Infrastructure player, ITD Cementation, has not made much headway, despite the infrastructure boom in the country over the past couple of years. Insignificant turnover growth, poor margins and high valuations not backed by earnings growth make the stock an unattractive candidate in the infrastructure space.
Frequent change in ownership has also slowed the capital ramp-up essential for operating in this sector. Investors looking to play the infrastructure theme can consider exiting the stock and switching to other attractive players in the space.
At the current market price, the stock trades at 90 times its earnings for the financial year ended December 2006. Even considering revenues on conversion of unexecuted orders, as of March 2006, the valuation appears unjustified vis-à-vis its peers.
ITD is engaged in building marine structures, piling and civil engineering works, transportation and hydropower projects.
Declining numbers
For the fourth-quarter ended December 2006, ITD's sales and net profits fell 22 per cent and 16 per cent.
With this, the company has seen a negative annual net profit growth of 11 per cent over the past three years compared to at least 20 per cent growth reported by a numbers of peers.
That the company has managed to improve its operating profit margin by 300 basis points to 6 per cent for the latest financial year can be viewed as a positive.
However, increasing staff cost and interest costs have dented the net profit margins to just 0.5 per cent.
While reasonable raw material price could have aided the company last year, the OPM may not be sustainable, given the uncertainty in cement pricing. Further, the unexecuted orders worth Rs 1,969 crore, as of March 2006, consisted of about 50 per cent road projects, which typically earn low margins against 7 per cent of piling and foundation projects (a segment in which the company is well-established) which yields better returns.
The company's interest coverage ratio of just about one also appears to dent confidence in the current high-interest rate scenario.
Even as the company made a rights offer in October 2006 to partly fund working-capital requirements, we believe that working-capital requirement can only increase if the company tries to ramp up its sales volume.
Not geared for future
While a chunk of ITD's business comes from road projects now, it has so far not participated in public-private partnership projects such as the build-operate transfer model that may provide large orders with relatively better margins. We believe that such models are likely to dictate the infrastructure space in future.
Lack of early qualification in this space may lead to intense competition when the company plans to enter this segment.
Further, ITD's net worth was eroded in 2004. The company's capital funding also came to a halt as its ownership changed hands twice in four years.
Any support through joint venture from its parent, Italian-Thai Development Public Company, to bid for BOT projects may provide a breakthrough.
The joint ventures with the promoter company have so far been only in the non-BOT space. The promoter company is also not precluded from bidding for projects on its own or through other joint ventures.
This background, therefore, does not build a strong case for support from the promoter company.