As the Maytas Infra story takes a turn, its share price is scaling new highs. The stock has moved up four-fold from its low of Rs 31.40 in March 2009. Among latest events, Maytas Infra’s management control has been handed over to Infrastructure Leasing & Financial Services (IL&FS). While the move looks good, what does it bring for IL&FS and investors? For one, IL&FS had already invested substantial money in Maytas, and currently owns 37 per cent stake in the latter. With it taking control of Maytas, IL&FS is required to make an open offer (already announced; at Rs 112.80 a share) for an additional 20 per cent.
“The selection of IL&FS has been done in consent with bankers, lenders and stakeholders of the company on certain conditions like lock in period of two years. And at the end of the day, IL&FS post-open offer itself will hold large investments for a 57 per cent stake in Maytas,” says Ved Jain, government-nominated director for Maytas. “I think IL&FS is interested in Maytas given its huge investments in this company. The whole idea seems is to bring Maytas on the track and later put it on the block,” says Ambareesh Baliga, vice president, Karvy Stock Broking. For retail investors though, “while IL&FS will definitely help the company and the move seems to be positive, as far as the stock price of Maytas is concerned there is very little room for appreciation,” says investment advisor, SP Tulsian of sptulsian.com.
Cracks in the structure
Maytas Infra, which is promoted by the family of B Ramalinga Raju of Satyam Computer Services, came into the limelight after the Satyam fiasco. After problems cropped at Satyam, Maytas’ new business inflow almost stopped, bankers became reluctant to lend and contracts for some of its prestigious projects like the Rs 12,000-crore Hyderabad metro rail contract were terminated. Even as the execution of projects was slow and the cash flow insufficient, Maytas was forced to sell stake in some of the projects. Its financial conditions eroded and employees were seen leaving fearing that Maytas might ultimately get liquidated. Later, the management control of Maytas was taken over by government representatives, which though helped allay some of the fears.
Meanwhile, it’s net worth eroded from Rs 638.46 crore in 2007-08 to about Rs 200 crore as on March 2009. Simultaneously, debt went up from Rs 973 crore to Rs 1,700 crore. The impact of this is visible in the tripling of interest costs to Rs 168.4 crore leading to a loss of Rs 489.8 crore in 2008-09.
Common synergies
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At this critical juncture, IL&FS’ entry has provided a new hope that Maytas may come back on track and thus, result in better valuations for shareholders. IL&FS, which is already operating into the infrastructure space of transportation, power, water, maritime and other allied activities, can prove helpful through its capability, experience and financial muscle. The company aims to revive all existing projects that Maytas has been awarded in the past and might sell its stake in some of the BOT projects to realise cash.
Infusing liquidity
IL&FS has drafted its strategy whereby it will first infuse some liquidity and kick start Maytas’ operations, which currently has an order book of Rs 7,500 crore spread across different verticals like road, port, power and airport.
Today, the biggest challenge for Maytas is to arrange funds for working capital so that it can execute projects in hand. Positively, it has reported a cash profit of Rs 32 lakh for June 2009 quarter, which reflects that Maytas is in relatively better shape now as compared to a few months earlier.
“The company is already cash positive in the June quarter and we think the cash profits should improve from here onwards thus easing pressure on the liquidity and working capital management,” says Milind Patel, deputy managing director, IL&FS Financial Services. IL&FS also intends to restructure the debt and start negotiations with financial institutions for working capital. “Once we come into the picture, we will revive Maytas’ financing and improve its working capital so that the company can execute more projects as well as bid for the new projects,” says Patel. However, this will not be easy given the poor operating performance and high debt in the books of Maytas.
Debt-trap
“IL&FS initially will bring Rs 55 crore as an additional debt and infuse more debt in case of Rs 250 crore of funding required for the BOT projects in the future,” says Jain. However, Maytas’ current debt to equity ratio is significantly high at about 8 times and fresh debt would only take this higher. Though the new management intends to halve debt to about Rs 800-1,000 crore in future, the pace at which the debt falls will depend on how fast the company is able to bring back the advances of Rs 390 crore given to the erstwhile Satyam Computer, improve cash profits and infuse fresh capital.
Conclusion
Although the recent moves led by IL&FS are positive, the revival would not be quick. Also, its share price has run up significantly, suggesting that valuations are high. “At this juncture the valuations are stretched. The company will take a while to come on track although IL&FS is saying 12 months but if it takes more than that it will only add more risk to the investments,” says Baliga.
The market also seems to be ignoring the risks associated with the current order book as many analysts doubt how much of these orders are good and could lead to profits. That apart, uncertainties regarding new business, funding of working capital, excessive debt and attrition of experienced employees could remain concerns in near-term. Considering the need for fresh funds, Maytas may go in for an equity infusion leading to earnings dilution, say analysts.
“In my view, the per share value of Maytas works out to Rs 145. Even if we take out the NPV of 10 per cent of the current order book of Rs 7,500 crore (assuming all orders are good), the valuations are not more than Rs 2,200-2,300 crore as against the current enterprise value of Rs 2,400 crore,” says Tulsian.
The stock is currently trading at Rs 137 per share or a market capitalisation of Rs 805 crore. If the Rs 1,700 crore of debt is added, Maytas’ enterprise value works out to be about Rs 2,500 crore. Thus, experts believe that most of the upside is already factored in the prices. While new investments don’t appear attractive, for those who have been holding on to Maytas they may well hold it for some more time for various measures to materialise, which hopefully should help improve valuations in the medium to long-term.