All aboard Stagecoach buses as trains leave the station

By Noor Zainab Hussain and Tanishaa Nadkar

(Reuters) - Rail operator Stagecoach is preparing for a future as a smaller firm operating buses and trams in Britain, as it faces exclusion from three important rail routes that could cost the company 1 billion pounds.

The company, which reported a 4% rise in annual profit from continuing operations thanks to higher demand for bus services, said it would no longer bid for new UK rail franchises - a business that has so far accounted for almost half of revenue.

"As it stands, we would expect from November to be a company focused on UK bus and tram," Finance Director Ross Paterson told Reuters.

Stagecoach's bids to renew existing East Midlands and West Coast rail franchises with partners were disqualified for not complying with pension funding requests and the company was also left out of the South Eastern franchise.

The company, which had partnered with SNCF and Virgin Group for the West Coast franchise, has responded by suing Britain's transport authority.

The latest setbacks came after Stagecoach lost the contract to run trains from London to Edinburgh last year after the government decided to renationalise the rail route.

Without the three franchises, Stagecoach stands to lose its UK rail business. Operating profit for 2019-2020 from the rail business is expected to be minimal, with a 100-million-pound hit from the loss of the franchises.

But the company has been boosted by higher revenues at its UK bus business despite Britons relying less on buses as they shop more online and change working patterns.

CEO Martin Griffiths said Stagecoach had no intention to bid for new UK rail franchises on the current risk profile offered by the Department for Transport.

"I would never say never but I don't see a change in the risk profile any time soon," Griffiths said. "We need to move on, we need to prioritise our bus, coach and travel businesses here in the UK."

The company's shares were 1.9% higher at 119.8 pence at 1018 GMT after falling earlier in the day.

Stagecoach sold its North American business this year.

Pretax profit from continuing operations rose to 132.9 million pounds for the year ended April 27 from 128.3 million pounds a year earlier.

"With rising costs to operate main routes and growing public negativity around rail operators, this may not be the worst scenario for the business if it focuses efforts on a greater profit margin among its coach and bus operations," said Julie Palmer, partner at Begbies Traynor.

Dallas-based Greyhound was put up for sale by FirstGroup last month as the North American bus line battled to compete with growing pressure from low-cost airlines.

(Reporting by Tanishaa Nadkar and Noor Zainab Hussain in Bengaluru; Editing by Bernard Orr and Deepa Babington)