Man Infraconstruction IPO subscribed more than 60 times

FIIs put in bids for 1.94 crore shares

The initial public offer (IPO) of Man Infraconstruction received strong investor response as the IPO was bid a staggering 60.44 times by 16:00 IST on the last of the bidding for the IPO today, 22 February 2010. The IPO got bids for 28.12 crore shares compared with 46.53 lakh shares on offer.

Category-wise data shows that foreign funds had put in bids for 1.94 crore shares by Friday, 19 February 2010 compared with 22.68 lakh shares reserved for the qualified institutional buyers (QIB) category as a whole. Mutual funds put bid for 69.18 lakh shares. But there was not a single bid from domestic financial institutional (excluding mutual funds).

Just before the opening of the IPO on 18 February 2010, the company received commitments of Rs 24.50 crore from anchor investors, who subscribed for 9.72 lakh equity shares at Rs 252 per equity share, at higher end of the price band of Rs 243-252. The anchor investors include Nomura Asset Management Singapore, Reliance Mutual Fund, Legg Mason Asian Enterprise Trust, Monsoon India Inflection Fund, Axis Mutual Fund and India Diversified (Mauritius).

Promoted by Parag Shah and Mansi Shah, Man Infrastructure provides construction services for the port sector, residential and commercial real estate and roads. Over the years, real estate sector projects have become the major contributor to the consolidated revenue of the company.

Man Infraconstruction IPO subscribed 6.87 times

Gets bids for 3.19 crore shares as compared with 56.25 lakh shares on offer

Man Infraconstruction initial public offer (IPO) was subscribed 6.87 times, NSE data showed. The IPO got bids for 3.19 crore shares as compared with 56.25 lakh shares on offer

The company's IPO comprises of 56.25 lakh shares which includes 9.72 lakh shares reserved for anchor investors. The price band is Rs 243 to Rs 252 per equity share. The IPO remains open for bidding between 18 and 22 February 2010.

The company has already received commitment of Rs 24.50 crore from anchor investors, who subscribed for 9.72 lakh equity shares at Rs 252 per equity share, at higher end of the price band of Rs 243-252. The anchor investors include Nomura Asset Management Singapore, Reliance Mutual Fund, Legg Mason Asian Enterprise Trust, Monsoon India Inflection Fund, Axis Mutual Fund and India Diversified (Mauritius).

Man Infraconstruction would raise Rs 142 crore at the upper-end of the price band and Rs 137 crore at the lower band. The company plans to utilise the IPO proceeds to purchase capital equipment and for general corporate purposes.

Man Infraconstruction provides construction services for port infrastructure as also residential, commercial and road projects.

The company's consolidated revenues surged 151.77% to Rs 594.2 crore and net profit rose 156.25% to Rs 82 crore in the year ended March 2009 over the year ended March 2008.

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.

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