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PBA Infrastructure - IPO

PBA Infrastructure
Narrow focus

The mainstay - road construction - is low margin and highly competitive and the presence in only state- Maharashtra- risky

PBA Infrastructure, incorporated as Prakash Building Associate Pvt Ltd in 1974, specialises in constructing roads. The company has envisaged that it will require Rs 32.12 crore to undertake road construction projects that is may bid for and bag. Of this, it plans to raise Rs 2.12 crore through internal accruals, Rs 10 crore will be earmarked as seed capital requirement for BOOT/BOT projects, Rs 10 crore for the purchase of machinery, and Rs 10.12 crore to enhance the working capital margin money.

Strengths

• Road development is the largest and the fastest growing infrastructure segment. The value of contracts executed by PBA Infrastructure in the last five years exceeded Rs 350 crore. The projects were spread across the entire country. Currently, the company has an order book of Rs 564.01 crore, including Rs 172.42-crore orders received by its joint venture???.
• The Mumbai-based company has a good track record in bagging and executing road projects in Maharashtra. In the current five year plan (10^th plan) 2002-07, the plan outlay of Maharashtra for road projects, at Rs 1869 crore, is second after Delhi. Therefore, the company is strategically placed to get and implement road projects coming up in the state.

Weaknesses

• Almost 90% of PBA Infrastructure's revenue comes from road projects, which are low margin and highly competitive.
• The balance sheet of the company is inadequate for taking up large projects.
• The company has considerable exposure to state-sponsored projects where credit risks are higher as compared to national-level and internationally financed projects. The significant business concentration in Maharashtra can pose a problem if the state's finances suffer.
• The experience of the company in executing BOT/BOOT projects, which is subject to uncertainty, is negligible. The BOOT project revenue led NOIDA Tool Bridge Company is yet to show profit even after four years of execution of the project.

Valuation

In FY 2005, PBA Infrastructure's sales stood at Rs 124.32 core and net profit Rs 6.58 crore. EPS on post-issue equity works out to Rs 4.9. The issue price of Rs 60 discounts this 12 times. Due to its over-dependence on low margin run-of-the mill road projects and small size, the company may not get higher discounting. However, construction stocks have seen speculative buying on news and rumours of order flows. PBA may also benefit from this on listing.