Man Infraconstruction IPO Review

Focused on real estate projects

The share of residential to total order book is 83% and that of commercial 10%

Promoted by Parag Shah and Mansi Shah, Man Infrastructure provides construction services for the port sector, residential and commercial real estate and roads. The company started off as a contractor for port infrastructure in August 2002 providing services including construction of onshore terminals, container freight stations, operational buildings and workshops. It has gradually entered into contracting services in the residential and commercial space in the Mumbai market. Over the years, real estate sector projects have become the major contributor to the consolidated revenue of the company. The share of the real estate sector to consolidated contract revenue came down in the fiscal ended March 2009 (FY2009) to 53% from 60% in FY 2008, but has since accelerated to 72.5% for the nine month ended December 2009.

Man Infrastructure's five biggest clients based on cumulative sales turnover of the last five fiscal years were Dynamix, Simplex, Gateway Terminals, MICT and Gokuldham Real Estate Development Company. In FY 2007, 2008 and 2009, 57.44%, 15.92% and 2.48%, respectively, of its standalone contract revenue was derived from Gateway Terminals (a container terminal operator at the Jawaharlal Nehru Port Trust) for port infrastructure projects and 6.65%, 11.47% and 5.88%, respectively, from Neelkanth, and 1.60%, 36.33% and 26.56%, respectively, from Dynamix, and 0%, 11.25% and 34.06%, respectively, from Simplex. The company has developed strong customer relationships on account of timely completion of projects in accordance with their requirements. It has long-term relationships with many of its clients, including subsidiaries or affiliates of the A.P. Moller group such as Maersk India and Gateway Terminals, and subsidiaries or affiliates of P&O Ports (now known as DP World) such as Mundra International Container Terminal, and have received repeat business from such clients.

Currently, Man Infrastructure's operations are confined to construction services. It has no presence in infrastructure project development. This is one area the company is looking at entering. Moreover, it also intends to move up the value chain in the construction services business from current item rate contracts to turnkey solutions from project design to commissioning. Towards this, the company is building up capabilities organically as well as through selective acquisitions of specialized businesses with design capability.

Man Infrastructure is offering fresh equity shares of 56,25,150 through the IPO at an offer price band of Rs 243-Rs252, which would raise about Rs 137 crore to Rs 142 crore. The company intends to use the proceeds to meet the expenditure on purchase of capital equipments of Rs 122.53 crore and for general corporate purposes.

Strengths

The order book was Rs 2020.93 crore end December 2009. About 93% comprised real estate projects, with the share of residential to total order book standing at 83% and that of commercial orders at 10%. The balance is made up of port infrastructure (5%) and road infrastructure (2%) projects. Nearly 22.31% of the total order book is accounted for by Slum Rehabilitation Authority projects and government residential projects in Maharashtra. Moreover, real estate contracts are concentrated around the Mumbai market, which has bounced back quickly from the slowdown and continues to be stable.

Weakness

Execution of some of the projects slowed down in the first nine months of FY 2010. Consequently, the contract revenue declined 14% to Rs 388.07 crore. Continued slowdown in contracts irrespective of client side or contractor related issues might affect revenue, going forward, if not sorted out.

Some of the promoter group companies are into real estate development as well as have object clause to pursue construction services.

A majority of the order backlog is made up of item rate contract. The proportion of revenue derived from contracts, where the consideration is payable solely on item rates, was 42.42% in FY 2008 and 53.00% in FY 2009. Hence, margin is not insulated from the vagaries in movement of commodity prices as well as labour and construction equipment costs.

Have limited experience in the execution of construction projects in infrastructure sectors other than port infrastructure and real estate. Similarly, has no prior experience of build-operate-transfer projects, either the bidding or development and operation.

Despite targeting a port capacity addition of 511 million tones in the Eleventh Five-Year Plan (YEARS!!), the country is going slow on order finalisation. The slippage is currently estimated at about 40% and this could impact the order inflows from this sector.

Valuation

Consolidated sales were up by 154% to Rs 586.92 crore and net profit equally higher by 159% to Rs 82.55 crore in FY 2009. On post-IPO equity, the FY 2009 EPS works out to Rs 17.5 and the nine-month ended December 2009 annualised EPS Rs 18.9.

Underlying the high profit, OPM stand at 30.4% for the nine months ended December 2009, up from 24.7% in FY 2009. For a pure construction company, this margin looks high.

At the current offer price of Rs 243-Rs 252, the consolidated EPS for FY 2009 is discounted 13.9-14.4 times. Comparable companies BL Kashyap and Consolidated Construction Consortium are discounting their FY 2009 consolidated EPS 10.2 and 22 times.