Rail Vikas Nigam: Whats Next After Stellar Share Surge

A bunch of orders as part of India's infrastructure push in the last three months has sent shares of Rail Vikas Nigam Ltd. soaring 77% so far this year. The state-owned firm isn't done yet as it has guided for higher order inflow.

Yet, the stock is already trading at pricier valuations than its peers providing services to the Indian Railways. And India is headed into an election year when government contracts usually dry.

RVNL has been a key beneficiary of Indian Railways' National Rail Plan Vision 2030 to create capacity and increase share of the railways in freight to 45% from the current 27%. That has the potential to bring in more orders and therefore increase revenue for RVNL.

Shares of Rail Vikas Nigam rose 0.25% on Monday, as compared with a 0.46% advance in the benchmark NSE Nifty 50. The stock is not widely tracked by analysts.

RVNL takes on railway projects like installing new lines and railway electrification as well as metro projects, workshops, bridges and more, on a turnkey basis.

The company's order book stands at Rs 50,000 crore, as of December 2022. And it won orders worth more than Rs 5,000 crore in the last few months. That includes the Rs 2,248-crore Mahi Bajaj Sagar Project in Banswara, Rajasthan to augment irrigation in the region.

The company in December 2022 bagged a Rs 1,500 crore UTF Harbor Project in the Maldives.

It also inked a Memorandum of Understanding with the government of Kyrgyzstan to build four railway projects, worth an estimated cost of around Rs 20,000 crore.

These International projects would give a huge footprint to the company in the overseas market and could attract more projects from other countries, Atul Karwa, analyst at HDFC Securities, wrote in a January report.

RVNL is also shifting focus from railway infrastructure to concentrate on metro, tunneling work, port connectivity and marine works since the bulk of orders currently come from the Indian Railways.

The company is targeting an order book of Rs 75,000-1,00,000 crore in two years and a top line of Rs 22,000-23,000 crore in FY24.

While it expects margin to go down in the short term, the company is optimistic of an improvement as it enters high margin management consultancy services.

The company has an asset-light model where the Ministry of Railways provides all the machinery, plants and stores for execution of projects.

RVNL reported a revenue of Rs 19,382 crore in FY22, on a gross asset base of Rs 379 crore. Indian Railways is its biggest client, contributing 100% of its sales, as on FY22.

The company also counts state governments, departments, and public sector undertakings among its clients.

The management has guided for a revenue of Rs 21,000 crore in FY23 and Rs 22,000-23,000 crore in FY24. It expects net profit of above Rs 1,300 crore in FY24.

Costlier Than Railway Peers

RVNL is trading at 17 times its estimated earnings per share for FY23. That's almost on par with the valuation of peer Rail India Technical and Economic Service Ltd., which earns a higher operating profit margin because of its presence in business consultancy, contributing 41% to its revenue in FY22.

By comparison, Indian Railway Construction International Ltd. trades at a price-to-equity multiple of 10.

Key Risks

The company faces execution risk as a typical railway project takes around five years to complete. It means that 80% of the company's current order book will take around 3-3.5 years to be out of their books.

The company faces client concentration risk as its major revenue comes from the Ministry of Railways. This can affect the company financials due to changes in budgetary decisions by the government.