Investors with a medium-term perspective can consider exposures in the stock of Subhash Projects and Marketing (Subhash). Strong growth in earnings, a robust order-book and successful bids in water-related projects and power transmission and distribution space augur well for the company's earnings growth prospects. Hydropower projects being implemented by subsidiary companies are likely to be earnings-accretive in the long term. At the current market price, the stock trades at 10.5 times its likely earnings for FY-08. Subhash Projects has a small market capitalisation of about Rs 600 crore and may be subject to market volatility in the short term. The stock is unlikely to repeat the manifold gains it made in 2005. Investors may, therefore, have to moderate their returns expectations.
Expanding business
Subhash Projects is an established player in water-related projects. It has also successfully diversified into solid waste management, power transmission and distribution (T&D) and hydropower projects. We believe that the diversified areas hold potential, as there are not too many players executing small projects in this space. Further, they are also likely to offer sustained income to the company.
The company's waste management project in Delhi, for instance, will ensure regular flow of income for eight years.
The company has also completed hydel projects of 20 MW and 6 MW in Karnataka and Arunachal Pradesh respectively.
Though of smallsize, these projects offer the company the technical qualification to bid for similar schemes. Though qualified for road projects, the company has not joined the plethora of small players in riding the road infrastructure wave.
The company appears to prefer to build on its core competencies, thus distinguishing itself from other similar-size players.
Subhash's expansion in the power T&D (transmission and distribution) space has been well-timed. Projects in this area, which now account for about 35 per cent of the order-book, have been the main driver of the company's revenue over 2006 and this year. The company has T&D contracts from Bihar, West Bengal and Uttar Pradesh, with over 8,000 villages under the Rajiv Gandhi Vidyutikaran Yojna.
With an early entry advantage, we expect Subhash to benefit from the rural electrification programme.
From being a water projects contractor, Subhash Projects has transformed itself into an integrated player in urban development projects.
Its recent agreement with the Gujarat Government for various city development plans in areas such as water supply and sewerage, electricity utility, roads and township development, reflects the company's plan to move up the value chain. Though these projects have a long gestation period, they are likely to provide steady cash flows.
Growing numbers
The present order-book of Rs 2,800 crore, with about half in water projects, is likely to be executed over the next two-three years, lending visibility to earnings over the medium term.
For the nine months ended December 2006, the company's revenue stood at Rs 533 crore — twice that of the corresponding previous period. This has improved the operating margin to about 8 per cent from less than 6 per cent a couple of years ago.
While this is still less than a number of peers, we expect the increase in T&D revenue stream to improve the OPM. The company's return-on-equity is, however, superior to peers such as Madhucon Projects.
The company's aggressive bidding in water and T&D projects and participation in projects such as the Pondicherry port would require it to ramp up capital.
This may lead to equity expansion without adequate earnings growth, as the benefits of such capital deployment are likely to occur much later. Investors may, therefore, see sedate performance in the near term, if there is ramp up in equity.