Ramky Infrastructure IPO Review

Investors with a high risk appetite and a two-to-three year perspective can subscribe to the Initial Public Offer of Ramky Infra, a construction contractor in the infrastructure space. The offer is priced at Rs 405 to Rs 468, resulting in a valuation of 21 times the FY-10 per share earnings and 14 times the estimated FY-11 earnings on post-issue equity. Valuations of nearest comparables, Nagarjuna Constructions, IVRCL and CCCL, are at a par or a slight discount.



What lends strength to the company are the strong revenue and profit growth even during the slowdown witnessed in FY-09, large order book, increasing size of orders secured, widespread presence in terms of geography and segments, and expertise in the irrigation, and water and waste management divisions. The company aims to raise Rs 530 crore from this offer, of which Rs 350 crore is a fresh issue and the balance an offer for sale.

Wide presence

Ramky's primary strength is its capacity as an Engineering Procurement and Construction and lump-sum contractor in a variety of segments. The order book stands at Rs 7,432 crore as of March 2010, with a further Rs 3,147 crore secured in the June quarter. e The order book is at five times the revenues for FY-10, providing near-term earnings visibility. Ramky has considerable expertise in the key divisions of water and waste water management, and irrigation. These segments together contribute more than half the order book and offer higher margins, and hold sizeable potential under government development schemes. About 80 per cent of the order book comes from various State governments.

The road segment contributes 21 per cent of the order book, followed by construction of buildings such as hospitals and residential buildings (14 per cent). Industrial and power projects make up the rest.

Such a diverse order book provides the flexibility to change exposure to segments according to the opportunities that present themselves, build on expertise to bid for a wider variety and higher-value projects, and partner other infrastructure players to increase order inflow.

The average size of orders secured has also improved from Rs 22 crore in FY-07 to Rs 93 crore in FY-10, signalling its ability to secure and execute bigger projects, boding well for future prospects.

Development projects

Ramky turned developer in 2007, , and has recently completed two road projects, a pharmaceutical SEZ and a bus terminus, including a commercial area It has three industrial parks, an SEZ, two residential and two road projects, in the pipeline.

That said, risks stem from projects as a developer. Its newly operational SEZ is still not fully occupied.

Construction of its industrial and two new road projects is yet to take off, calling for near-term investments while revenues from these are unlikely to accrue in the next few quarters. The SEZ is for gems and jewellery, a rather risky bet with the ongoing constrained retail consumption in overseas markets.

A degree of comfort comes from its residential projects, which are on schedule, and where a good portion has already been sold.

Strong financials

Ramky has clocked a compounded annual three-year consolidated sales growth of 43 per cent, and net profit growth of 49 per . Operating margins have held steady at 10 per cent for the past three years, even as the order book doubled.

About Rs 80 crore of issue proceeds will fund acquisition of construction equipment, further boosting operating margins. Working capital turnover has held at about 4 months, while collection periods shrunk by about a month. About Rs 175 crore from the issue will fund working capital. Return on equity held above 20 per cent for the past three years.

Even so, a higher debt intake (pre-issue debt-equity at 1.8) led to interest costs eating into margins; net margins fell to 2 per cent in FY-10 from 4 per cent in FY-08. However, Rs 25 crore of issue funds will be used to payoff debt, helping to improve margins. The debt-equity ratio, post-issue, is at 1.1 times, which will allow the company raise further debt to fund its development projects.

via BL