Source: Businessline
Investors can consider taking exposure in the initial public offering of Atlanta at the cut-off price. At the price band of Rs 130-150, the offer is priced at 13-15 times its per share earnings for March 2006 on a diluted post-issue equity. Valuations are comparable to players such as Valecha Engineering and Era Constructions. Reasonable valuations, good operating margins and a good order-book lend optimism to our view from a near-term perspective.
Business
Atlanta is primarily an EPC (Engineering Procurement and Construction) contractor in the road segment with a presence in the mining and realty space too. Much of the IPO proceeds will be invested in a special purpose vehicle to execute the Nagpur-Kondhali section of the highway on a BOT (Build-Operate-Transfer) basis. The rest will be used for initial investment in a housing project in Mumbai, to repay debt and buy machinery.
Atlanta is one of the smaller players in the construction business trying to transform itself from a pure EPC contractor to an operator of BOT projects. The company has gained experience by executing its first BOT project ahead of time. This could help the company qualify for more such projects in future. Currently, Atlanta has one BOT project under execution and has bagged another for which it is raising funds.
The revenues from both will start accruing in the next two years. BOT projects are lucrative and offer good opportunities for growth as the government encourages more public-private partnerships. The equity expansion will also enable the company bid for large projects. The ability to forge project-specific partnerships with bigger players such as Gammon India could also improve its chances of qualifying for bigger orders.
Near-term visibility
The company has an order book of over Rs 600 crore, of which the unexecuted portion, as of June 2006, is close to Rs 300 crore, approximately three times its 2006 revenues. These orders are only for the EPC contracts on hand and not for the BOT projects. Though the order book-to-sales ratio is lower than most other players in the construction sector (four-five times FY-06 revenues), the execution timeframe, at about a year, gives it near-term earnings visibility.
Financial performance
Over the last five years, the company's sales have grown at a compounded annual rate of 24 per cent and earnings at 47 per cent. Operating profit margins at over 30 per cent is high compared to its peers. Over the last two years, income from the high-margin mining segment has risen substantially to contribute 11 per cent of revenues from 2 per cent in 2004. The company also owns its own range of equipment, which gives it better margins as volumes increase.
The offer opened on September 1 and closes on 7. The lead manager is Karvy Investor Services.