At 10-12 times FY18 earnings estimates, the RITES IPO (initial public offering) valuation may seem reasonable. But for growth-hungry investors, it may not offer much.

For all the talk of government patronage and investments in public infrastructure, the revenues of the consulting and engineering services provider on an average expanded by less than 10% a year in the last five fiscal years to FY17. Full-year FY18 revenues are not yet available.

The subdued revenue growth reflects the changing nature of the consulting business. RITES has expertise in preparation of feasibility and detailed engineering reports for the railway sector. But competition is on the rise, especially in operation and maintenance, and project management consultancy.

Also, clients now prefer a single agency which can do design, engineering, construction and commissioning on a turnkey basis, RITES pointed out in its FY17 annual report. But turnkey projects have lower margins than consulting. Investors taking a long-term call on the IPO should consider these points.

The company did see a jump in order inflows between FY16 and end-March 2018. But as one analyst with a domestic broking firm warns, margins may shrink from historical levels as the contribution of the consultancy business revenue decreases, weighing on earnings growth. The contribution of non-consulting businesses is expected to rise on increasing inflow of EPC (engineering, procurement and construction) contracts, says the analyst. Incidentally, Ebitda (earnings before interest, tax, depreciation and amortization) margin softened in FY17 as revenue contribution of the consulting business dropped.

As of March, about 53% of the company’s order book came from consultancy services. Turnkey construction projects contributed 29%. According to ICICI Securities Ltd, RITES intends to book more turnkey projects, thanks to strong investments in the railways.

RITES claims wage provisions have weighed on FY17 earnings. Also, given the long-term nature of the infrastructure projects, profitability trends will be more pronounced over a longer period. FY18 and FY19 numbers should provide more clarity.

That said, the 4,819 crore order book does provide good revenue visibility for 2-2.5 years. Being a preferred consultant for Indian Railways, the company should find enough business opportunities—for example, it set up a joint venture to supply green energy to the national carrier.

But public infrastructure projects are prone to execution delays. Also, as ICICI Securities points out, a large part of RITES ’ export business is dependent on bilateral relations between India and other countries. This business can be adversely affected in case of a change in Indian government’s policies. Overall, while government support does provide business security, the nature of the sector and changing composition of the business raises questions about the future earnings growth trajectory.