RITES Limited (RITES) Earnings Call Transcript & Summary

Good afternoon to all of you, ladies and gentlemen. I'm Rajeev Mehrotra, Chairman and MD of RITES Limited. I'm happy to welcome you all to the investor conference call on RITES Limited's financial results for Q2 FY '21. Hope all of you and your families are keeping well during this time of pandemic. I have with me, Director of Finance, Mr. BP Nayak; CFO, Mr. Parmod Narang. As you all know, we have invested 24% stake aggregating to INR 48 crores in the IRSDC and we have also taken a bold position there. And there have been a couple of questions on the business model of IRSDC in the past. So we decided to request MD and CEO of IRSDC to join us along with the management in this call. And if there are any clarifications on the business model of IRSDC, we will request his guidance to the investors. As you know, RITES in the Miniratna (Category-I) Schedule 'A' public sector enterprise and a leading player in the transport consultancy and engineering sector in India, having diversified services and geographical reach. Now I will briefly take you through the highlights of company's results for Q2 FY '21, and then we can open the forum for questions and answers. I hope you all have been able to access the financial results, presentation and press release uploaded on our website as well as are put through stock exchanges. Let me first talk about the consolidated results for Q2 FY '21. Despite pandemic conditions, I feel that the results of the company for the quarter remained satisfactory. We have been able to generate revenue as well as maintain margins during these tough times, attributable to our committed workforce, a strong order book, which we had in the beginning and quick execution of projects wherever normalcy was found to be returning. I will now summarize the results on consolidated basis. And as you all know, almost 97% of our income is coming from stand-alone numbers as a part of the consolidation. So whatever I am talking about consolidated numbers is relevant to the stand-alone also directly. RITES also consolidated -- sorry, RITES total consolidated revenue has decreased to INR 500 crore as against INR 888 crore in Q2 FY '20. But if you see the quarter-to-quarter comparison, previous quarter, it has risen by 33% against Q1 FY '21. So I believe that this is a strong scaling up in difficult working conditions. Similarly, operative revenue, excluding other income, stands at INR 439 crore in Q2 FY '21 as against INR 746 crore in Q2 FY '20. So that has increased 31% over Q1 FY '21. You will notice that this decrease is -- decrease in revenue is mainly due to export deliveries not scheduled during this quarter. And approximately impact of INR 262 crore is coming only because of this item and certain disruptions in supply chain and travel restrictions imposed due to pandemic. In Q2 FY '20, there was also a receipt of final settlement amount of INR 91 crore from a foreign client. If you see there is only a fall of 9% in the operating revenue on Y-o-Y basis. As this looks moderate, looking at the difficult circumstances we have throughout the country as well as overseas in certain projects. If we exclude the effect of exports, which were not scheduled this quarter. So this looks a reasonable, say, impact of COVID. EBITDA and PAT stand at INR 189 crore and INR 132 crore against INR 339 crore and INR 237 crore, respectively in Q2 FY '20. EBITDA and PAT in Q2 FY '21 has increased 83% and 104%, respectively, in comparison to Q1 FY '21. While we are giving previous number is -- previous quarter number is because still we are not completely out of the difficult scenario, which existed in Q1 comprehensively. We have been able to sustain margins as a result of expeditious execution and timely implementation of cost control measures. EBITDA and PAT margins stand at 37.9% and 26.5% against 38.2% and 26.7%, respectively. So we have been able to broadly control the levels of EBITDA and PAT in the operations. Performance of the stand-alone segments, company achieved a revenue of INR 242 crore from consultancy business, which is down by 5.2% over Q2 FY '20 but the company has improved margins in this segment at 47.4% as against 44.5% in Q2 FY '20. The margin has improved as a result of effective utilization and rationalization of manpower. Leasing revenue stands at INR 27 crore in Q2 FY '21 as against INR 30 crore in Q2 FY '20. The decline was due to temporary suspension of work at certain sites, construction sites mainly and ports during the lockdown. Profit margins of leasing got impacted because of fixed costs associated with this like depreciation remaining intact during this period as well. There were no export delivery scheduled for Q2 FY '21. However, H2 FY '21 is expected to see exports to Sri Lanka and Mozambique, and all these products are under manufacturing at production units. Turnkey revenue during Q2 FY '21 stands at INR 154 crore against INR 179 crore in Q2 FY '20. Turnkey margins were maintained at 3.6% during this quarter. Performance of our subsidiary that is REMCL also got impacted due to less traction power required by railways during this quarter. REMC revenue stands at INR 18 crores as against INR 22 crores in the previous quarter of last financial year, mainly for these reasons. Similarly, profit before tax has also decreased to INR 8 crores as against INR 14 crores in Q2 FY '20. The revenue from power generation grew at 17% over Q2 FY '20. In fact, the windmills actually generated much more than what they did last year. Now commenting on the order book. Company's consolidated order book now stands at INR 6,661 crore as of September 30, 2020, with new or extension of orders secured for INR 948 crore during this quarter alone. During this period, RITES secured more than 60 new projects or contracts including enhanced scope of work in the existing contracts. RITES has received turnkey works for electrification and construction of ROBs, road over bridges, consultancy works for metros, highways and also secured first order for locomotive leasing to a fertilizer plant. RITES has also been able to secure detailed design work for Indore and Bhopal metro depots, technical consultancy for construction of airport at Shimoga and projects against MoU signed with Coal India, they have also started giving some projects for implementation. I believe that the results of this quarter reflect positivity about sharp recovery in business operations. And going ahead, company is still hopeful of a moderate growth in FY '21 in anticipation of further easing of COVID-related restrictions or return to normalcy. Now we can open the forum for question and answers thank you very much for your kind attention.

[Operator Instructions] The first question is from Rohit Natarajan from Antique Stockbroking.

Sir, now that we have already concluded first half of the fiscal. And in the initial remarks that is the last quarter, you said that this year, in FY '21, the revenue target is to have some single-digit growth. And if I see the numbers currently, if you have to get that even if no flat revenue growth, you will have to do a 43% kind of Y-o-Y growth in the second half execution. What exactly is the pipeline over there? I mean, are we on that guidance trajectory have that impact?

Yes, very important question. And the sector position is like this that exports, we wanted to start exports from Q3 onwards. But because of certain supply chain disruptions, we have not been able to get. Even now there are disruptions on certain components like tank shaft, axle and wheels being imported for these exports. There have been delays of 1 to 2 months in this. Looking at the overall delays so far, we are hopeful that from January onwards, the shipments will start to Sri Lanka and possibly February mid or end onwards to Mozambique. This should take us to almost INR 550 crores and possibly targeting INR 650 crores of shipments by March. Now if this alone comes through, rest of the activities would take care of possibly still a single-digit moderate growth. But I am still putting a sort of flag on this that if the situation does not improve or deteriorate as we have seen things happening overseas. Except that rider, I believe that still we should be giving a reasonable moderate single-digit growth and mainly in Q4.

The next question is from the line of Ankit Merchant from Reliance Securities.

I just have a few queries. One is related to the order book structure. So what we have seen is that the consultancy order book is still flat at INR 2,500 crores. So can you give some guideline or what do we have in the pipeline for the next? And do we see the order book improving in the consultancy segment? Also, if you could share some light on the leasing because the leasing order book has also dropped significantly. So if you could guide me on that?

Okay. The consultancy order book per se is actually strong INR 2,500 crore order book is almost there to execute in 18 months to 2 years. There are some other major orders being followed, but we'll have to wait a little more to see the outcome. There are major tenders for 3 new DFCs. There is a tender likely very soon for high-speed rail corridor PMC. So we are eyeing all those things, and this may take a little more to materialize and all this is on competition basis. So we believe that we should remain with a significant role in these projects. So we are eyeing those major consultancy contracts. Commenting on the lease, when suddenly the construction activities were stopped, port operations got stopped, certain clients desired to stop the lease for some period. So about 6 to 7 locomotives had to be put on rest. And I think except 1 or 2 all have again been put to use at different location or to a fertilizer plant and 1 to a steel plant. So this drop is mainly because of certain locos, which we had to withdraw and now being redeployed. But per se, there's no redundancy, maybe possibly just maybe 1 still remains to be deployed compared to the pre-COVID period. Turnkey, we have seen a rapid growth in this quarter because few projects came now. We are still trying to get some more work because we believe that we have capacity to execute some more such projects. So hopefully that should also be seen true. Exports, we have not seen any increase in this year because we had actually enough in hands to do this year as well as next year. And because of the travel restrictions, actually new export orders are not yet out. So we'll be pursuing as soon as the travel and other activities start. So summarizing on the order book, I will say the INR 6,661 crores is the highest we have so far. There is a good visibility for 18 months to 24 months. And we would continue to remain, say, cautious about the important national projects coming whether on nomination or on competition.

Sure. That's helpful. And the new turnkey projects, which we -- which have been awarded to us. So do we see any margin dilution in those particular projects going ahead? And also if you could highlight the measures which you have taken to improve the EBITDA margins because year-over-year basis, also, we have seen some improvement. And how likely are they -- they are going to sustain in, say, next 2 to 3 quarters?

Well, there was a very moderate, maybe 5 to 10 basis points reduction in the price offered by us for the new turnkey orders. I think we have clarified this much small moderate improvement. We can always try to make through the cost optimization for such projects, which we've already started doing not only for turnkey but for other projects also. The cost profile of rights is that manpower cost is almost 45%, maybe 50% of the total cost. So whenever a situation of this was seen in March itself, we started positioning that if this goes longer, how do we do? So we took 2, 3 steps, certain positions, which were on deputation. We cut short the tenure, people went back to their departments, certain positions on contract were not renewed, certain positions, which were in senior age group were foreclosed because of the health challenge also and we have not filled up any retirement vacancy. So put together, so far, we have been able to achieve a reduction of about 281 numbers in last, say, about 9 months, which is very, very unusual in the operations I have seen in RITES in last 13 years. But the business model permitted us to look at this possibility, and I think this has come very handy during this pandemic.

Sure. If the operator allows, I just have 1 more question. That sir, related to the CapEx. So we were expected to spend close to INR 400 crores sort of CapEx, INR 80 crores for locomotives. So have that -- have you already done that? And INR 150 crores, we were doing some CapEx for the building as well. So any update on that?

Yes, building work in Calcutta. We have 1 regional office for East and Northeast that work has started. There is a new office complex near AIIMS. So we have made payment of second installment there, NBCC World Trade Tower. On locomotive side, just we have placed orders, but we have cut down the requirement to INR 40 crores. Because this year, already, there's a pressure on the new leasing demand. So that still remains for INR 40 crores. The CapEx plan is on, yes.

The next question is from Jonas Bhutta from PhillipCapital.

Sir, just 1 question. I wanted to understand. So in one of the prior questions you highlighted that you are also vying for some consultancy projects in the upcoming HSR projects. So these are the one between Delhi and Bombay or Delhi or Ahmedabad, right? So just wanted to understand from a qualification perspective, right, how much of -- how much RITES did benefit from the existing HSR project basically in terms of consultancy? And whether you are seeing for a scope expansion, given that you've got the experience on the Mumbai, Ahmedabad? So in context to what total project size is versus how much is RITES' opportunity within this entire HSR ecosystem, if you can elaborate on that, that will be great, sir.

Well, I think in the -- one of the previous briefings, I have said that we are in touch with certain Japanese consultants because they have to be there because this is being funded by JICA. So they'll have to have a Japanese consultant as the lead consultant for such project. We are in very advanced stage of discussion on this issue. But I will like to be excused from sharing more details on this. I'll clarify what we are doing. We are almost about to conclude our understanding with some leading consulting companies to make a consortium, to submit a bid for this project. Now whether we get this or somebody else is still an issue to be seen. But as far as our preparedness to eye this opportunity, we are very strongly after this. And I'm sure we'll get a meaningful role. Now to get an idea, what could be the size of this pie? I would again say that for such large projects, the consulting part, or we call it PMC part, would actually range from 3% to 5%. I would not to be very specific to the price, which might actually finally emerge. So I'm giving you a range, 3% to 5%. And you would have heard that they've already given work award for INR 25,000 crores of construction work to L&T. So we have, on an average, maybe the fees possibility of INR 1,000 crore, where maybe 3 or maybe 4 maximum consultants could join in, a combination of Indian and foreign consultants to present a technical team for this project, which is going on as perceived by us.

So just on that question. So the total EPC pie within this INR 108,000 crore Bombay Ahmedabad project is about INR 60,000 crores, INR 65,000 crores. And the 3% to 4% bandwidth that you mentioned -- range that you mentioned is on -- will be applicable on the INR 65,000-odd crore for the...

Repair and constructions, yes, you are right. You are right, actually. Construction, electrification, signaling part, not on the rolling stock part.

Not on the rolling stock part. So basically, we are looking at anywhere close to INR 2,000 crores to INR 2,500 crores kind of total opportunity? And within that, it will be distributed amongst 3 or 4 consultants.

Actually, they -- to my knowledge, they will go step wise. They might just do for certain figures, which are already decided to be started. So this might go into phases. So we see a major phase coming out very soon. And we are actively pursuing it, yes.

Got it. And sorry, if I can squeeze in 1 more. Sir, in terms of -- not from the current year perspective, but over the next 2 to 3 years. So you had elaborated in your previous conference calls, the road map to expand the scope of your consultancy business beyond what we typically look at, which is slightly railway heavy. You had talked about getting into certain road projects internationally, something, I think, 1 in Bangladesh or something like that. And then you are trying to get into certain infrastructure management projects in Kerala and stuff like that. Can you just help us understand where in the journey are we, in the last 6, 9 months whether much development has happened? And when can we start seeing meaningful fruit, sir, in terms of order inflows from the diversification side, if one can call that?

Yes, Jonas, we have already won this highway work in Bangladesh. We have already started deploying team there. So that project is...

There was more expected, as in, it was supposed to sort of benefit.

Yes, there are 1 or 2 projects which are in very advanced stage of award. And due to a limitation, I cannot announce a project till we have been declared L1. So wait a little more. It's going as conveyed to the group in the past. We are pursuing them. It is going on.

The next question is from the line of Pankaj Bobade from Axis Securities.

Sir, you mentioned about manpower cut down in order to save on costs. So can you please elaborate more how much savings have we done this quarter? This quarter, we have booked around INR 113 crores of employee costs, right? So would this be the new normal? Or is there anything more to come? And second question would be, as we have the Chief of IRSDC. I would like to understand what is the business model of the JV or the subsidiary, JV partner, JV where we are partners? And would it be a game changer for our business going forward?

Okay. Pankaj, taking your 2 questions. Let me start with the second one. I'll request Mr. Lohia, who is the MD and CEO of IRSDC. Once we finish first round of questions. Then I'll request him to brief on because there might be questions, Pankaj, from others also on IRSDC. So let us here the questions. Once we finish first round on RITES' questions, then we'll request Mr. Lohia to chip in and give his views. Coming to your first question on the manpower. Look, in H1, I will say, because April onwards, we started doing this exercise. We have been able to reduce manpower costs by 8.4%. The manpower restructuring in this company is a combination of regular, deputation, contract and then retired and reemployed certain expertise we hire on that business. So this combination actually proved to be very helpful in cutting down the requirements for about 6 months to 9 months, which we have seen going through already. But it does not stop us from expanding should the business so requires. And you would have noticed in our website that there is already an ad for certain categories of maybe 140 or so. But this would take care of next 6 months to 1.5 years, 2 years. So this is a flexibility, which we are very gainfully used to manage the cost during this time. And you said about the new normal. Yes, if we are not able to control the manpower cost, the business has to be competitive and relevant to the cost, which client can bear.

So manpower cost per quarter, would it be in the range INR 100 crores, INR 120 crores?

By large, this has been like this. Yes. Yes. I think INR 480 crores, INR 490 crores per year. But new industrials, we'll go very careful only when the new business is enhanced, we will expand.

So this is structural. I mean, there would not be any reinstatement or revision on the same, right?

Well, Pankaj, if we have...

Unless and until we have a new business.

If 9 months, we have paid salaries and incurred costs that have been a wastage because 9 months have gone like this. We again see still 1 or 2 months going like this. It is not normal in Delhi. I believe this is not normal in Mumbai, and we hear from Bangalore also it's not normal there as well. So 2, 3 key business activities areas we are seeing are still affected. So it's good that we reduce this number. The moment we feel that the projects can shape up, we can hire...

Sir, your voice is cracking.

We can hire the same or others when the business picks up.

Sir, your voice is cracking. Sorry, I couldn't understand. What did you say?

Situation is still not normal everywhere. It is good that we reduce the number for these 9 months. Can you hear me, Pankaj?

No, no. I'm not able to hear you.

The admin, can you please...

Pankaj, we can hear the management clearly, request you to call us back from a different device maybe.

Sure.

The next question is from the line of Parimal Mithani from Credential Investments.

So recently, sir, a lot of high-speed contracts have come up for bidding. And since you being, key players being for a competitor? None of the players have got any contract as of right now, most of have gone to the private players. Is it because of their quoting a low bid price or how the thing because especially towards the turnkey projects and in the quarter gone by, we have won almost INR 860 crore of turnkey project. So is it on a low bidding price, if you can explain, sir?

Mr. Parimal, if I got your questions right, you are referring to the NHRC contracts.

Yes, sir.

So far only EPC contracts have been announced. And this 1 package has gone to L&T. We are nowhere in the league of this type of EPC contract. We have started doing a moderate size of maybe INR 1,000 crore to INR 2,000 per year EPC contracts, mainly rail line doubling, electrification, signaling and workshops. So we do not even qualify to bid for such mega construction projects, and we are not actually equipped to handle that construction sight. But having said that, in just one of the previous questions I answered, we are seriously working on closing in on a consortium, which should be a serious bidder for the PMC work for this. Wait a little more and then see the outcome. We are aligned to the possibilities where we can get business share from this specific business.

But sir, this consultancy, would it be a competition for any private players here because as we have seen in this -- because my understanding is consultancy, we are #1 in India in terms of doing for the railways. Do you see any competition from any private tier coming for that in terms of getting orders?

It's very difficult to say because the tender is not yet even out, so how many bidders would be there. But I can assure you 1 thing that we will be one of the most serious bidders in this game, whether private or international players come or local come. And we have already done a very meaningful exercise to make a group to put a serious bid for this.

And sir, last question. On the IRSDC, if you can highlight afterwards all your points on the phone call, it would be much better, sir, the model in the quarter.

Yes. I think once we finish round 1, Mr. Parimal will request MD IRSDC to share his views.

The next question is from the line of Dixit Doshi from Whitestone Financial Advisors.

Yes. Most of my question has been answered. Just 1 question. Sir, you mentioned that there were some one-off in Q2 FY '20 of INR 91 crore, some settlement with the overseas client. So that INR 91 crore is recorded in the other income?

Yes, yes, other income of Q2 FY '20.

Okay. So that INR 141 crore has come down to INR 60 crores. So that is mainly due to this INR 91 crore of onetime?

Yes, yes, yes.

The next question is from Rohit Natarajan from Antique Stockbroking.

Sir, my question is more to do with the consultancy segment. Sir, what could be the quality assurance opportunity that you have within this space? And also on sector piece, that is railway CapEx of usually happening around INR 1.5 trillion, what exactly is the quality assurance component within that complete amount that is distributed every year? And what is RITES' market share in it?

Okay. This -- we have, in fact, clarified earlier also, let me just put together the whole process. The procurement of certain items is done -- I'm sorry, the procurement of certain items is inspected by RDSO, like the ver. et cetera. Machinery is COFMOW. And all other items like rails, electrical items, certain mechanical items, springs, axles, wheels, rails, all this has been done by RITES. Now these items are not necessarily CapEx items. Of course, these are CapEx once the new line is being set up. There is a significant consumption in the refurbishment or rehabilitation of tracks also. So this is impacted by CapEx as well as OpEx. In ballpark, full figure could be that in the procurement of railways, about 35% to 40% items would be relevant to our inspection. And our inspection fee would be around 0.9%. So you can see around INR 350 crore to INR 450 crore of space available right now. This may get impacted if the purchase is delayed or it is shifted to other quarter or other year. But other than that, we have a very exclusive presence. For India, we have about 12 offices, which are doing this service to railways through the country and hundreds of items are being expected.

So if I understand it correctly, at least, we should get INR 350 crore to INR 400 crore of quality assurance every year, that should be the order inflow.

Yes. I think that -- based on today's listing, that's the correct.