has neared completion, but still, we have some residual works for the station development as well as for 1 railway line, which will be around INR 300 to -- INR 300 crores to INR 350 crores. So that will carry forward for us in the second and third quarter. And by that time, I think we should be able to start off the new lines. However, the electrification work, which has been awarded a little bit earlier, they are now coming to the phase of execution. And by the third or fourth quarter, we should expect some revenue from the electrification projects. So with that, the new lines, we can just comfortably take that it will go for 4 to 5 years' time. The second question on exports, you have rightly said that we'll be able to complete all the Sri Lankan order. And there is a possibility that a part of the Mozambique orders they get slipped to the next financial year. This is happening because of the restrictions and some critical third parties are cape gauge locos, which we have been doing for a first time. And some critical parts are expected from other countries. And there are some small delays here and there. So I think with that anyhow...

Sir, you voice is cracking. I'm not able to get what you are saying, if you can...

Okay. So I rightly said that export 80% will get completed by this year. And the Sri Lankan orders will get completed because they are already the broad-gauge engines and locos and carriages, which is being done as a routine matter. The 20% segment will get delayed in the Mozambique because the new segment, which we have entered the cape gauge, and it will depend on a certain space which are critical to be imported. And so I feel admittedly, but we are making our efforts to see that this also is done within this financial year.

Sure. And lastly, on the R&D side, a lot of traction is getting from the registration development and lot of projects being handed over to R&D. Any color on what kind of revenues and what kind of potential you are looking at in that subsidiary?

Yes. R&D is also connected with station development corporation. There was some sluggishness initial phase. But with the success of Gandhinagar and Habibganj is getting completed, now there is some visibility in this type of model and additional stations have been added up for expansion. 49 stations have been now taken up for expansion. There would be good progress in this in coming future.

Any revenue number or anything you would like to highlight? What can -- can we contribute to our profitability?

Of course, I can't say, but 49 stations have been added up for station development.

We have the next question from the line of Venkatesh Subramanian from LogicTree.

My question is, we have a INR 11,000 crore order book at the moment. Could you please give us an idea of what is the execution time frame for this INR 11,000 crores, number one. Number two, if you could just throw some light on what kind of orders did you expect for the current financial year.

INR 11,000 crores order suppose if we take the pre-COVID level and growth, which we were trying to do from the pre-COVID level. So averaging out, I think it should be the tune of around INR 3,000 crores. So INR 3,000 crores we should have a visibility, the orders for around INR 3 crores to INR 4 crores is available with us for execution. And having consolidated this order book, now our focus is more on project execution and targeting business on the international consultancy. We already started submitting our bids. We have got some favorable results. And we are putting more emphasis on international bidding, overseas bidding, and as well -- just concentrating on getting some export orders. We have developed the standard gauge loco also, recently, it has also been completed. So our geographical reach for locos and rolling stock, has moved from Southeastern Asian countries to African countries and now to Middle East countries also. So we will focus more on getting some export orders as well as domestic market in the metros and international markets for railway as well as highway consultancy.

Some sort of a number, sir, which is what kind of order prospects for this year, roughly some estimates.

We have been getting orders in a regular way for consultancy around INR 200 crores to INR 300 crores every quarter. I think that will continue. As we are closing on consultancy, we'll be adding up orders also. And the export orders are something which we are looking on, maybe we should strike something in the African countries of the same tune of around INR 1,000 crores in the next -- next year, at least.

Great. So REMCL renewable. So is that, in say, 3 to 4 years, how large can REMCL be then?

REMCL this quarter has seen the highest turnover of INR 25 crores. If you can see our earlier, we were doing around INR 80 crores to INR 90 crores we were doing REMCL in the pre-COVID situation. And the inflow was almost steady. One was the power procurement for Indian Railways, which was also constant and at a power generation of the wind mill, which was a variable element. And now with the ambitious plan of Indian Railways going for electrification, 100%, the earlier requirement of around 4,000 to 4,800 megawatt of power procurement will get multiplied by at least 2x. Therefore, we anticipate in the next 4 years, there could be a requirement of 9,000 megawatts of power requirement, which will take us through and wind mill, wind mill will be constant. So we think we should have around 15% growth in like so 60% level should be there. It may be there will be a 15% growth [indiscernible] 15%.

15% CAG, or sir [50%] CAG?

15% CAG for 4 years, around 60% growth is anticipated in REMCL.

All right, sir. Last question, sir, what is the current cash in the balance sheet, sir, as of 30th June?

It's around INR 740 crores is our cash in the balance sheet.

We have the next question from the line of Kunal Sheth from B&K Securities.

My first question is pertaining to the consultancy segment. Sir, I just wanted some clarity in terms of revenue. Last time, we had mentioned that in consultancy, we will be able to grow this year over FY '20 base. So do we still hold that guidance? Or -- just wanted to check on that, sir.

Yes, we should hold it because the gray area in consultancy, which affected due to COVID was the quality assurance. And now we are once again coming back to the normalcy and the quality assurance is coming back to its pre-COVID level. With the additional revenue of the overseas consultancy, we should be able to sustain the growth, which we were earlier meeting.

Okay. Okay. And secondly, sir, you mentioned that the export order book, what part of it is executable in the current year?

I said around 80 or maybe around INR 900 crores, INR 900 crores would get executed in the current year.

About INR 900 crores.

We have the next question from the line of Parimal Mithani from -- an Investor.

Can you hear me, sir.

Very much, very much.

Yes, sir. The one is have recently one of your colleagues in the conference [indiscernible] got a word of 5,000 wagons from Russia basically. I just wanted to know, since we have a JV with sale for supply again, how do we compete with it? And what's the -- and I see we are not -- we are restricted to few countries not to supply, the rest of the world we can supply. That's my -- is my logic correct on that, sir?

Yes, we have a joint venture company with SAIL Kulti we have. We are manufacturing wagons for Indian Railways. Our production capacity is around 1,000 wagons in a year. We are trying to leverage this expertise and our facilities for bidding for the rolling stock for wagon business, ADB is calling for some tenders, international tenders are coming up. But what is being stuck is that they require an export credential, which currently we are lacking. We have not exported our wagons elsewhere. So if we can join hands with somebody who has already exported, maybe we can be able to take this forward for other customers also.

Sir, so my question is in terms of how things we have -- if I'm not going to say the type of IPO, it was mentioned that export will be area going ahead for the foreseeable future. So how do we compete with the great weight and how what's the -- if you can just throw a light -- i know it's -- if you can just help us in understanding it. And do we have similar lines of...

We are trying to [indiscernible] efforts. We will be submitting our first bid very shortly for ADP project. We'll try to know our numbers and where we have to strengthen ourselves.

Okay, sir. Okay. But is there a bifurcation between both the companies where they can be [indiscernible]. I just wanted to understand that.

No, nothing like that. Nothing like that. Malaysia, Indonesia and Thailand is another counterpart of our railway ministry has been supply. So we thought that we should not have conflicts within ourselves. That's [indiscernible]

Okay. Sir, secondly, I wanted in terms of your turnkey and consultancy business. I think the turnkey side of the business will be order book is heavier now. And how do you see consultancy because that has been our main business going higher. And how do you foresee in the next 3, 4 years.

The Turnkey order book comes in a particular duration. Now we have the second phase turnkey, and we cannot expect same level of turnkey year-to-year. So the turnkey will be continuing. It has a longer completion time, but consultancy has a very shorter completion time. Sometimes the consultancy is even 3 months, sometimes 6 months, maybe 60% of our consulatncy is between 3 to 6 months, except for the GC and PMC, which is going on. And -- in the same stage, we start getting orders also. If you see that we have got around 45 new works in consultancy, which [indiscernible] amount to every second day we are getting some order. I'm not decide price may be small, but still we are getting jobs. So the consultancy will go on in this session and turnkey will be a long lead item. So it could be balanced. And with our international consultancy, I think the matter is how to balance the top line and the bottom line that -- we'll be working on it.

And sir, in terms of consultancy, you suffered little bit of -- because of the COVID, the quality assurance business was not there this time. So how do you see going forward from now and since -- do you see...?

The last 2 months have brought us near to the pre-COVID situation. So we anticipate that if the same situation exists as there is no third wave as such [indiscernible] we should be able to save you.

We have the next question from the line of Jonas Bhutta from PhillipCapital.

A couple of questions. Firstly, I wanted to understand -- sir you made this comment that you are expecting your...

Mr. Bhutta, I'm sorry to interrupt you but we are not able to hear you clearly.

Yes. Is this better now?

Yes.

Yes, yes.

Yes. So just wanted to pick on your comment where you said that your turnkey revenues in FY '22 may not -- may in fact decline. I'm just curious to know because you started the year with a backlog of INR 2,200 crores, which is more or less where it was in FY '20. And in FY '21, despite the COVID challenges, you ended up doing about INR 600-odd crores kind of top line. Just wanted to know why with the same backlog, we are actually building in lower sales despite having a 3-year visibility on a INR 2,200 crore backlog can easily so[indiscernible] about INR 700-plus crores of revenue. So wanted to understand the logic behind on this first one.

Actually, we had the electrification works and doubling works, plus some station development works, which were awarded somewhere between 2016, '17. And with the normal estimation result, effectively, these work got started to get executed in '18. And we were making a revenue in turnkey work tune of around INR 600 crores to INR 700 crores year round. So the INR 2,200 crores or whatever was there, it is almost INR 1,800 crores to INR 1,900 crores is under completion. And what is left with us now is some station development work, some workshop works. The electrification works are completed. That's one and doubling work is completed and other doubling work is in the advanced stage of completion. So the real work whichever is available with us, we hope to complete it, and it may give us a revenue of around INR 300 crores to INR 400 crores. This is what I'm anticipating currently. And by the third quarter, third or fourth quarter, we should be able to commence the next phase of turnkey, that is the electrification work for which we have awarded the agencies are fixed. They should be able to give us revenue. So I'm not counting much on turnkey in this financial year because export is going to be neither -- the gap filling. So I think with this, we should be able to cross over the pre-COVID then look forward for the next year for further incremental revenues.

So you're saying that out of INR 2,200 crore kind of opening order book, you will recognize just about INR 300 crores, INR 400 crores of sales this year.

Yes, this INR 2,200 crores is a recently awarded, INR 1,800 crores of electrical work. The electrical works, RE work was awarded around last -- I mean in the fourth quarter, I think, fourth quarter.

[indiscernible].

Yes, 600...

No, sir, we didn't win any major -- so the only biggest order that we won, I think, was in Q2 of last year of about INR 600 crores, INR 700 crores roughly.

Yes. INR 600, INR 700 crores, and this quarter, we have consolidated around INR 600 crores of RE work this quarter, the Q1, around INR 600-odd crores we have RE growth.

I'll take this offline. Okay. My second question was on exports. So we -- like you mentioned that you first developed Sri Lanka and then you move towards Africa and now Middle East. So from a 1- to 2-year perspective, do you currently have any bids or any projects that you're working on, which you can share with us, that could potentially lead to order inflows either in the current year or in the next year. So once you are done with this INR 1,300 crore backlog effectively by first half of next year, do you have bids in the pipeline, which you think can come in?

Yes, there are 3 to 4 countries in Africa, with whom we are already having discussions, I think that should come through, 1 or 2 should come through.

Okay. And the tentative size would be about $100 million each? Is that...

Yes. Yes, yes.

Understood. And my last question, sir, was to understand on the internationalization of your consultancy services business. So while we've already started to win orders in Nepal and Bangladesh. Can you elaborate on -- today what percentage of our consultancy book is international? And is there a target that we are working with, where we want to take it to a higher percentage? And how do we get there? If you can elaborate on that?

Percentage so far, I think it should be around 10% should be our consultancy overseas consultancy, putting Bangladesh, Malaysia then some other countries, which we are working on. Out of the [indiscernible] . Yes, it should be around 10%.

And any target where you want to take this, sir? Or you expect this to remain at that?

I have a very ambitious target because we have been building for many projects, and we are shortlisted and winning it -- I mean, getting ourselves positioned technically high. So with a little bit of a fine-tuning of our financials, I feel that we should be able to win much more projects. With that -- inputs with me, I feel that we should take our consultancy at least to a level of 20%.

Understood. And lastly, if I can squeeze in one more, sir. So the export execution that we are going to see in the current year, does it -- and given that we've seen the sharp run-up in metal prices or commodity prices, does this in any way impact the profitability of the Sri Lankan and the Mozambique order in any form of format, sir?

Some slight impact maybe, but mostly the -- steel for cases and all these things have been done. Of course, the steel price got shoted up over the past 3 to 4 months, and then it has come down a bit. But most of our fabrication work was over. It is more of the finishing work, which is now less with us. So I don't find big hit on it. We will be able to sail through with the same margins.

So about 25% kind of margins on exports can be expected.

Every segment, I mean every like a coach, BMU, loco, everyone has a different profit line and profit percentage. It depends on what we are shipping and how we are going to manage it.

Sir, I'm sorry, we are able to hear you now. The next question is from the line of Harshit Kapadia from Elara Capital.

So with this -- getting a very high order inflow of INR 4,000 crores, in the working capital margins remain the same that the fund will be provided by the Indian Railways. Would ride to be using our own working capital to finance this project?

[indiscernible] remain the same. The railway should be giving us the initial advances. There's nothing going from our CapEx.

Okay. That's good. And second thing related to margins of this order. So would we anticipate increase in the EBIT margin level generally is around 2% to 3%. So with this higher order inflow and with a better execution, with better volumes, can we move towards [indiscernible] margin for this segment? Or will it remain at 3%?

No, I anticipate a higher margin. First of all, we have got this work, the bidding, and we have taken it at a bit higher margin. And because of the volume, the overheads are going to be -- the percentage of overheads will be reduced. And with some efficient working, we should make this -- we should make some higher margins, not like the earlier ones.

Okay. And sir, if you can also highlight any big order opportunity you have on the consultancy side, especially from the Indian Railways. Any large project that you envisage, which could be coming in this year or next year -- next 2 years?

Actually, the COVID had pushed all the tendering activities by a year. So almost around 6 to 7 metro projects where we were called for, and we have submitted our bids very recently. We are awaiting the results. And I'm hoping and praying that we should click 1 or 2 projects, that will give us a good higher value of consultancy in India.

Okay. Anything on the suburban railway station or high-speed rail -- really high-speed trains, anything on that front as well.

High speed, we are just waiting. Actually, RITES is a diversified organization. If one door closes, we can open up the other door. Still nothing has been concluded in concrete. So we're just waiting for it and see which door we can open up.

Understood, sir. And just a final question on the solar project side, any update on what is the status of the 2.6 gigawatt of [indiscernible] supposed to be...

[indiscernible] Project, the initial CapEx mode of to the 400 megawatts has been reduced. We have reconsidered the land and visibility, and it has been reduced to 200 megawatt. And even earlier, the 1,600 PPP mode has also reduced around 740 megawatts and the 600-megawatt has also come down to 400 megawatts. Now -- the tenders are on. And now we hope that we'll get some good positive response.

But why has the project size been reduced? Was it only because of land? Or is there any issue that you are facing?

Actually, the clusters of land. Clusters of land has not been taken in -- there are certain clusters of land which is not having the approaches. There was a dispute between the bidders, bidders are asking us to do the approaches and land development, which was not addressed very precisely in the contract. So then we thought that instead of keeping it i mean better to go for those lands which are already having their right of way and other development facilities, and we can work on the remaining part that who has to do, whether [indiscernible] will do or the developer will do, that will come in the second phase.

So what they're telling me is the only investment amount where rights would be [indiscernible] with only for 200-gigawatt solar project where you would be putting your equity.

Yes, Yes.

Which would be called, let's say, INR 150-odd crores.

INR 100 crores.

INR 100-odd crore.

Yes. yes.

We have the next question from the line of Kunal Sheth from B&K Securities.

Sir, sorry to harp on this -- about this turnkey project. Sir, you mentioned about the growth, but did you mentioned that then this year, we will only be taking up only INR 300 crores, INR 400 crores of revenue? Because usually, the time lines of the projects are 2 to 3 years. So does that mean in the next year, you'll see significant bunching up?