Riding the Railway Track with RVNL. A primer on the stock

 I think best part is even after railways orders getting slightly dried up we will continue with the positive growth may not be with the CAGR of 27% and all what we had to think that may take one or two years to reach even that, so I am sure the way we are getting the orders, the way we are performing as Mr. Rajesh Prasad mentioned about Indore Metro, now Chennai Metro another Rs.5000 Crores, Rs.6000 Crores work which we have already started and other places different metros even in highways plus Vande Bharat is also now on a very smooth path because after share purchase agreement, shareholders and everything is settled now

Mr Pradeep Gaur, Chairman and Managing Director

Stock data

Price Performance:

Company description:

Rail Vikas Nigam Limited (RVNL) is a public sector enterprise under the Ministry of Railways in India. Established in 2003, RVNL primarily focuses on planning, executing, and monitoring railway projects related to infrastructure development, modernization, and expansion. The company plays a vital role in enhancing the Indian Railways network by undertaking various construction and development projects.

Business segments:

1. Project Implementation:

RVNL’s core business segment is project implementation. It involves the planning and execution of various railway infrastructure projects, including the construction of new rail lines, gauge conversion, doubling of tracks, electrification, and station development. The detailed list is as follows:

• New lines:

This includes augmenting the rail network by laying new railway lines to achieve a seamless bi-modal transportation network.

• Doubling:

It involves the provision of additional lines by way of doubling the existing routes to enable the Indian Railways to ease out traffic constraints.

• Gauge conversion:

This includes the conversion of meter gauge lines to broad gauge railway lines.

• Railway electrification:

The Company is engaged in the electrification of the current un-electrified rail network and electrification on the new rail network.

• Metropolitan transport projects:

Company takes up projects to set up metro lines and suburban networks in metropolitan cities.

• Workshops:

This includes manufacturing facilities and workshops for repairing and manufacturing rolling stock.

• Others:

This includes the construction of traffic facilities, railway safety works, other electrification works, training works, surveys, construction of bridges including rail over bridges, etc.

2. Consultancy and Services:

RVNL also provides consultancy services related to railway projects. This includes project feasibility studies, detailed project reports, engineering consultancy, and project management.

Business Model:

RVNL operates under a business model that focuses on efficient project execution and consultancy services. Key aspects of its business model include:

1. Government Entity: RVNL operates as a government-owned entity and collaborates closely with the Ministry of Railways to implement crucial railway projects.

2. Project Execution: The company specializes in executing projects related to rail infrastructure development, with an emphasis on timely completion and quality.

3. Consultancy Services: RVNL offers consultancy and project management services to other railway organizations and government agencies.

Order Book:

As of Q2FY24, The company had an order book of approx. Rs.65,000 Crores plus and out of that, Rs.35,000 Crores is the nomination basis, Rs.30000 Crores to the bidding, it includes Rs.8700 Crores for Vande Bharat, so total Rs.65000 Crores plus.

Projects

RVNL has been assigned a total of 143 projects so far. The company has completed 140+ projects with 72 projects under implementation and 3 projects yet to be sanctioned. 

Securing New orders:

The company has received various contracts and orders from several parties for the construction of railway corridors, implementation of infra projects, design and construction of metro rail stations, construction of multi-modal logistics parks, etc. Some of the Major orders are from Tata Steel, NHAI, GMRCL, Madhya Pradesh Metro rail corp, among others including orders from foreign countries like Kyrgyzstan.

Special Purpose Vehicles:

RVNL has set up four SPVs which are in operation- Kutch Railway Company Ltd, Krishnapatnam Railway Company Ltd, Baruch Dahej Railway Company Ltd, Haridaspur- Paradip Railway Company Ltd. The company also has an SPV under construction(The Angul Sukinda Railway Limited) and an SPV under consideration(Dighi Roha Rail Limited). 

Subsidiary:

RVNL has a subsidiary called High-Speed Rail Corporation of India Ltd. which was incorporated for undertaking primarily for feasibility studies and implementation of the high speed corridors in India to run passenger trains at speed of up to 350 km per hour.

Offer for sale:

Disinvestment of 9.64% equity shares was done by the President of India acting through the Ministry of Railways through an Offer For Sale realizing an amount of Rs.552 cr. 

Investments

The Company had investments of ~Rs 1872 Cr as of FY21 mainly contributed by investments in Joint Ventures 

Contingent liabilities

The Company has contingent liabilities of ~Rs.3000 Cr arising due to adjudication in arbitration invoked by the Contractor not acknowledged as debts by the company and other pending court cases. 

Financials:

What we like:

1. Key beneficiary of increase in Railway capex (doubled in past five years) cornering more than one-third of the share:

RVNL share in MoR civil works is at 30% which is the highest among PSU (IRCON at 5%). Balance works executed by MoR internally through 16 zonal railway units. Among private companies, KEC International, L&T and Tata Projects are key beneficiaries

2. All expenditure incurred on it is pass-through where interest and principal repayment are borne by MoR:

Projects funded through loans from Indian Railway Finance Corporation (IRFC) is a pass-through entry. MoR takes responsibility toward debt servicing. The MoR has delegated powers to RVNL for sanctioning estimates for the projects given to them upto 100% cost on account of price escalation and up-to 20% cost on account of reasons other than price escalation (i.e., change in design) on the original sanctioned cost of the projects.

3. Better alternative among railway PSU:

The RoCE of RVNL is 18% and is higher than IRCON’s 13% and core RoCE of 23% better than RITES 22%. The cash to market cap ratio is the highest at 19% and the company has a sturdy execution track record and higher growth potential. The Executable order book provides healthy book-to-bill visibility. The Low risk to margin adds as the cherry on top. The company also has Efficient & profitable capital allocation to port-rail connectivity projects.

4. Infrastructure Development:
5. Critical Infrastructure Projects: RVNL is actively involved in planning and executing critical railway infrastructure projects across India. These projects include the construction of new rail lines, gauge conversion, track doubling, electrification, and station development. The significance of these projects cannot be overstated, as they contribute to the overall development of the country’s transportation infrastructure.

2. Economic Growth Catalyst: Infrastructure development, particularly in the railway sector, plays a vital role in boosting economic growth. RVNL’s projects facilitate efficient transportation of goods and passengers, reducing logistics costs and enhancing connectivity between cities and regions. This, in turn, has a positive impact on trade, industry, and commerce.

3. Consistent Demand: RVNL’s involvement in infrastructure development ensures a consistent demand for its services. The ongoing need to expand and modernize the railway network to accommodate growing passenger and freight traffic creates a reliable stream of project opportunities. This stability can be attractive to investors seeking consistent returns.

5. Consultancy Services:

1. Diversification of Revenue: RVNL’s consultancy and project management services represent a diversification of its revenue streams. While project implementation remains the core of its business, offering consultancy services to other railway organizations and government agencies allows RVNL to tap into a different market segment. This diversification can help mitigate risks associated with project delays and fluctuations in government spending.

2. Expertise and Knowledge Sharing: RVNL’s consultancy services are often sought after due to the company’s deep expertise in railway infrastructure. This expertise allows RVNL to contribute to the planning and execution of railway projects beyond its own portfolio. It also positions RVNL as a knowledge-sharing entity in the field of railway infrastructure, enhancing its reputation and industry standing.

3. Potential for Higher Margins: Consultancy services often command higher profit margins compared to traditional project execution. This can lead to improved profitability for RVNL’s consultancy segment, potentially bolstering the company’s overall financial performance.

Factors to consider:

1. RVNL’s business is highly dependent on government-funded railway projects, making it vulnerable to changes in government priorities and budget allocations.
2. Railway projects often face challenges related to land acquisition, approvals, and delays, which can impact project timelines and costs.
3. The company operates in a competitive market, and its ability to secure projects may be influenced by competition from other infrastructure companies.

Conclusion:

Rail Vikas Nigam Limited (RVNL) plays a crucial role in India’s railway infrastructure development and modernization. Its government ownership provides financial stability, but it also exposes the company to government decisions and project-related risks. Investors should carefully assess the company’s financial performance, project execution capabilities, and government policies before considering investment in RVNL. Staying informed about the railway sector’s developments and government initiatives is essential for making informed investment decisions.