Ramky Infrastructure IPO Analysis

Ramky Infrastructure, promoted by first generation promoter Alla Ayodya Rami Reddy and Y R Nagaraja, provides construction services in verticals such as water and waste water, irrigation, transportation, power, and building & industrial construction. The company started off as a construction service provider and in 2003 it has turned a developer of infrastructure projects.



The construction business is the domain of Ramky Infrastructure and the development business is carried out through various subsidiaries or special purpose vehicles. Ramky Engineering and Consulting Services FZC, a wholly owned subsidiary in the UAE, operates a small consultancy business in areas such as infrastructure development, waste management, environment and property development.

Currently, the company has 14 development projects including five industrial parks, five road projects, one transport terminal project and three integrated township projects. Barring the Hyderabad Ring Road project, all other projects are under various stages of implementation/development. The company has a 51% equity interest in Ramky Elsamex Hyderabad Ring Road Project, a SPV formed for the Hyderabad Ring Road project. The company is currently developing three integrated township projects (around Hyderabad and Warangal in AP) with an aggregate saleable area of 16.4 million sq ft including 14 million sq ft from a project, which is developed as one of the consortium partner with an equity interest of 29.19%. The other consortium partners in the large township project are other promoter group companies.

Five industrial park projects are being developed on an aggregate land of 2,938 acres. The company will sell the developed plots with common infrastructure developed by the company. The company has 100% equity stake in all barring the 2,143-acre Ramky Pharma City at Vizag, where it has 51% equity stake.

While the Rs 180-crore proceeds from offer for sale goes to the selling share holders (Alla Ayodya Rami Reddy, Tara India Holdings, and Tara India Fund III Trust), the Rs 350-crore proceeds from fresh issue of shares will be deployed in capital equipment (Rs 80.46 crore), working capital requirement (Rs 175 crore) and repayment of loans (Rs 25.05 crore).

Strengths

Order book stood at Rs 7431.71 crore end March 2010, translating into 3.4 times its trailing sales and offers strong revenue visibility. Since April 1, 2010 to June 30, 2010, the company has added orders worth Rs 3147.31 crore to the total order book.

One of the niche players in the execution of water and waste water projects, with strong completion track record of 104 water and waste water projects in the last eight years. Apart from water and waste water projects, has completed about 82 building construction projects, 15 irrigation projects, 28 transportation project and 32 industrial projects will provide strong reference. Strong pre-qualification capabilities across verticals on the back of strong execution track record, financial net-worth and equipment fleet to ensure steady order flow. Expertise in strong growth verticals such as water and waste water along with other infra segments such as roads, urban infra, power T&D will stand good given strong investment in the pipeline in water and power segments.

Strong infrastructure investment provides huge opportunity. Competition is intense in less complex and small ticket size projects. Foray into BOT projects will give the company edge over other medium size players in non-water verticals such as transportation. Currently, preference for PPP projects in roadways is greater. Thus, a construction provider without presence/participation in BOT projects will be at a disadvantage. Bagging of handful of BOT projects strengthens effectiveness in the area even though the company is a late entrant and has little to show in terms of mature BOT projects.

Share of revenue from external client contracts was about 86% in FY 2010.

Weaknesses

About 35% of the total order book as of March 2010 is from Andhra Pradesh. Moreover the irrigation orders from Andhra Pradesh and part of total order book stand at Rs 1431.33 crore (or 19.25% of total orders book) as of March 2010. Recently, construction players executing irrigation projects in AP have been slowing on execution due to delay in payments. With the environment still fluid in AP the execution of the order backlog from AP might go off schedule affecting the revenue and profit.

Considering streamlining its activities and concentrating on core business of construction and infrastructure development. If the company were to pursue this strategy, it may transfer some or all of its non-core businesses to appropriate entities within the promoter group. The non-core businesses that could be transferred include, among others, certain waste management projects that have been awarded to the company either alone or jointly with other entities within the promoter group, but which have been established, financed, solely operated and managed by such other entities within the promoter group.

Promoter group companies such as Ramky Enviro Engineers and Ramky Estate & Farms have presence in the waste management business and real estate development activities, respectively. Even though Ramky Estates and Farms has executed a non-compete undertaking dated December 10, 2007, in favour of Ramky Infra, of late they have come together to execute realty projects where the former having greater share than Ramky Infra. Therefore, conflict of interest cannot be ruled out.

The company is a relatively new entrant in the BOT road project business, having completed only one project with other one being delayed on account of want of possession of land. Hence, its execution capability has to be seen.

The company has to repay the secured debt of Rs 519.61 crore in the current fiscal ending March 2011. End of March 2010, secured debt stood at Rs 1011.02 crore. This can strain the financials of the company.

Assistant Registrar of Companies, Hyderabad, sent a showcause notice in June 2010 to Ramky Pharma City alleging that it has provided financial assistance to its shareholders to fund the purchase its equity shares. The company has contended that it has erroneously quoted Ramky Pharma City instead of Ramky Infrastructure in the declaration of beneficial interest (i.e., Form 22B).

Registered negative cash flow from operating activities for consecutive last three fiscals. The negative cash flow from operation stood at Rs 111.02 crore in FY 2010, Rs 191.12 crore in FY 2009, and Rs 201.38 crore in FY 2008.

Under the working capital loan agreement with State Bank of India, the latter has the right to convert the loan outstanding to equity shares if there is any default in payment. The loan outstanding amount end July 2010 was Rs 239.37 crore.

Valuation

For FY 2010 the company clocked consolidated revenue of Rs 2182.72 crore, a growth of 40%, and a net profit (after minority interest) of Rs 128.85 crore, a rise of 55%. The EPS works out to Rs 22.2 and Rs 22.6 on post-issue equity of Rs 58.06 crore (on lower price band) and Rs 56.90 crore (on upper price band), respectively. The offer price of Rs 405-468 discounts the consolidated FY 2010 EPS by 18.2-20.7 times. Listed player Patel Engineering is available at a PE of 16.2 times and Nagarjuna Construction at a PE of 16.4 times its FY 2010 consolidated earnings.

via CM