Rail Vikas Nigam IPO Opens: Should You Invest?

Rail Vikas Nigam Limited's initial public offering (Rail Vikas Nigam IPO) began today and will last up to April 3. Rail Vikas Nigam Limited (RVNL), the wholly owned government company is a 'Miniratna' (Category - I) company incorporated by the ministry of Railways in 2003 as a project executing agency working for and on behalf of Ministry of Railways. Rail Vikas Nigam Limited was incorporated with the objective to undertake rail project development, mobilisation of financial resources and implementation of rail projects pertaining to strengthening of golden quadrilateral and port connectivity and raising of extra- budgetary resources for project execution, HDFC Securities said in an IPO note.

The object of the initial public offering (Rail Vikas Nigam IPO) is to carry out disinvestment of 12.12 per cent equity stake of government of India. A total of 25.34 crore equity shares of face value of Rs 10 are being offered in the Rail Vikas Nigam IPO in a price band of Rs 17-19 aggregating to the issue size of Rs 430.87 crore - Rs 481.57 crore.

Rail Vikas Nigam Limited's total order book which includes laying new railway lines, doubling of tracks, gauge conversion, railway electrification, metropolitan transport projects, building workshops and bridge construction works as of December 31, 2018 stood at Rs 77,504.28 crore.

RVNL works on a turnkey basis and undertake the full cycle of project development from conceptualization to commissioning and its major client is the Indian Railways. The other clients of the company include various central and state government ministries, departments, and public sector undertakings, HDFC Securities said.

Individuals interested in subscribing to the issue can do it by bidding in lot size of 780 equity shares per lot and in multiples thereof. A discount of Rs 0.50 per share is being offered to RVNL's employees and retail customers, HDFC Securities note said.

Rail Vikas Nigam Limited's Financial Performance

In the first half of financial year 2018-19 Rail Vikas Nigam Limited reported net profit of Rs 253.62 crore on revenue from operations of Rs 3,622.88 crore. In the full financial year 2017-18 it had reported net profit of Rs 569.92 crore on revenue of Rs 7,597.36 crore.

Key Concerns For Rail Vikas Nigam Limited

Upon the completion of this offer, the government of India will hold approximately 87.84 per cent of RVNL's post-offer paid up equity share capital. Consequently, the President of India, acting through the ministry of Railways will continue to control it and will have the power to elect and remove directors and determine the outcome of most proposals for corporate action requiring approval of its Board or shareholders, such as proposed five-year plans, revenue budgets, capital expenditure, dividend policy, transactions with other government of India controlled companies.

Under the Companies Act, this will continue to be a public sector undertaking which is owned and controlled by the President of India. This may affect the decision making process in certain business and strategic decisions taken by the company going forward, HDFC Securities noted.

Raising another concern about RVNL, HDFC Securities said that, "RVNL has unsecured loans that may be recalled by the lenders at any time."

RVNL has availed an unsecured loan from Indian Railway Finance Corporation (IRFC) which may be recalled by them at any time. While for payment of interest and principal on the borrowing from IRFC, ministry of Railways would make available to the Company the required funds, the debt servicing will only pass through RVNL books. In the event that any lender does not provide further funding to it, the Company would need to find alternative sources of financing, which may not be available on commercially reasonable terms, or at all, HDFC Securities note added.

Should You Invest In Rail Vikas Nigam IPO?

Canara Bank Securities in a note to its clients recommends subscribing to the stock in the Rail Vikas Nigam IPO. As of March 31, 2018, the company had an EPS of Rs 2.73 and NAV of Rs 18.83.

"The company would trade at 6.96 times price to earnings ratio and 1.01 times its price to book value for FY18 earnings. We believe that the stock is fairly priced. One may subscribe to the IPO for long term gains," Canara Bank Securities said in a note.

"However, there is uncertainty with regard to change in the government policy to reconsider the practice of giving railway projects/works on nomination basis to RVNL or to give projects/works to CPSUs through limited competitive tenders. The outcome may have bearing on size of the future order flow and margins. Nevertheless, RVNL commands better bidding prospects due to the proven past record," the IPO note added.

At the higher end of the price band of Rs 19, the issue is priced at price to earnings of 7 times (post dilution) on FY18 and 7.8 times on H1FY19 (annualized) basis, which we believe is reasonable as compared to closely listed peer IRCON International that trades at price to earnings of 9.1 times on FY18 basis. As of 31 Dec'18, Centrum Wealth Research said in a note.

Given the government's focus on rail infrastructure spends (Metro, Port-Rail Connectivity, electrification etc), healthy order book, asset light model and reasonable valuation, we suggest that investors can subscribe to the issue from a long term perspective, Centrum added in the note.