With the Modi government back at the Centre, one would expect government-supported infrastructure firms such as RITES Ltd to be high on the shopping list of investors.

Yet, despite a recent 1:4 bonus announcement, the company’s shares have remained broadly unmoved at about 278 in the last two weeks. Sure enough, since its listing, the RITES stock has risen 44.7% as the railway infrastructure company delivered a sharp profit growth in the fourth quarter.

But the question is will it be able to repeat its past performance in the coming quarters.

While RITES has developed an edge in railway infrastructure, the firm enjoyed a high Ebitda margin largely because of its consulting business. Last year, though, the contribution of consulting to its total revenue mix came down. It shrank to 56.2% of revenue mix in FY19 from 67.4% in FY18. Ebitda stands for earnings before interest, tax, depreciation and amortization, and is a measure of profitability.

On the other hand, RITES has been increasing the contribution of its low-margin turnkey construction business in the revenue mix.

For example, its turnkey construction division’s revenue increased from 146 crore in FY18 to 567 crore in FY19, taking the contribution to 27.7% of its FY19 revenue mix. Increasing its low-margin turnkey construction business means, its Ebitda margin will get impacted.

(Graphic: Vipul Sharma/Mint)
(Graphic: Vipul Sharma/Mint)

“Consultancy, which makes 24% operating margin, was 71% of FY16 revenue. This share, however, will cool off to 49%, we project, by FY21. As we see, the incremental revenue will be booked from the abysmally low-margin turnkey projects. The blended EBITDA margin of 32% in FY16, thereby, will be marked down by 11 percentage points over the next two years. The catalyst remains in winning new consultancy/ leasing/export orders," said analysts at Antique Stock Broking Ltd in a recent note to clients.

To be sure, the company’s order book has been bulging on the back of renewed orders from both turnkey construction and consulting. Besides, RITES has been diversifying the order base and the share of private order book stood at 25% at the end of FY19.

“With the government’s thrust on infrastructure development and a robust order pipeline in the transportation segment, RITES is well-positioned to tap these opportunities. It is already working on key metro projects and expects the order inflow momentum to continue, going forward," said a recent client note from Reliance Securities Ltd

The company’s current order book of around 6,100 crore, which is about three times its FY19 revenue, gives it good visibility in revenue. Still, about 42% of its order book comprises low-margin turnkey construction. So, further margin compression cannot be ruled out.

Unless RITES can increase its consulting revenue, the allure of this stock’s asset-light model could fade further.

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