Investors can avoid the initial public offer (IPO) made by construction company Roman Tarmat as the pricing appears steep in relation to the size and nature of its business. In the price band of Rs 150-175, the company is valued at a price-earnings multiple of 15-18 times its nine-month annualised earnings for FY-07 on a diluted basis. Small-cap companies such as PBA Infrastructure or Tantia Construction, which have a wider portfolio of business, now trade at a discount to Roman Tarmat.
Profile and offer details
Roman Tarmat is in the business of constructing highways and runways. The company plans to raise Rs 43-50 crore for procuring capital equipment and for long-term working-capital requirements.
No niche business
Roman Tarmat's business is concentrated in the road segment. Highways and roads now account for 83 per cent of the company's order backlog of Rs 337 crore. While this segment yields low profit margins, a good number of infrastructure players have nevertheless benefited from the volume flowing from the Government's spending on roads.
Roman Tarmat's completed projects and order-book reflect that the company has been undertaking maintenance works and small projects from Public Works Departments or corporates. It has not so far participated in any of the National Highways Authority of India (NHAI) projects — the prime means of order flow for most infrastructure companies that operate in the segment. Companies that spotted the opportunity early have not only benefited from volumes but also achieved forward integration by graduating to EPC (Engineer-Procure-Construct) projects, thus improving margins and gaining bidding qualification.
Roman Tarmat has, however, remained a regular `contractor' and not so far made any significant move to diversify its services. This might cap opportunities to garner EPC contracts. The company's revenue grew at a compounded annual rate of 27 per cent over the three years to Rs 87 crore in FY-06 (Rs 83 crore for the nine months ended December 2006). Roman Tarmat's size, in terms of revenues, does not, however, compare well even with those of other small-cap companies. This raises concerns over the company's ability to scale up operations.
Roman Tarmat has stated in the prospectus that it would look to bid for large-scale projects and contracts on a build-operate-transfer (BOT) or annuity basis. Even assuming that its expanded equity base would provide some financial qualification to bid, the company may have to compete with bigger players which are already established in the space. This would require the company to not only bid aggressively but showcase superior technical qualification.
Further, the company has entered into joint ventures for four of its road projects. While this strategy would help bid for projects, it would reduce profitability for Roman Tarmat, given the small size of the projects.
Roman Tarmat has managed to maintain its operating profit margin in the 12 per cent range for the past two years. This may have come about as a result of increased contribution from airside works, which accounted for 25 per cent and 18 per cent of the total contract receipts over 2006 and 2005 respectively. With runway projects down to 13 per cent of the order backlog, the company's ability to maintain its OPMs would determine whether it can manage superior margins in an otherwise low-margin segment such as roads.
Roman Tarmat has so far enjoyed income-tax benefits under Section 80 IA. However, post-Budget proposal, the company may lose this, as contractors are no longer eligible for the same.
Road contracts awarded by Special Economic Zones and success in bagging large projects may provide upside to the company and remain key risks to our recommendation.
The infrastructure-listed space now appears to be clearly making a distinction between large integrated players and small players, some with niche business. The disparity in valuations for these companies is proof of this. Hence, we believe that valuations may be a greater deciding factor for middle-of-the-road companies such as Roman Tarmat.
The Roman Tarmat IPO that opened on June 12 will close on June 19.