As a sector, railway construction has been vastly under-represented on the bourses. A few private sector companies, such as Texmaco Rail and Engineering Ltd, can be found on the exchanges, but not many public sector ones.
However, in the span of less than a year, the three companies mentioned above—RVNL, Ircon and RITES—which have been promoted by the railway ministry, have got listed.
The excellent order books of these companies seem to be driving investors towards the stocks. RVNL, which was listed recently, has a ₹77,504-crore order book, about 10 times its FY19 annualized revenues (see chart). More than half of these orders are expected to be completed in the next two-three years.
Ircon and RITES are also sitting on decent order books of more than ₹26,000 crore and ₹6,142 crore, respectively. This is about 6.7 and 3.7 times their FY18 revenue, which seems to show a high revenue visibility.
However, having a large order book is one thing and ground execution quite another. “For PSU (public sector) companies, often the order books tend to look good on paper. There can always be overruns. Hence, one must look at the execution carefully. But in the case of RVNL, the lower valuations has been a driver of the stock lately as compared to its peers," said Arafat Saiyed, assistant vice-president (research) at Reliance Securities Ltd. Despite its rally post-listing, RVNL trades at 10-11 times annual earnings.
RVNL’s business model is that of an agency which selects contractors and developers. That’s why the company has thin operating margins of about 5.1% for FY18. Government policies on pricing, particularly of contracts and sourcing, can also impact future margins and profitability.
Railway companies have markedly higher debtor days, such as seen in the case of Ircon, which is about 63 days. This too can prove to a be a drag for these companies. Debtor days is the number of days it takes for debtors to pay up.
Ircon and RVNL are also sitting on relatively high cash of ₹1,500 crore and ₹1,200 crore, respectively, which tends to drag down overall return on equity (RoE). RVNL’s RoE, for instance, is just 14.5%. If these companies can improve their execution and increase their RoEs, the run-up in their shares may be justified. Otherwise, the sudden interest in these companies may prove to be short-lived.