Supreme Industries, Supreme Infrastructure

Supreme Industries, Supreme Infrastructure

Supreme Infrastructure

Supreme Infrastructure

Supreme Infrastructure

Supreme Infrastructure

Supreme Infrastructure attracts 62% premium on debut

Settles at Rs 175.25 on BSE compared to IPO price of Rs 108

Supreme Infrastructure settled at Rs 175.25 on BSE, a premium of 62.2% over IPO price of Rs 108. The stock debuted at Rs 189, a premium of 75% over the IPO price.

The scrip hit a low of Rs 167.15 and high of Rs 224. On BSE, 47.28 lakh shares changed hands in the counter. The company had priced the IPO price at the top end of the Rs 95-108 price band.

The current price of Rs 175.25, discounts its year ended March 2007 EPS of Rs 9.20, by a PE multiple of 19.04.

At the IPO price of Rs 108, the PE multiple was 6.46 based Q1 June 2007 annualized EPS of Rs 16.70. The PE multiple was 11.73 based on the year ended March 2007 EPS of Rs 9.2.

The Supreme Infrastructure India (SIIL) IPO had ended on 26 September 2007 with 52.75 times subscription. It received total bids for 18.32 crore shares as against total issue size of 34.75 lakh shares. The qualified institutional buyers (QIBs) category was subscribed 52.10 times. The non-institutional investors category was subscribed 65.42 times. The retail investors category was subscribed 48.22 times.

SIIL is into infrastructure development, primarily engaged in civil construction. Presently, it is engaged in construction of roads, highways, widening of highways and execution of contracts under National Highway Authority of India (NHAI), Mumbai Metropolitan Region Development Authority (MMRDA) and of others. As on 1 August 2007, the company had orders to the tune of Rs 299.84 crore

The proceeds of the IPO will be utilised to part-finance the company's expansion plans and meet its long-term capital requirements. The company also has plans to foray into the construction contracting activity in real estate projects.

SIIL reported a net profit of Rs 12.76 crore on sales of 81.66 crore in the year ended March 2007. The company reported net profit of Rs 5.78 crore on revenue of Rs 39.43 crore in Q1 June 2007

Supreme Infrastructure Allotment

Supreme Infrastructure Allotment

Grey Market - Reliance Power, Consolidated Construction, Kouton, Supreme Infra

Reliance Power 60 to 80 34 to 35

Dhanush Tech. 295 90 to 95 (Good comeback, IPO is now about 18 times oversubscribed, Can't guarantee the listing price though)

Koutons Retail 415 75 to 80

Consolidated Construction 510 200 to 205

Supreme Infra 108 55 to 58

Saamya Biotech 10 5 to 6

MAYTAS Infra 320 to 370 135 to 140

Circuit Systems (India) Ltd 35 5 to 6

Grey Market - Reliance Power IPO, Saamya, Kouton, Consolidated Constructions

Reliance Power GREY MARKET PREMIUM OF 32 to 34

Dhanus Tech. 280 to 295 60 to 70

Koutons Retail 370 to 415 75 to 80

Consolidated Construction 510 170 to 180

Supreme Infra 95 to 108 55 to 58

Saamya Biotech 10 5 to 6

MAYTAS Infra 320 to 370 130 to 135

Circuit Systems (India) Ltd. 35 5 to 6

Grey Market - Maytas, Kouton, Consolidated

Power Grid Corporation 44 to 52 22 to 23

Dhanus Tech. 280 to 295 70 to 75

Koutons Retail 370 to 415 75 to 80

Consolidated Construction 460 to 510 180 to 185

Supreme Infra 95 to 108 65 to 70

Saamya Biotech 10 6 to 7

MAYTAS Infra 320 to 370 150 to 155

Circuit Systems (India) Ltd. 35 3 to 4

Kaveri Seeds 150 to 170 12 to 14

Jindal Steel, ACC, Idea, Satyam Computers, NTPC, PNB, Kouton Retail, Consolidated Constructions, Supreme Infrastructure

Jindal Steel, ACC, Idea, Satyam Computers, NTPC, PNB, Kouton Retail, Consolidated Constructions, Supreme Infrastructure

Grey Market - Maytas, Supreme Infra, Saamya Biotech

Power Grid Corporation 44 to 52 22 to 23

Dhanus Tech 280 to 295 110 to 115

Koutons Retail 370 to 415 95 to 100

Consolidated Construction 460 to 510 210 to 220

Supreme Infra 95 to 108 75 to 80

Saamya Biotech 10 8 to 9

MAYTAS Infra 320 to 370 140 to 150

Circuit Systems (India) Ltd. 35 4 to 5

Kaveri Seeds 150 to 170 12 to 15

Supreme Infrastructure India: Avoid

Investors can give the initial public offer of Supreme Infrastructure the go-by. Lack of a focussed strategy, a very small revenue base that could depress earnings even in a mild slowdown and presence in businesses such as quarrying that carry regulatory risks do not augur well for growth prospects. The company’s business also does not have high entry barriers.

The offer price (Rs 95-108) is at 8-10 times the company’s earnings for FY 2006-07 and on the current equity base. While the valuations are in line with similar companies, the risks associated with Supreme Infrastructure appear high relative to small-sized companies such as Tantia Constructions or PBA Infrastructure.

Within the infrastructure space, there are already superior listed plays which offer high earnings visibility backed by requisite technical qualification. Our recommendation for Supreme, however, does not factor in the possibility of gains on listing.

On the company and offer

Supreme Infrastructure is a construction company that builds roads and also executes projects involving widening and strengthening of roads and highways. The company also operates a ready mix concrete plant for internal consumption and for sale.

The Rs 33-38 crore raised through this offer will be utilised for purchase of plant and machinery for its construction activity, including specified machinery for real-estate construction and for long-term working capital requirements.

Post issue, the market capitalisation of the company would be Rs 132-150 crore.

Risky propositions

Supreme Infrastructure has been in the business of executing concreting orders in the roads and highway segments. The company has now been named a contractor for an upcoming IT park to be built by a group company recently incorporated by the promoter.

This company, with no previous experience in real estate development, will develop an IT park in Mumbai, on land for which development rights have been granted by the promoter for a consideration of Rs 44 crore. We foresee the following risks to this venture: For one, neither the group company nor Supreme have prior experience in developing and marketing real-estate. This is a project awarded by a start-up group company, which is likely to have limited financial and marketing resources.

There have been previous instances in other groups where transactions of realty companies with associates have posed problems of realisations.

Two, this order (for which the company is yet to enter into an agreement with the group company) of Rs 90 crore forms 30 per cent of Supreme’s total order backlog of Rs 300 crore, thus adding risks to earnings growth.

Three, about 20 per cent of the offer proceeds is to be utilised for procuring machinery for real-estate construction. As the company has not laid out any specific plans (in the offer document) on its venture into real-estate construction, there could be underutilisation of the equipment bought for this purpose, resulting in lower return from investment.

Attractive margins but….

Supreme Infrastructure has enjoyed double-digit operating profit margins despite being in the low-margin road business.

We attribute the relatively high margins to its owning a ready mix concrete (RMC) plant as well as a quarrying and stone crushing unit.

These activities of the company in Powai were stalled by the State Pollution Control Board and the High Court recently, although the RMC was later allowed to function.

The company will also have to get various approvals for another RMC to be installed in Karnataka and for quarrying activity near Mumbai.

With increasing environmental and public outcry with regard to such activities, the company may face regulatory risks to these businesses efficiently. Any such disruption may cause a reduction in profit margins from current levels.

While infrastructure growth does provide earnings visibility for a good number of construction companies, we are not sanguine about Supreme’s prospects, given that its small turnover base of Rs 82 crore (FY 2006-07) and narrow range of businesses provide little cushion from the above risks.

Governance issues relating to the structure of the real-estate construction business and high unsecured loans from group companies are concerns too. The offer is open during September 21-26. Karvy Investor Services is the lead manager

Grey Market - Saamya, Consolidated, Koutons

Power Grid Corporation 44 to 52 21.50 to 22

Dhanus Tech 280 to 295 95 to 98

Koutons Retail 370 to 415 75 to 80

Consolidated Construction 460 to 510 205 to 208

Supreme Infrastructure 95 to 108 65 to 67

Saamya Biotech 10 3.50 to 4

Circuit Systems 35 3.5 to 4

Kaveri Seeds 150 to 170 15 to 17

Grey Market - Kouton, Consolidated, Circuit, Supreme

Power Grid Corporation 44 to 52 20 to 21

Dhanus Tech 280 to 295 95 to 100

Koutons Retail 370 to 415 70 to 75

Consolidated Construction 460 to 510 205 to 210

Supreme Infra 95 to 108 60 to 65

Saamya Biotech 10 3 to 4

Circuit Systems (India) Ltd. 35 3.5 to 4

Kaveri Seeds 150 to 170 5 to 7

Supreme Infrastructure

Promoted by Bhawanishankar Sharma and his two sons Vikram and Vikas, Supreme Infrastructure is a Mumbai-based small construction company with primary focus on road construction. Traditionally, road construction is a low-margin business. But with presence in quarrying, crushing, wet batch mixing, asphalt and ready-mix concrete (RMC), the company is well integrated to earn healthy margin in constructing roads.

The RMC plants, one at Powai in Mumbai and another at Bhiwandi outside Mumbaiwith, have an aggregate capacity to produce 90 cubic meters of RMC per hour. Another RMC plant, with a capacity of 60 cubic meters of RMC per hour, is being installed at Powai. There is a proposal to set up an RMC unit at Citradurga in Karnataka. This will add another 30 cubic meters of RMC per hour.

The wet mix plant and the asphalt plant are located at Powai. The quarrying and crushing unit is in Bhiwandi. Their current capacity is 80 tonnes an hour of wet mix macadam and 85 tonnes per hour of asphalt, respectively. After meeting inhouse requirement, RMC, wet mix and asphalt are sold to other users.

Apart from setting up an RMC plant to cater to the needs of the National Highway (NH) 4 Western Transport Corridor project in Karnataka, Supreme Infrastructure is constructing a new crushing plant. A Rs 90-crore order for construction of an IT park from Supreme Housing & Hospitality (SHHL), a company set up by promoters, marks Supreme Infrastructure’s foray into construction of office blocks.

To meet the funding requirement for these projects, augment plant and machinery (P&M), and meet long-term working capital requirement, Supreme Infrastructure is tapping the capital market. The company has budgeted Rs 14.33 crore for purchase and upgrade of P&M, and Rs 6.88 crore for buying P&M required for road construction, and Rs 17.90 crore for long-term working capital requirement.

Strengths

The unexecuted portion of the order book was Rs 299.84 crore on 1 August 2007. The current order book stands at Rs 330 crore including RS 30-crore orders for supply of RMC. Excluding the supply order for RMC and Rs 90-crore order for building the IT park, the remaining the orders of Rs 210 crore are for road projects.

Enjoys higher margin compared with peers operating in the same segment despite the construction business largely skewed towards the thin-margin and highly competitive road segment. Has been historically earning a net profit margin of 10%-12% in road projects. The integration into quarrying, crushing, wet maccadam and RMC allows for better margin in road projects compared with peers.

Is registered as class ‘I’ by the public and works department (PWD) of the Maharashtra government and as ‘A’ class contractor by the Bombay Municipal Corporation. Entitled to bid for and accept works and orders as per its bidding capacity.

Weaknesses

Prospects largely skewed on single segment: road construction. About 89% of the current order book (as of August 2007) accounted by three projects: two road projects and another construction of IT park of the promoter group company. Has little experience in executing building construction, specially IT parks.

May have to suffer bad publicity and financial losses due to litigations by environmentalists against its RMC, asphalt and quarrying /crushing activities (which form its backward integration and provide competitive strength) in and around Mumbai.

Till year ending March 2007 (FY 2007) had claimed Section 80IA benefit for Rs 15-crore projects cumulatively. But has stopped claiming the benefit from FY 2008. Has not provided / charged / reversed the Section 80IA benefit claimed subsequent to the withdrawal of this benefit in the Union Budget for 2007-08.

Cash flow from operations has increased to a negative Rs 2.77 crore in FY 2007 from a negative Rs 46 lakh in FY 2006 on account of higher sundry debtors and inventories. Sundry debtors rose to Rs 16.43 crore in FY 2007 compared with Rs 3.79 crore in FY 2006. Inventories were up to Rs 14.05 crore in FY 2007 from Rs 1.82 crore in FY 2006.

Valuation

Sales revenue clocked a CAGR of 67.78% to touch Rs 81.66 crore in FY 2007 from Rs 6.14 crore in FY 2003. EPS on post-issue expanded equity of Rs 13.87 works out Rs 9.2 in FY 2007. The offer price discounts this by 10.3x & 11.7x on the lower and upper price band of Rs 95 and Rs 108, respectively. As comparable peers such as PBA Infrastructure, MSK Projects and Roman Tarmat are available at a P/E of 11.6, 15.7 and 23 times, the issue is reasonably priced.

Supreme Infrastructure India fixes price band for IPO

At Rs 95 - 108 a share

Supreme Infrastructure India has set a price band of Rs 95-108 per share for its forthcoming initial public offer.

The offer will open on 21 September 2007 and will close on 26 September 2007. The offer represents 25.05% of the company's post-issue paid-up capital.