Elara Securities Maintains ‘Sell’ Recommendation on RITES Despite 43% Stock Surge

Despite a significant 43% surge in RITES stock in the year-to-date 2023, Elara Securities has reiterated its ‘sell’ call on the company, setting a target price of ₹370, suggesting a downside of more than 21%.

The stock has experienced a 23.5% gain in the past year, reaching a record high of ₹584 on September 11, 2023, but has since decreased by over 19% from its peak. Nevertheless, it has seen a substantial increase of over 54% from its 52-week low of ₹305.60 recorded on December 26, 2022.

2023 has proven to be a volatile year for RITES, with positive returns in 6 out of 11 months and negative returns in 5. The stock had its highest increase in July, rising by 25%, while experiencing the most significant decline in February, down by 1.5%.

In the September quarter, the company reported a 23.49% decrease in consolidated net profit to ₹101 crore compared to ₹132 crore in the same period last year. Revenue from operations also fell by 11.68% to ₹582 crore in Q2 FY24 from ₹659 crore in the corresponding period in the previous year.

Elara Securities maintains its bearish stance on the stock for several reasons:

1. Order Dynamics: RITES received a Letter of Award (LOA) to supply 10 diesel locomotives worth $37.7 million or ₹313 crore to CFM, Mozambique (Ports & Railways). However, it lost an order for 300 high-sided wagons to a competitor, even though RITES was previously declared L1. The estimated order size for wagons was ₹200 crore.
2. Valuation: The brokerage had initially factored in inflows of ₹500 crore from Mozambique based on RITES’ L1 positioning. Due to the recent announcement, Elara assumes a lower inflow. Consequently, while keeping revenue and earnings estimates unchanged in FY24E, it reduced them by 2% each in FY25E and FY26E. Elara expects an earnings CAGR of 12% during FY23-26E, with an ROE and ROCE of 22% each during FY24-26E, considering a low working capital cycle despite the increase in turnkey construction, along with a strong dividend yield of 3.4% for FY24E.