This Railways-backed stock with high dividend payout is Axis Securities top pick

On BSE, RITES shares closed at ₹368.60 apiece up by 0.9%. The stock had touched an intraday high of ₹373.20 apiece — taking the overall upside to more than 2% on Monday. Its market cap is around ₹8,857.5 crore.

RITES is a leading player in the transport consultancy and engineering sector in India and uniquely placed in terms of diversification of services and geographical reach in various sectors such as railways, highways, urban engineering (metros) & sustainability, airports, ports, ropeways, institutional buildings, inland waterways, and renewable energy.

The company is the only export arm of Indian Railways for providing rolling stock, other than Thailand, Malaysia, and Indonesia.

Year-to-date, RITES shares have gained by at least 37.6% on Dalal Street.

In its research note, Axis Securities highlight 3 investment rationale for RITES shares. These are:

1. Strong revenue visibility owing to robust and diversified order book:

The company holds a strong order book of ₹5950 Cr and is well-diversified with high-margin Consultancy contributing ~41%, Turnkey projects ~49%, Exports ~5%, and the rest from Leasing. Furthermore, ~80% of the order book is sourced from the GoI and its PSU while the rest are from private parties. The order book gives revenue visibility for the next 2 years.

2. Increased push on Infra development:

The government initiatives such as Gati Shakti Master Plan, National Infrastructure Pipeline, Bharatmala, Expressways, National Rail Plan, High-speed trains, Sagarmala, etc. to develop world-class infrastructure in India are expected to benefit incumbents like RITES.

With higher Capex for Railways in Budget 2022, the company is eyeing new consultancy tenders from Metro and High-speed Rail Projects along with Railways. Being a leading player in transport consultancy, RITES is expected to be a significant beneficiary of the Indian Railways’ infrastructure push. Opportunities within railways such as track doubling, electrification, 3rd line, and up-gradation of signaling systems along with railway station development offer significant headroom for future growth.

3. Robust financials and high dividend payout:

The stock brokerage derived adequate operational comfort from the company’s strong financials (with net cash and cash equivalents of ₹725 crore as of 30th Sep’22), high ROE and ROCE, and a high dividend payout (70% in FY22). Axis Securities expect the company’s financial matrix to remain healthy from a medium to long-term perspective.

In Q2FY23, the company garnered a consolidated net profit of ₹140.20 crore versus ₹174.49 crore, while revenue from operations stood at ₹659.08 crore versus ₹765.56 crore in Q2 of FY22. However, in the first half of FY23, the company’s PAT rose to ₹284.90 crore compared to ₹252.35 crore in the same period year ago, meanwhile, revenue also climbed to ₹1,264.12 crore in H1FY23 versus ₹1120.61 crore in H1FY22.

In the second quarter, the company declared a dividend of ₹4.5 per share (45 % of paid-up share capital). While in FY22, the company paid a total dividend of ₹17 per equity share (170%).

At the current market price, the RITES dividend yield is around 4.6%.

On its valuation, Axis Securities said, “We continue to like the company’s execution capability and its order book position, clean balance sheet and high dividend payout and expect Revenues/EBITDA/APAT to grow at a CAGR of 18%/18%/14% respectively over FY21-24E. We value the company at 15x FY24 EPS of ₹27.”

Hence, Axis Securities recommends a ‘Buy’ rating on RITES shares with a target price of ₹405 apiece.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.