ARSS Infrastructure Projects IPO Review

A relatively low asking price and a focus on government projects make the offer from ARSS Infrastructure Projects a reasonable bet, but only for investors with a high-risk appetite.

A construction contractor in the Railways and roadways segment, the company plans to raise Rs 103 crore from this issue to fund working-capital and joint ventures.

In its price band of Rs 410-450, the offer is at a valuation of 8.6 to 9.5 times the estimated FY-11 per share earnings on a post-offer equity. Reasonable valuations notwithstanding, given the risks to the business, investors are advised to exit the stock if it touches about a 21 per cent return.

ARSS has a high exposure to Railways (which offer higher margins) and roadways, a sizeable order book, strong sales and profit growth, and a secure client base in government contracts. The company also uses joint-ventures to bid for and execute bigger projects and build on execution capabilities. Strong margins and post-issue lower debt-equity are other positives for the company.

However, the order book has several contracts with a relatively short execution period. ARSS will have to keep up the pace of securing fresh orders to maintain current rate of growth.

A promoter facing criminal investigations, past instances of default in payment of power bills, default in servicing debt and decline in working capital turnover pose significant risk.

Background

ARSS executes construction contracts in Railways (laying and linking of tracks, earthwork and construction of bridges) and roadways (widening and strengthening of roads), with a recent move into irrigation. Geographically concentrated in Orissa, the company has moved into regions such as Tamil Nadu, Rajasthan, Jharkhand and so on. Almost 90 per cent of the contracts come from government-based institutions such as Ministry of Railways, Orissa Public Works Departments, and so on, providing a secure repeat client base. The company also has in-house design capacities.

Current order-book stands at Rs 2,877.5 crore (4.6 times 2008-09 revenues), and is well-diversified with 41 per cent in the Railways segment, 40 per cent in roads, 3 per cent in irrigation and the balance in other smaller works.

The order book is represented by over a hundred contracts, a smaller average contract value (about Rs 21 crore), and bulk of the order book is executable by FY-11 providing near-term earnings visibility. However, maintaining current growth rate depends on the company's ability to continually secure fresh contracts which provide similar margins.

Issue objects

ARSS has used joint ventures with players such as Kalindee Rail and Patel Engineering to execute projects where it lacks capability. Such ventures could help it build on its own expertise and allow a bidding capacity for bigger and more varied projects.

Besides, gradual build up of expertise could help it eventually qualify for projects on its own strength. About Rs 5 crore from the issue proceeds will go to funding such joint ventures and Rs 86 crore towards working capital.

Turnover of working capital, however, has gradually declined from 3.36 in FY07 to 1.67 times (as of December 09). Huge increases in inventory could partly explain this slide.

The order book just about doubled in FY-08 over the year before, but work-in-progress (WIP), a part of inventory, jumped about nine times. This has continued in FY-09 as well where WIP more than doubled against an order-book growth of 64 per cent.

Financials

Sales recorded a strong 118 per cent three-year CAGR while net profits put up a 149 per cent growth. Given a higher component of railway projects, and price escalation clauses built into a majority of the contracts, operating margins have been maintained above 10 per cent FY-07 onwards, standing at 12.5 per cent for the nine months ended December 09.

Net profit margins as well have stayed at about 8 per cent. Funding position appears comfortable with debt-equity on a post-issue basis on the lower side at 1.23 times, and interest cover at 2.7 times (December 09). The company has, however, defaulted on interest and repayment of loans in FY-06, FY-04 and FY-03.

Offer details

The issue is open from February 8-11. IDBI Capital Market Services and SBI Capital Markets are the lead managers.

via BL