Maytas Infra IPO

Maytas Infra is moving up the value chain in the construction business and diversifying its service offerings.

While many companies have tapped the capital markets in the infrastructure space, not all of them have cheered investors.

The key ingredients to the success of the outperformers are appropriate size of balance sheet, diversification in terms of geography and services, a strong order book and adequate margins.

Promoted by B Teja Raju (son of Satyam Computer Services chairman B Ramalinga Raju), Maytas Infra is one such company having these attributes. Focused on irrigation, roads and bridge, and building infrastructure business, Maytas is one of the fastest growing construction companies.

Maytas’ contract revenues on a standalone basis have grown at 57 per cent annually to Rs 787.7 crore in FY07 and net profit has increased at 107 per cent annually to Rs 55 crore. Also, the operating margins have improved from 5.1 per cent in FY03 to 16.1 per cent in FY07.

Maytas generates a majority of its income from the roads and irrigation accounting for 77 per cent of FY07 revenue. Road segment includes the construction of roads, highways and bridges, while irrigation includes development and construction of dams, canals and tunnels.

However, the company is now focusing on other segments as well. Its current order book accounts for only 68 per cent coming from the transportation and irrigation segments, while the share of other segments such as buildings, power, railways and oil & gas sectors account for the rest.

Bigger horizon
There are considerable opportunities within the road and irrigation segments driven by higher government spending on highways, rural roads, bridges, irrigation canals, dams and tunnels.

According to industry estimates, investment in the road segment is expected to grow at 15 per cent annually till 2011. The company has a sizeable order book of Rs 1,113 crore from the road segment.

As of June 2007, Maytas had 12 road and bridge contracts in different stages of construction in the states of Assam, Chhattisgarh, Karnataka, Uttar Pradesh, Maharashtra and Tamil Nadu. These projects are undertaken either independently, or as part of a joint venture.

For example, it has invested Rs 57 crore as its equity participation for 33 per cent participation interest in the Bangalore-elevated tollway project, a build-operate-transfer (BOT). This project is estimated to cost Rs 775.7 crore and to be completed by the 3Q FY08.

Also in irrigation, under the different central and state development schemes such as Accelerated Irrigation Benefit Programme (AIBP), there are huge investments lined up.

According to a CRIS-INFAC report, investments worth Rs 74,400 crore will be made over the next five years compared to Rs 51,400 crore over the last five years.

Though there are considerable opportunities in the transportation and irrigation segment, there is intense competition as well. However, the company also believes there is enough room for everybody to grow.

To further reduce its dependence on these sectors and tap the emerging opportunities in the other infrastructure segments, the company is making its presence in the other segments as well.

“We are identifying suitable partners and positioning ourselves for expected opportunities in the water and waste water management, special economic zones, urban infrastructure, ports and airport,” says B Teja Raju, vice-chairman, Maytas Infra.

Port and airports
Maytas plans to enter into development and operation of ports and airport through alliances with strategic partners.

The company has already been awarded a project for the development of a deep water port at Machilipatnam, Andhra Pradesh on a build-own-operate-and-transfer basis at an estimated cost of Rs 1,590 crore.

The company proposed an equity investment of 40 per cent in a consortium with Nagarjuna Construction and SREI Infrastructure Finance.

Along with opportunities in port infrastructure, the company is also eyeing to participate in airport projects.

According to the civil aviation ministry, India requires an investment of Rs 4.8 lakh crore to be invested in this sector by year 2020 towards development, building and modernisation of airports.

Power
Along with other partners, the company is also investing in the growing power sector. Out of the total issue proceeds of Rs 327 crore at the upper price band, Maytas will invest 162 crore as its equity share in power projects.

The company has formed two special purpose vehicles with 50 per cent interest in both companies -- KVK Nilachal Power and SV Power.

Both these companies will have a combined power generation capacity of about 400 MW of power in Orissa and Chhattisgarh. KVK Nilachal is on a BOT basis and will be completed in FY10. SV Power is on a build-operate-own basis to be completed by third quarter of FY09.

Outlook
Maytas is growing in terms of revenues and order book. The order book has gone up from Rs 800 crore in FY05 to Rs 3590 crore currently, which is almost 5.6 times of its FY07 revenues, executable over 18-30 months.

More importantly, the diversified portfolio of its current order book with increasing share of power and other growing segments indicate better volumes and higher margins.

Maytas is in the investment phase, where most of its projects are under implementation. It is infusing fresh capital in the long gestation BOT projects and SPVs through the IPO and internal accruals.

The company is expected to maintain strong revenue growth driven by current order book and its entry into other areas.

At the upper price band of Rs 370, the issue is priced at 39 times its FY07 fully diluted earnings. This seems expensive compared with peers such as IVRCL and Patel Engineering, which are trading at 34 and 23 times respective trailing earnings.

However, considering the future earnings growth, higher operating margins and its stakes in 11 SPVs make Maytas a promising investment.

Issue opens : September 27
Issue closes : October 4