Record Backlog And Global Market Expansion Will Strengthen Future Outlook

Key Takeaways

• RITES' strategic focus on execution and order inflows has led to a strong order backlog, supporting potential future revenue growth.
  
• Aiming for international market expansion, RITES expects revenue diversification and sustained growth despite pressure on export order margins.
  
• Declining revenue, lower export margins, and delays in order execution are impacting RITES' profitability and cash flow, with increased competition limiting growth.

Catalysts

Provides design, engineering consultancy, and project management services in the field of railways, highways, airports, metros, ports, ropeways, urban transport, inland waterways, and renewable energy.

• RITES has implemented a two-pronged strategy of improved execution and aggressive order inflows, which has resulted in a record-breaking order backlog of ₹8,000 crores. This suggests potential growth in revenue as these orders are executed in future quarters.
  
• The company anticipates a minimum 20% growth in top line revenue for FY '25-'26, driven by new orders in consultancy, turnkey projects, and exports, indicating possible future increases in earnings.
  
• RITES has maintained a consistent win rate of one order per day for four consecutive quarters, highlighting strong order inflow which could sustain future revenue and earnings growth over the coming fiscal years.
  
• Despite the expectation of lower margins in competitive export orders, RITES projects maintaining overall EBITDA margins around 20% and PAT margins around 15%-16%, signifying a strategic balance between growth in revenue and maintaining profitability levels.
  
• The company plans to leverage opportunities in international markets, such as Bangladesh, Mozambique, and the Middle East corridor, aiming for continuous export order inflow in each quarter, supporting its revenue diversification and future growth potential.

RITES Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming RITES's revenue will grow by 20.0% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 16.8% today to 13.9% in 3 years time.
• Analysts expect earnings to reach ₹5.4 billion (and earnings per share of ₹11.74) by about February 2028, up from ₹3.8 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as ₹4.6 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 34.4x on those 2028 earnings, up from 27.7x today. This future PE is greater than the current PE for the IN Professional Services industry at 28.0x.
• Analysts expect the number of shares outstanding to grow by 0.12% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 13.16%, as per the Simply Wall St company report.

RITES Future Earnings Per Share Growth

Risks

• The year-over-year decline in revenue and profit for the current fiscal year, including a 25% drop in PAT, suggests challenges in maintaining existing business levels, which could adversely impact future earnings.
  
• Export margins are projected to be substantially lower than historical levels (dropping from 20% to around 10%), affected by competitive global tenders, potentially reducing profitability.
  
• Execution of existing orders, particularly in exports, has faced delays, such as with the Bangladesh order, which could impact cash flow and revenue timing.
  
• Dependence on large turnkey projects, which have traditionally lower margins, may continue to weigh down overall profit margins, affecting net income growth.
  
• Challenges in capturing new consultancy and quality assurance clients due to increased competition, particularly illustrated by a dip in quality assurance revenue, could restrict revenue growth.

Valuation

• The analysts have a consensus price target of ₹266.0 for RITES based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹301.0, and the most bearish reporting a price target of just ₹237.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹38.8 billion, earnings will come to ₹5.4 billion, and it would be trading on a PE ratio of 34.4x, assuming you use a discount rate of 13.2%.
  
• Given the current share price of ₹218.15, the analyst price target of ₹266.0 is 18.0% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.