Given the track record, strong order book, growth opportunities and reasonable valuations, Man Infra’s IPO could deliver healthy returns.
Good visibility
The growth in the company’s revenues and net profits should remain strong in the coming years, too. The company currently has an order book of Rs 2,021 crore, which is about 3.4 times its 2008-09 revenues and is to be executed over the next two years, thereby providing good revenue visibility. Besides, the company has sustained operating profit margins of over 20 per cent and net profit margins of about 14 per cent in the last few years, which is among the highest in the industry. This is because of the company sub-contracting limited works--- sub-contracting work to others typically eats into margins. Also, timely execution of projects and very low debt in the books, have helped the company to maintain high margins.
The company deploys in house equipments for majority of its project requirements, which has also resulted into a high asset turnover of about 6 times in the 2008-09. Lower dependence on others for assets leads to its optimal use and hence, better margins.
However, considering the strong order book and expected new business in the coming years the company is now further investing in new equipments. For instance, as of now most of the equipments are employed in the ongoing projects. The benefits of increased availability of equipments will accrue in the form of the company being able to bid for large and complex orders as well as further improve up on execution.
| ON A FIRM FOOTING | |||
| in Rs crore | FY08 | FY09 | 9MFY10* |
| Sales | 236 | 594.3 | 381.4 |
| Op. margin (%) | 22 | 25 | 30.4 |
| PAT | 31.80 | 82.50 | 66.40 |
| PAT margin (%) | 13.50 | 13.90 | 17.40 |
| RoNW (%) | 50.00 | 43.70 | NA |
| * for the nine month period ending December 2009 Source: Company, RHP | |||
Changing revenue mix
In the year 1996, the company initially started by providing construction services for the port sector. But later on, as opportunities emerged in the real estate space, it shifted its focus to construction of buildings. This was also more to do with the fact that there were fewer projects awarded in the port infrastructure segment over the last one year consequent to the slowdown. As a result of this, the share of ports and roads in order book has dropped to just about seven per cent in the current fiscal (as of December 2009). However, this trend should change as a result of the new orders expected over the next 6-8 months from the port segment. The company intends to bid for large BOT and PPP projects in the roads and port segments. In the roads space, the company does not have extensive experience, but in the port segment, considering its experience and clients base (the company has executed projects for JNPT, Mundra Port, Pipavav Port) it should be able to scale up its business.
Conclusion
Considering its strong order book and opportunities in the sector, growing revenues and net profits at a healthy pace should not be a problem for the company in the near future. However, in the long run, it’s over dependence on the real estate sector and large revenues accruing from a single client (about 50 per cent from DB Realty) are among key concerns. Also, its ability to scale up business in the ports and particularly in road segments will need to be watched considering the increasing competition and the company’s conservative and selective approach towards bidding for new projects. How the company tackles these issues will be among the key things to watch in the coming years.
Positively, the company has relied less on debt as a funding option while bidding for new projects and is selective about projects, which have resulted in high net profit margins.
Meanwhile, the IPO is priced at about 12-13 times at the upper price band on the basis of its annualised earnings for 2009-10. Further, considering the strong order book, the company can clock an earnings growth of about 35-40 per cent in 2010-11. Based on the 2010-11 estimated earnings, the IPO is priced at a PE of 9-10 times, which is reasonable compared to the peers in the industry and leaves some room for appreciation.