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Sunday, May 21, 2006

Unity Infraprojects: Avoid


Investors can avoid subscribing to the initial public offer from construction player Unity Infraprojects (Unity). The offer appears ambitiously priced even after factoring in revenue flows from conversion of orders on hand.

Infrastructure spending has prompted a number of players in this space to tap the capital market and ramp up the equity base. The construction activity in the country is likely to ensure that even small players get a share of the business. However, the ability of such companies to compete with established players and execute projects across geographies will determine their long-term growth prospects.

At the price band of Rs 651-732, Unity is likely to list at 30-34 times its expected earnings for 2006-07 on a post-issue basis. While a few established players command this valuation, similar-sized peers such as Valecha Engineering still trade at a significant discount to Unity's offer price.

The sector is also likely to witness more players entering the market in the near future. This throws open a number of options for investors looking for exposure in the infrastructure space.

Objects of issue

Unity derives a chunk of its revenues from building varied civil structures. It is also into other infrastructure works such as roads, bridges and irrigation projects. The company proposes to use the proceeds of the issue to procure capital equipment, repay debt and invest in build-operate-transfer (BOT) projects. The expanded equity base will be Rs 13 crore.

Lacking an edge

At Rs 1,391 crore, Unity's order-book is about five times the 2004-05 revenues. About 50 per cent of the orders are in the civil construction space. Transportation and irrigation constitute 18 per cent and 32 per cent of the orders respectively. Unity is also geographically less diversified with 80 per cent of its projects in Maharashtra.

While irrigation projects can bring reasonable margins, civil structuring and roadways are unlikely to fetch high returns.

In the civil structure segment, Unity may not be able to gain advantage over the unorganised market unless it is able to carve itself as an EPC (engineering, procurement and construction) contractor. The company now does not have in-house designing capability and cannot be classified as an integrated player.

Quite a few small companies that came up with offers recently have niche businesses that set them apart from the rest. While Tantia Construction has an edge in railway infrastructure, Sadbhav Engineering had gained entry into the road BOT space in consortium with Gammon India. As of now Unity Infraprojects does not have any such distinguishing feature to command a high valuation.

The company has, however, entered into a joint venture with IVRCL Infrastructures and Projects for a lift irrigation project in Maharashtra. This may aid in qualifying for similar projects.

Unity's venture into Andhra Pradesh is also a positive as the State has a high budget allocation for irrigation projects. It may have to, however, compete with bigger players such as Nagarjuna Constructions.

Joint ventures

Apart from the understanding with IVRCL, Unity does not have joint venture with frontline companies to gain entry into areas such as BOT projects. In its tie-up with Patel Engineering the latter's holding is now just one per cent. Unity's plan to enter high-potential project segments may depend on its ability to forge ties with technically qualified players.

Financials

With revenues of Rs 222 crore as of December 2005, Unity Infraprojects saw a jump in operating profit margins from 8 to 13.5 per cent.

If the company is able to move away from fixed price contracts to projects with escalation clauses, it may be able to sustain margins. Forty per cent of the revenues derived up to December 2005 was from fixed-price contracts.

Offer details: The offer is open from May 19 to 24. DSP Merrill Lynch is the lead manager to this issue.