Tantia Constructions

Tantia Constructions can be a small part of the portfolio of investors with a penchant for risk. Reasonable revenue and profit growth in FY-09, a tough year especially for smaller construction companies, strong order book and presence in lucrative segments such as Railways and urban infrastructure lend themselves well to future earnings growth.

This Kolkata-based player is well-positioned to tap infrastructure development activities in the east and north-eastern regions of the country — geographies that hold higher potential for business, given the relatively slow growth, compared with the rest of the country.

At the current price of Rs 90.5 the stock trades at 4.2 times its expected earnings for FY-10. Given that the company managed a 12 per cent profit growth in FY-09 which was a difficult year, the coming year’s earnings growth with the recent spate of order inflows can only be better.

Investors can buy the stock with a two-year perspective but should actively consider booking profits occasionally by setting target returns.

This would help them lock into gains that small cap stocks often make in a market rally.

Niche player

Tantia Constructions is a contractor with presence in road, rail, bridges and urban infrastructure projects. For a small-sized contractor with revenue of Rs 450 crore (FY-09), the company has enjoyed lucrative profit margins. Its operating profit margin (OPM) for FY-09, for instance, was 13 per cent — superior to a number of listed players.

This high margin can be attributed to two factors: One, the company’s presence in urban infrastructure and rail projects that typically carry healthy return on investments. Two, its well-entrenched presence in the north-eastern regions such as Mizoram and Assam, where there is little competition, given the tough conditions; thus providing scope for higher bidding prices.

Given the government’s steady increase in the budgetary allocations for the region, and the recent creation of the North-East Rail Development Fund, Tantia could emerge as a key beneficiary especially in smaller contractual works.

Tantia has witnessed a spate of order flows from the beginning of this year taking its total order book position to Rs 1,935 crore, four times its revenue for the latest ended financial year.

Projects from Railways, including the Delhi Metro, and road projects account for a good 34 per cent each of the total order book. Urban infrastructure stands next at 28 per cent. Tantia has presence in power transmission and airports as well, though the value of such projects is not significant.

The current order-book proportion could well ensure that the company’s OPMs are in the 12-15 per cent range, provided it is not hurt by any sharp hike in commodity prices. On this account, Tantia did witness a decline in its OPMs in the quarter ending September 2008 but quickly recovered, perhaps due to price escalation clauses available for raw materials costs.
Steady revenue growth

While Tantia’s earnings growth for FY-09 was a muted 12 per cent, its earnings over the last three years has grown at a compounded annual rate of 26 per cent. Recent quarters ending March and June suggest that the company’s earnings growth is back on track after a dip in the December quarter.

Interestingly, Tantia is among the few small infrastructure players that have managed to expand their revenues (on a year-on-year basis) over the last four quarters. This provides comfort as it suggests that the execution of projects has not been hurt as a result of economic slowdown or credit crunch.

Execution, though, has come only at the cost of high leveraging. The company’s debt: equity ratio at about 1.7 times although not alarming, is rather tight, limiting scope for further leveraging, given the small size.

However, that 15 per cent or Rs 30 crore of the total Rs 192 crore of long-term debt is from FCCBs due only in 2012 provides some comfort. The decline in interest rates has also provided marginal relief to the company’s profits.

via BL