Roman Tarmat Listing on Monday, 9 July 2007

Roman Tarmat will list on BSE and NSE on Monday, 9 July 2007. It will be placed in the B1 group on BSE. The company had fixed the IPO price at the top end of the Rs 150 - 175 price band.

At the IPO price of Rs 175, the PE multiple is 22.43, based on the year ended March 2006 EPS of Rs 7.8.

Roman Tarmat IPO ended on 19 June 2007 with 29.67 times subscription. The issue received total bids for 8.60 crore shares compared to total issue size of 29 lakh shares.

The total bids in the Qualified Institutional Buyers (QIBs) category were 3.84 crore shares. From this category, the Foreign Institutional Investors bid for 2.86 crore shares, Domestic Financial Institutions bid for 73.75 lakh shares and Mutual Funds bid for 20.88 lakh shares.

The Non Institutional Investors bid for 2.60 crore shares, out of 4.20 lakh shares allotted for this category.

The retail individual investors bid for 2.13 crore shares. From this, 2.01 crore shares were bid at cut off price and 11.87 lakh shares were price bids. The employees bid for 75,000 shares.

Roman Tarmat is a Mumbai-based infrastructure company engaged in the business of highways, runways and other civil work.

The company, established in 1986, provides engineering, procurement and construction services for infrastructure projects sponsored by Government/Government agencies.

Broadly, the business activities can be categorised into the following three segments: airside works; highways and roads; and other civil work. The company is one of the few construction companies in India operating in the area of construction of runways, which requires a strict focus on quality to ensure safe take off and landing of aircrafts.

Over the years, it has developed the expertise of building runways that adhere to the strict quality standards and has built runways for major civil airports (Mumbai and New Delhi airports) as well as military airports.

The order book comprising un-commenced projects, unfinished and uncertified portions of its commenced projects, as on 30 April 2007, was Rs 336.89 crore.

The company posted a net profit was Rs 8.50 crore in FY 2006, as compared to Rs. 3.67 crore in FY 2005. Total income of Rs 90.94 crore in FY 2006, as compared to Rs 77.30 crore in FY 2005.

Roman Tarmat IPO Subscription Details

Qualified Institutional Buyers (QIBs) - 27.4921 times

Non Institutional Investors - 62.1384 times

Retail Individual Investors (RIIs) - 21.8190 times

Employee Reservation - 0.7500 times

OVERALL - 29.67 times

Roman Tarmat: Avoid

Investors can avoid the initial public offer (IPO) made by construction company Roman Tarmat as the pricing appears steep in relation to the size and nature of its business. In the price band of Rs 150-175, the company is valued at a price-earnings multiple of 15-18 times its nine-month annualised earnings for FY-07 on a diluted basis. Small-cap companies such as PBA Infrastructure or Tantia Construction, which have a wider portfolio of business, now trade at a discount to Roman Tarmat.

Profile and offer details

Roman Tarmat is in the business of constructing highways and runways. The company plans to raise Rs 43-50 crore for procuring capital equipment and for long-term working-capital requirements.

No niche business

Roman Tarmat's business is concentrated in the road segment. Highways and roads now account for 83 per cent of the company's order backlog of Rs 337 crore. While this segment yields low profit margins, a good number of infrastructure players have nevertheless benefited from the volume flowing from the Government's spending on roads.

Roman Tarmat's completed projects and order-book reflect that the company has been undertaking maintenance works and small projects from Public Works Departments or corporates. It has not so far participated in any of the National Highways Authority of India (NHAI) projects — the prime means of order flow for most infrastructure companies that operate in the segment. Companies that spotted the opportunity early have not only benefited from volumes but also achieved forward integration by graduating to EPC (Engineer-Procure-Construct) projects, thus improving margins and gaining bidding qualification.

Roman Tarmat has, however, remained a regular `contractor' and not so far made any significant move to diversify its services. This might cap opportunities to garner EPC contracts. The company's revenue grew at a compounded annual rate of 27 per cent over the three years to Rs 87 crore in FY-06 (Rs 83 crore for the nine months ended December 2006). Roman Tarmat's size, in terms of revenues, does not, however, compare well even with those of other small-cap companies. This raises concerns over the company's ability to scale up operations.

Roman Tarmat has stated in the prospectus that it would look to bid for large-scale projects and contracts on a build-operate-transfer (BOT) or annuity basis. Even assuming that its expanded equity base would provide some financial qualification to bid, the company may have to compete with bigger players which are already established in the space. This would require the company to not only bid aggressively but showcase superior technical qualification.

Further, the company has entered into joint ventures for four of its road projects. While this strategy would help bid for projects, it would reduce profitability for Roman Tarmat, given the small size of the projects.

Roman Tarmat has managed to maintain its operating profit margin in the 12 per cent range for the past two years. This may have come about as a result of increased contribution from airside works, which accounted for 25 per cent and 18 per cent of the total contract receipts over 2006 and 2005 respectively. With runway projects down to 13 per cent of the order backlog, the company's ability to maintain its OPMs would determine whether it can manage superior margins in an otherwise low-margin segment such as roads.

Roman Tarmat has so far enjoyed income-tax benefits under Section 80 IA. However, post-Budget proposal, the company may lose this, as contractors are no longer eligible for the same.

Road contracts awarded by Special Economic Zones and success in bagging large projects may provide upside to the company and remain key risks to our recommendation.

The infrastructure-listed space now appears to be clearly making a distinction between large integrated players and small players, some with niche business. The disparity in valuations for these companies is proof of this. Hence, we believe that valuations may be a greater deciding factor for middle-of-the-road companies such as Roman Tarmat.

The Roman Tarmat IPO that opened on June 12 will close on June 19.

Roman Tarmat IPO Analysis

Roman Tarmat IPO Analysis

Roman Tarmat IPO Analysis

Promoted by Jerry Varghese, Roman Tarmat provides engineering, procurement and construction services for highways and roads, airside works and other civil work. The company has also set up a ready-mix concrete (RMC) plant at Goregaon, Mumbai, with an installed capacity of 30 cubic meters per hour to cater to its captive requirement and four automatic stone crushing units to enhance its operational efficiency.

Roman Tarmat’s IPO is to fund long-term working capital requirement and invest in capital equipment. The price band has been fixed at Rs150-Rs175. The issue opens on 12 June and closes on 19 June 2007.

Strengths

• End April 2007, the order book was Rs 336.89 crore comprising un-commenced projects, unfinished and uncertified portions of commenced projects. The order book is to be executed over two years. Generally, 35% of the road projects are executed in the first year and balance 65% in the second year. The order book represents four times the reported March 2006 year ending revenue.

• End March 2007, about 9,456 km of roads were yet to be awarded under the National Highways Development Programme. As Roman Tarmat is one of the players operating in the road segment, it may see further increase in order book. Apart from this. the company is also likely to benefit from increase in investment in restructuring of existing airports and setting up green field airports.

Weaknesses

• Has claimed tax benefit of Rs 6.02 crore under Section 80IA in FY 2006, and Rs 6.3 crore in the nine months ended December 2006. The retrospective withdrawal of Section 80IA benefit may not only impact FY 2007 profit but also future profit until the orders bided taking into account 80 IA benefit are executed going forward. The Finance Bill 2007-08 has clarified that benefits of Section 80-IA (which provides for a ten-year tax benefit to an enterprise or an undertaking engaged in development of infrastructure facilities, Industrial Parks and Special Economic Zones) shall not be available to a person who executes a works contract. The company has also not included this benefit under ‘tax benefits available to the company’ in the prospectus.

• From FY 2003 to nine months ended December 2006, there was a gradual improvement in operating profit margin (OPM), from –0.8% to 12.4%. This was on account of increase in proportion of revenue from airside works. As a percentage of contract receipts, the proportion of airside works went up from 3% to 25%. However, in the pending order book end April 2007, the proportion of airside works declined to 13%. Thus, OPM may not sustain at current levels. OPM for road projects is 8%-10% and for airside works 14%-15%.

Valuation

Roman Tarmat’s net profit was Rs 8.15 crore in the nine months ended December 2006. Annualised EPS works out to 9.9. At the offer price band of Rs 150- Rs 175, P/E comes to between 15.1 and 17.7, respectively. Comparable and bigger players in terms of revenue --- Valecha Engineering and C&C Construction ---- are currently trading at nine months’ annualised recurring earning of around 15 times.