The Railway ministry has 2 GINORMOUS TARGETS. They want to :

  1. Handle 50% of all freight in the country by 2030. (As of now only freight operations of the railways are profitable and are already the largest handlers of Coal, Iron, Cement, Steel, Food Grains, Fertilizers, Petroleum Products)
  2. 100% Electrification of the entire Railway network by 2022. (As on 31st march 2018, the Indian Railways has electrified 49% or 33,057km of the route kilometres and 46% or 55,240 km of the total running track. Leaving about 50% of the electrification to be done in the next 3 years)

The first reaction for us all when we see a govt target is to simply yawn. Sometimes however, the govt institutions really surprise us. Take NBCC for example, it grew from 5 Rs a share in 2012 all the way to 130 Rs a share in 2017. Imagine making 2600% on a CPSE in 5 years !

If the Railway Ministry has to achieve its targets, it needs a few executing agencies and RVNL today is its Top Guy, over the likes of IRCON. This is what RVNL does :-

  1. Electrification of Railway Lines.
  2. Laying of New Rail Lines. (includes tunnel work, bridge work and other stuff incidental to it)
  3. Doubling and Tripling of existing Single railway lines.(also converts narrow gauge to broad gauge)

Watch this video on the Order pipeline and how the company plans to go about it.

Seem pretty unpolished and raw to what the market wants to hear. Hope their market related innosense lasts long.

What I love about the company.

  1. Order book is packed and will be executing about 77,000 +cr of works over the next 5-7 years. This will have an EBIT of 8.5% of 6,500+ cr and a PAT of 4.5-5% 3,250+cr. Currently the company is trading at a market cap of 4,800 cr.
  2. No Debt.
  3. Fully Asset Light
  4. Financing the projects is not their head ache.
  5. Just 150 permanent employees. (rest are on deputation from the Indian Railways )
  6. Earning is based on a cost + fee model. Currently it is 8.5% and in some projects it is 9.35%.
  7. They do not go scouting for orders. The Ministry of Railways, which is also their direct owner continuously awards them work.
  8. In March 2018 they generated cash from operations, before changes in working capital of about 450 cr.

What i do not like about the company

  1. They are not a PWD (public works department) i.e they are completely dependant on the Ministry of Railways for work allotted.
  2. If the new govt or the re elected govt for some reason goes slow on the implementation of the projects the company is literally d**d.
  3. As per a CPSE notification they compulsorily have to pay the govt a dividend of 30% of the PAT or 30% of the govt equity (whichever is higher) every year.
  4. Unlikely that this company will trade at a PE higher than 15.

In the best case scenario(as per current order book, this can improve or decline ), this company can generate a PAT of about 3,200 cr in the next 5-7 years. Currently it trades at 4,800 cr. For us to double our money in a tleast 5 years, the company should trade at about 10,000 cr i.e have profits of at least 650 cr in some year in the next 3 years. In 2018 the company reported a profit of 570 cr. Highly likely that the company will surpass 650 this year, giving the stock at least a 60% probability of getting re re-rated and trading at a 12-15 PE.

Due to the elections, the majority think that this is an extremely speculative counter as the elections are right around the corner. True. But then in the words of the great G.M.Loeb “Buy when the majority think it is speculative and sell when people think it has reached investment grade.”

Read previous posts on my 12 bagger NBCC investment here – https://biginvestorblog.com/category/stock-ideas/nbcc/

3 replies on “RVNL. A company where the Government is your Tail Wind.

  1. Very good overview on RVNL, Nitin. What’s your view on Rites – higher Roce, higher margin business than Rvnl, not fully dependent on Railway. Do you think Rites can have similar growth like rvnl because of the same tailwind ? In that case, can Rites be a better investment choice?

    Thanks!

    Like

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