Man Infraconstruction IPO Analysis

Investors with a two-year perspective may subscribe to the Initial Public Offer from Man Infraconstruction (Man Infra), a construction contractor in the realty and infrastructure segment. The company intends to utilise funds to purchase capital equipment and for general corporate purposes.

With the price band due to be announced only later this week, investors may subscribe if the offer price is below Rs 400, resulting in maximum acceptable valuations of 20 times the estimated FY-11 earnings. Beyond this price, the offer is unlikely to provide attractive returns to investors. Peers in the listed space such as BL Kashyap and Ahluwalia Contracts are available at current valuations of 15 to 24 times trailing earnings, and 12 to 20 times estimated FY-11 earnings.

While the company does not possess too many distinguishing aspects, its superior margins, strong funding position and a secure client base set it apart from most other construction contractors. Strong order-book across segments further supports our recommendation.

Contract player

Man Infra undertakes and executes construction contracts besides providing project management and consultancy. In the infrastructure space, it takes up construction of roads and port container terminals and support infrastructure. In the realty sector, it undertakes residential and township construction, commercial and industrial construction.

Spread of the order-book over a variety of segments could mitigate risk to an extent, and allows flexibility to shift focus based on segment prospects. Man Infra has a secure client base with several repeat contracts from players such as Simplex Infrastructure, Gateway Terminals India, the Dynamix Group, and so on.

The company has not made any serious move to graduate to the status of an infrastructure developer from a contractor. Its current stance as a construction contractor may still serve it well; its ability to secure repeat orders bodes well here. As investment in infrastructure projects progresses and residential construction recovers from its slump, bigger developers will be looking to subcontract projects bagged by them. The company also does not have exposure to the slightly riskier IT parks and malls, focusing instead on schools and hospitals.

Order-book balance

Current value of unexecuted orders stands at Rs 2020 crore, 3.8 times the sales of FY-09. About 83 per cent of the order-book stems from residential contracts, a segment that has seen lower off-take and slowdown in construction. However, a good many of Man Infra's contracts come from repeat orders.

Further, about 22 per cent is under the slum rehabilitation programme of the Government of Maharashtra; providing a safe source of fresh orders as the State provides ample scope for business in this space, what with higher allocation to the said programme. Commercial construction accounts for 10 per cent of the order book. Ports and roads form 4.8 per cent and 2 per cent of the order book respectively.

Revenue contribution from the sectors is fluent, with ports accounting for 41 per cent and residential contracts 39 per cent of revenues for the nine months ended December 09, while contribution was 25 per cent and 60 per cent for the same period in 2008. This suggests that Man Infra has the ability to adapt order-book to suit opportunities. Orders are also slated to be executed with 24 to 36 months, providing medium-term revenue visibility.

Margin strength

Pass-through costs on primary inputs of steel and cement, project consultancy services and almost nil interest costs have helped the company record operating margins of 23 per cent and net margins of 14 per cent (consolidated 2008-09). Operating and net margins bettered to 32 and 17 per cent in the nine-month period ended December 09 on lower raw material and sub-contracting costs.

Increase in investments in capital equipment has largely led to high depreciation costs; both assets and depreciation almost doubled in 2008-09 over the previous year, and further increased by 20 per cent in the above-mentioned nine-month period, over the same period in 2008.

With Rs 122 crore of the funds raised marked for purchase of equipment, depreciation is set to rise in the coming quarters.

While this would increase capital expenditure in the short term, owning a good part of equipment reduces hiring costs and risks of delays due to unavailability of critical equipment besides allowing mobility of equipment between projects.

The company operates on a zero-debt basis, leaving it in a secure position to fund bigger projects in the future, should it be required. Sales have clocked a 71 per cent three-year compounded annual rate, while net profits have grown 69 per cent in the same period.

Offer details

The offer is open from February 18-22. On offer are a total of 5,625,150 shares. IDFC SSKI and Edelweiss Capital are the lead managers to this issue.

via BL