Indian Roads Sector – A Delightful Drive Ahead?

  • Date 26th April  
  • Industry – Roads Construction 

Summary

Here is a snapshot of the interesting Roads Sector. We sense a revival, and a number of players are active here.

Additional Roads Sector Reports from JainMatrix Investments

  • Please read our Feb 2018 report on HG Infra IPO by clicking on LINK.
  • And our July 2017 report – IRB Infra Developers – In Invit We Trust – LINK
  • Additionally do read our Aug 2016 report on Dilip Buildcon IPO by clicking on LINK.
  • We share a Nov 2015 Roads sector report – LINK

Introduction

  • The development of any nation depends on transportation networks, and this is applicable to India with its varied terrain ranging from mountains to plains to coast. Transportation includes Roads, Railways, Airlines and Shipping, however in this note we will focus on Roads.
  • India has the 2nd largest road network in the world, aggregating to 61 lakh kms. Roads are the most common mode of transportation and account for 86% of passenger traffic and 65% of freight traffic. In India, NHs with length of 1.04 lakh km are just 1.7% of the road network, but carry about 40% of the total road traffic. On the other hand, state roads and major district roads at the next level carry another 60% of traffic and account for 98% of road length.
  • There are 2 Govt. bodies which award road projects at the central level, NHAI which is in charge of the National Highway Development Programme (NHDP) and the Ministry of Road Transport and Highways (MoRTH), which covers those highways not under NHDP. In addition, it also awards projects under Govt. schemes like Left Wing Extremism (LWE) scheme (road development in Naxalite areas), Special Accelerated Road Dev. Programme for North-East Region (SARDP-NE), NH Interconnectivity Improvement Project (NHIIP), etc.

jainmatrix investments

Road Projects Progress

  • From Fig 1 and 2, we can see that road projects awarded and completed flattened out during FY12-FY14. Delays in land acquisition & receipt of environment/forest clearances, economic slowdown and cash flow issues faced by developers had adversely impacted the sector. From the Fig 3 below we can see the transition of project awarding to new modes over the last few years.

jainmatrix investmentsFig 1 – MoRTH projects Awarded / Fig 2 – NHAI projects / Source: MoRTH / NHAI ARs 

  • In FY16, the NHAI introduced the Hybrid Annuity model (HAM) as the earlier BOT-Toll based awarding caused financial distress to the developers and the EPC model involved high upfront investment of funds. In HAM, 40% the Project Cost is to be provided by the Govt. as ‘Construction Support’ to the developer during the construction period and the balance 60% as annuity payments over the operations period along with interest on outstanding amount. This model has received good response from industry and investors.

jainmatrix investmentsFig 3 – NHAI project awarded

  • CRISIL Research expects investment in road projects to double to Rs. 10,70,000 cr. over 5 years.
  • Investment in state roads are expected to grow steadily, and rise at a faster pace in case of rural roads, on account of higher budgets for Pradhan Mantri Gram Sadak Yojana (PMGSY) since FY16.
  • The GoI approved the Bharatmala program under which 53,000 kms of national highways have been identified to bridge critical infra gaps. It will give the country 50 national corridors as opposed to 6 at present. Phase I will be implemented from FY18-22 with 24,800 kms of construction expected.

Key Players

  • In Q4 FY18, the MoRTH had aggressively awarded projects to further accelerate the pace of road infra development. See the order book position of a few listed road developers, Fig 4 and Fig 5.

jainmatrix investmentsFig 4 – Order Books of Roads players / Fig 5 – Order Book FY18 / Fig 6 – Benchmarking 

  • Note: FY18# is the order book basis 9M FY18 data and documents available on the exchange.
  • In Fig 6, we have done a benchmarking exercise to compare a few sector players.

Conclusion

  • The development of road infra in India is witnessing great momentum. Robust demand, higher investments, favourable policies and government’s willingness has changed the face of the road sector in the country. The construction of roads per day hit a new high of 27 kms/day for FY18, which is much higher than what was achieved earlier.
  • The momentum of building a stronger road network in India is likely to improve as it generates mass employment and leads to significant growth in contribution to the GDP. Given the current roads sector scenario, investors should definitely not miss this exciting opportunity.

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Disclaimer

This document has been prepared by JainMatrix Investments Bangalore (JM), and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of JM. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, JM has not independently verified the accuracy or completeness of the same. Punit Jain has positions in IRB Infra since Feb 2008 and H G Infra post listing. Other than this, JM has no known financial interests in IRB Infra or any other firm mentioned in the article. Neither JM nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient’s particular circumstances and, in case of doubt, advice should be sought from an Investment Advisor. Punit Jain is a registered Research Analyst under SEBI (Research Analysts) Regulations, 2014. JM has been publishing equity research reports since Nov 2012. Any questions should be directed to the director of JM at punit.jain@jainmatrix.com.

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H.G. Infra IPO – An Exciting Road Ahead

  • Date 23rd Feb 
  • IPO Opens 26-28th Feb with price range Rs. 263-270
  • Small Cap: Rs. 1,760 cr. Mkt cap
  • Industry – Roads Construction
  • Valuations: P/E 32.9 times TTM, P/B 3.7 times (Post IPO)
  • Advice: SUBSCRIBE 

Summary

  • Overview: HGI is a Jaipur based infrastructure construction, development and management firm with a focus on road projects, including highways, bridges and flyovers.
  • Revenues and profit for FY17 were Rs. 1,059 cr. and Rs. 53 cr. HGI’s revenues, EBITDA and PAT grew at 34.3%, 27.5% and 37.0% CAGR in 5 years.
  • HGI has a good 5 years performance where it has emerged as a rising star. The healthy order book, roster of completed roads projects and fair financial controls are impressive.
  • At a P/E of 32.9 times (adjusted post IPO), the valuations of the IPO appear to be high. However earnings growth is likely to be at a faster pace due to reduced interest costs, better efficiencies and sectoral traction. Good track record, robust financial performance, sectoral tailwinds and an experienced management team makes this IPO attractive.
  • Key Risks: 1) Project execution delays 2) Labor unavailability 3) Intense competition.
  • Opinion: Investors can SUBSCRIBE to this IPO with a 3 year perspective.

Here is a 5 minute video on HG. Infra Engineering IPO.

Here is a note on H.G. Infra Engineering (HGI) IPO.

IPO highlights

  • The IPO opens: 26-28th Feb 2018 with the Price band: Rs. 263-270 per share.
  • Shares offered to public number 1.71 cr. The FV of each is Rs. 10 and market lot is 55.
  • The IPO will raise Rs. 462 cr. by selling 26.26% of post IPO equity. The offer will be completed via an Offer for Sale (OFS) of Rs. 162 cr. and also by issuing fresh shares of Rs. 300 cr.
  • The promoter group owns 100% (no private equity ownership) which will fall to 73.7% post-IPO.
  • The selling shareholders are Hodal Singh, Harendra Singh, Vijendra Singh and Girish Singh of the Promoter family. They are selling 8.85% of their pre-IPO stake in HGI and are only part exiting.
  • The net proceeds from fresh issue of shares will be utilized as follows:

Exhibit 1 – IPO proceeds

  • The IPO share quotas for QIB, Non Institutional Buyer (NIB) and Retail are in ratio of 50:15:35.
  • The unofficial/ grey market premium for this IPO is Rs. 20-25/share. This is a positive.

Introduction

  • HGI is a Jaipur based infrastructure construction and development firm with a focus on road projects like highways, bridges and flyovers. Their main segments are (i) providing engineering, procurement and construction (EPC) services on a fixed-sum turnkey basis and (ii) EPC work for components of projects, primarily in the roads and highway sector.
  • HGI’s FY17 revenue, EBITDA and PAT were Rs. 1,059 cr., Rs. 124 cr. and Rs. 53 cr. resp.
  • HGI has also currently undertaking 2 water supply projects in Rajasthan on turnkey basis which includes the designing, construction, operation and maintenance of the project.
  • HGI is active across various states like Rajasthan, UP, Haryana, Uttarakhand, Maharashtra and AP. During the last 5 years, HGI has completed 13 projects above the contract value of Rs. 40 cr. in the roads and highways sector aggregating to a total contract value of Rs. 1,675 cr., which included construction, improving, widening, strengthening of 2 and 4 lane highways, construction of high level bridge and of earthen embankment, culverts and cart track underpasses.
  • As on Nov 30, 2017, HGI had 21 ongoing projects in roads & highways which includes construction, improving, widening, strengthening, upgradation and rehabilitation of 2, 4 and 6 lane highways, construction of high level bridge and construction of road network. This order book was Rs. 3,585 cr.
  • HGI is pre-qualified to bid independently on an annual basis for bids by NHAI (National Highways Authority of India) and MoRTH (Ministry of Road Transport and Highways) for contract values of up to Rs. 806 cr. based on HGI’s technical and financial capacity as on FY17.
  • HGI’s public sector clients include NHAI, PWD, MES and Jaipur Development Authority. They have also executed road construction contracts as a sub-contractor for private sector clients such as Tata Projects and IRB-Modern Road Makers.
  • HGI’s equipment base comprised of 1,064 construction equipment. Also HGI has employed 2,447 employees which includes 2,130 skilled workers like engineers and managers.
  • As of Nov 30, 2017, HGI had a total order book of Rs. 3,709 cr., consisting of 21 projects in the roads and highways sector, 4 civil construction projects and 2 water supply projects. See Fig 2.

jainmatrix investments, HG Infra IPO

Fig 2 – HGI’s order book by state and client type

  • Leadership is Harendra Singh (CMD), Vijendra Singh (Whole Time Director) and Rajeev Mishra (CFO).

News, Business Model and Strategies of HGI

  • Some impressive completed projects are 1) Yamuna Expressway in Noida, UP, 2) 4 laning of Jaipur-Tonk-Deoli project (Raj.) 3) Construction of Kuberpur to Fatehabad Road, Agra-Inner Ring Road (Phase-I) Agra, UP and ongoing 4) Rehabilitation and Up-gradation of Amravati-Nandgaon-Morshi-Warud-Pandhurna NH-53 (Mah.)
  • HGI’s business strategies are:
    • To focus on the EPC business in roads & highways sector and enhance execution efficiency.
    • Selectively expanding its geographical footprint in states such as Gujarat, Punjab and MP, which have favorable geographic and climatic conditions, other than Rajasthan and Mah.
    • Selectively explore hybrid annuity model (HAM) to grow its project portfolio.
  • Business Model: HGI follows a evaluation process during pre-bidding stage, which involves technical surveys, feasibility studies and analysing the technical and design parameters and the cost involved in undertaking the project. This approach enables them to bid at competitive prices and successfully win projects. Once they win a bid, their focus is to ensure high quality of construction during execution, as a result of which, they are able reduce maintenance and repair costs and realize higher margins during the operation & maintenance stage.

Roads Infrastructure Industry Outlook in India

  • India has the 2nd largest road network in the world, aggregating to 61 lakh kms. Roads are the most common mode of transportation and account for 86% of passenger traffic and 65% of freight traffic. In India, national highways with length of 1.04 lakh kms constitute a mere 1.7% of the road network, but carry about 40% of the total road traffic. On the other hand, state roads and major district roads at the next level carry another 60% of traffic and account for 98% of road length.
  • In FY16, the road transport sector contributed 3.2% to the Indian GDP.
  • Road transport is the most widely used mode of transport for freight and passengers. In Fiscal 2017, 64.5% of freight was carried by roads as compared to railways, from 56% in FY2010.

Key growth drivers for road sector are as follows:

  • Rise in GoI investments, reforms and higher budgetary support. CRISIL Research expects investment in road projects to double to Rs. 10.7 tn. over the next 5 years. Investment in state roads is expected to grow steadily, and rise at a faster pace in case of rural roads, on account of higher budgetary allocation to Pradhan Mantri Gram Sadak Yojana (PMGSY) since FY16. The GoI has approved the Bharatmala programme under which 53,000 kms of national highways have been identified to bridge critical infrastructure gaps. Bharatmala will give the country 50 national corridors as opposed to 6 at present and Phase I will be implemented from 2017-18 to 2021-22.
  • Policy changes to drive execution of national highway projects. Execution of national highway projects declined in the past two years on account of the private developers’ weak financials and unwillingness of lenders to provide further credit to infra companies. To clear this backlog, NHAI terminated projects and accordingly, work on 5,500 kilometers of length was stalled. To put execution back on track, the NHAI re-awarded almost 1,000 kilometers of the terminated projects.
  • New region-specific initiatives to drive growth in road network. The GoI has taken new initiatives to build state roads. MoRTH has set up the National Highways and Infra Development Corp which will award national highway projects in border areas and in the north-east states. Apart from these projects, the Bharat Mala programme has also been proposed to build new roads along the border.
  • Between FY18 and FY22, it is expected that an investment of Rs. 4.30 tn. would be made in the next 5 years for national highways, up 2.9 times compared with the past 5 years. Notably, the government will account for more than half of the investment.

Financials of HGI

  • HGI’s revenues, EBITDA and PAT grew at 34.3%, 27.5% and 37% CAGR in 5 years, see Fig 3.
  • The margins fell significantly in FY14-15 impacting profitability, because of rising commodity prices (for fixed-price contracts) and idling of capacities as execution could not begin on many new projects. The slowdown was common across the industry.

jainmatrix investments, HG Infra IPO

  • Fig 3 – Financials
  • HGI had a RoE of 30.3% in FY17 while the 3 year average RoE stood at 25.7% (FY15-17). The RoCE stands at 36.4%. These return ratios are high.
  • HGI has been Operational Cash flow positive in all the last 5 financial years from FY13-FY17. This is a positive. Over FY13-15, HGI repaid its borrowings and funded CAPEX from internal accruals. However since FY16, CAPEX rose sharply and were funded by borrowings. See Fig 4.
  • The current D/E ratio is 1.72:1 which is high which will fall to 0.70 post IPO.

jainmatrix investments, HG infra

  • Fig 4 – HGI Cash Flow  
  • Because of high Capex, HGI has not declared any dividends in the last 5 years.
  • Remuneration paid to the Key Management Personnel (KMP) +1 was Rs. 6.27 cr. for FY17, and 11.75% of PAT. Another Rs. 1.54 cr. was spent on insurance premiums for KMP. See Exhibit 5.

jainmatrix investments, HG infra

  • Exhibit 5 – Renumeration
  • HGI had an equity base of 5.4 cr. shares pre-IPO. Post the issue of fresh shares, the equity base will stand at 6.51 cr. (assuming fresh shares are issued at UMP of Rs. 270/share). This means the asking FY17 P/E is 27.4 (pre-IPO) and 32.9 (diluted post-IPO).

Benchmarking

We benchmark HGI against other listed infrastructure construction companies. See Exhibit 6.

jainmatrix investments, HG Infra IPO

  • Exhibit 6 – Benchmarking
  • The PE post IPO is high, so pricing appears aggressive, as seen with IPOs, a negative.
  • The sales growth is excellent, comparable to sector leader, Dilip Buildcon. Profit growth is good also, partly due to a recovery from a slowdown in 2014.
  • The post IPO D/E looks reasonable and is much better than a few of its other peer members. The IPO being partly fresh issue will help to reduce debt burden.
  • The RoE at 30.3% and RoCE at 36.4% is excellent, high in the industry. This is a positive.
  • HGI had the lowest EBITDA margin in the industry. However in H1 FY18, EBITDA margin is improving, due to better scale and efficiency in operations.
  • PAT margins may improve due to lower interest costs going forward.
  • Orders booked to Billings looks healthy and indicates over 3 years of revenue visibility.
  • Putting it together HGI looks like a firm at the start of a high growth phase that can be accelerated by this IPO.
  • Dilip Buildcon has done very well in last 2 years since IPO, and so is the sector leader. IRB looks undervalued and profitable. See our recent IRB report – In INVIT We Trust 
  • Also see our Roads Sector Note – THE ROADS SECTOR – IS IT A REVIVAL?

Positives for HGI and the IPO

  • HGI has strong project management and execution capabilities. It also owns its construction equipment needed for ongoing projects. This helps control costs, and improves reliability.
  • We can see a healthy order book; also HGI is pre-qualified to bid independently for project tenders by NHAI and MoRTH. This provides enough head room for faster growth.
  • HGI’s management team is qualified and experienced in the construction industry. The Promoters Girish Pal Singh, Vijendra Singh and Harendra Singh have 20 years of infra sector experience.
  • HGI has evolved from a sub-contractor to independent EPC firm, and subcontracting work has reduced to about 30% of revenues. Thus HGI is successfully moving up the value chain.

Risks and Negatives for HGI and the IPO

  • The valuations appear on the higher side among peers as P/E is 32.9 times (adjusted post IPO).
  • As HGI takes up projects on HAM in future compared to EPC, its working capital may increase.
  • With no private equity ownership, HGI will transition from a family owned firm suddenly to a public listed firm. This change will have to be handled carefully, including disclosures.
  • All firms in the sector face business risks like high working capital requirement, long project gestation periods, govt. clearances, local public opposition and PIL/ litigation issues.
  • Delays in the completion of construction of current and future projects is a risk. A significant part of business is with GoI and any change in govt. policies or delays in payment are a risk.
  • The firm has a business concentration in Raj. and Mah. with 96% of orders from there. But HGI is quite capable of growing a pan India footprint given good opportunities and projects.
  • Competition is intense in road projects, particularly in EPC projects rather than BOT.
  • HGI’s business is manpower intensive and any nonavailability of employees or labor issues can have an adverse impact on operations.

Overall Opinion and Recommendation

  • The GoI has over the last few years and in Budget 2018 emphasized the roads and infra push in terms of budgets and ministry focus. This long suffering Roads sector has seen a revival in last 2-3 years is now expected to be a significant beneficiary of govt. spending.
  • HGI has a good 5 years performance where it has emerged as a rising star. The healthy order book, roster of completed roads projects and fair financial controls are impressive.
  • At a P/E of 32.9 times (adjusted post IPO), the valuations of the IPO appear to be high. However earnings growth is likely to be at a faster pace due to reduced interest costs, better efficiencies and sectoral traction. Good track record, robust financial performance, sectoral tailwinds and an experienced management team makes this IPO attractive.
  • Key risks are 1) Project execution delays 2) Labor challenges 3) Intense competition.
  • Opinion: Investors can SUBSCRIBE to this IPO with a 3 year perspective.

JainMatrix Knowledge Base:

See other useful reports on the right side panel and See Reports sections of the Menu.

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Disclaimer

This document has been prepared by JainMatrix Investments Bangalore (JM), and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of JM. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, JM has not independently verified the accuracy or completeness of the same. JM has no stake, ownership or known financial interests in HGI or any group company. Neither JM nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient’s particular circumstances and, in case of doubt, advice should be sought from an Investment Advisor. Punit Jain is a registered Research Analyst under SEBI (Research Analysts) Regulations, 2014. JM has been publishing equity research reports since Nov 2012. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com.

Ramky Infra – Clouded by Uncertainty

Date: June 26, 2012             CMP: Rs 90.3            Mid-Cap –  Market Cap 520 crores

Advice:  Sell on any rally, as stock is Risky                        Targets: Unpredictable

Ramky is a diversified infrastructure mid-cap firm. The focus areas are water solutions, sewage, roads, bridges, industrial parks, etc. FY12 revenues are 3884 cr. & PAT 260 cr.  The growth figures are Sales (40.3%), EBITDA (47.6%), Net Profit (46.4%) and EPS 46% over 5 years CAGR. Net Debt at 1840 cr (D/E 1.47) is within limits.

On the other hand, the share has performed very badly with an 80% fall since the IPO. The fall in the infrastructure sector over the last two years has had a disproportionate effect on this stock. A CBI investigation of Ramky Group about projects awarded during 2004-2009 by the AP Govt. and rumors of linkage to an AP politician have pulled down this stock to tragic levels.

Ramky is classified as a Risky stock, and Investors are advised to exit.

Ramky Infrastructure Ltd – Description and Profile

  • Ramky is an infra and construction firm with an environment focus.
  • FY12 consolidated revenues are 3884 cr. & PAT 260 cr. The 2,916 full-time employees are engaged in projects for Water (supply, storage, treatment), irrigation, Roads & Bridges, Buildings, Industrial parks and power distribution.
  • The order book of 13,703 cr (3.5 times revenue), is split by vertical as per Fig 1.
  • Customers are State Govt 59%, Private sector 29%, Central Govt 10% and PSU 2%
Ramky Order Book, JainMatrix Investments

Fig 1 – Ramky Order Book, JainMatrix Investments

Prestigious projects include:

  • Hyderabad Ring Road, a 150m road cum area development corridor with 8-lane controlled access expressway.
  • 80 MLD Sewage Treatment Plant at Airoli, Navi Mumbai, bagged an Urban Infrastructure Excellence Award given by CNBC TV18 & Essar Steel.
  • Construction of one of the Asia’s largest sewage treatment plants (172 MLD) with uplift an aerobic sludge blanket process, at Nagole Hyderabad.
  • Construction of Gandhi Medical College and Hospital Complex in Hyderabad.
  • Core strengths: 1) in-house design and engineering team that specializes in designing Water and Waste Water projects 2) Qualified / experienced employees and proven management
  • Shareholding pattern is: Promoters – Individual/Corporate 66.8%, MFs/ DII 7.2%; FIIs 2.1%, Individuals retail & HNI 6.7% and Bodies Corporate plus others 17.2%. Thus Promoters hold a clear majority stake – a good sign.
  • Many of the project payments are made at project execution milestones, so revenues are lumpy. Newer projects in Roads and Power transmission involve upfront payment of premium to government, so revenues start only once Toll collection starts, while construction is internally funded.
  • The Chairman / founder is AA Rami Reddy, and the MD is Y R Nagaraja.

Events, News and Strategies

  • Recent wins: Ramky was awarded two major projects under the NHDP. 1) Six laning of Agra – Etawah Bypass section of NH-2, to be executed as BOT (Toll) basis on DBFOT pattern. Concession period is 30 years, including construction of 910 days and cost is Rs.1207 Cr. 2) Four Laning of Hospet – Chitradurga section of NH-13 in Karnataka under NHDP on DBFOT/BOT basis. Concession period is 25 Years, including construction of 910 days, and cost is Rs 1033.65 Cr.
  • Promoters have been increasing shareholding in the past year as per BSE reports.
  • CBI is investigating Ramky Group and Ramky Estates and Farms about projects awarded during 2004-2009 by the AP Govt. The allegations include political clout used in awarding projects by former CM YSR and son JaganMohan Reddy. The share recently tanked following the arrest of Jagan Reddy in a disproportionate assets matter. Ramky is cooperating with the team in their investigation.
  • Rating: In April ’12, CRISIL revised its credit rating outlook on the long-term bank facilities to ”Negative” from ”Stable”, while reaffirming the rating at ”CRISIL A+”; the rating on the short-term bank facility has been reaffirmed at ”CRISIL A1”.
  • MF holdings have fallen from 3.1m shares (Dec’11) to 1.9m (Mar’12), a bad sign

Strategies executed:

Competition is intense across all business segments. To handle this, Ramky has executed the following strategies:

  • Bidding for high value projects in construction to benefit from economies of scale. Diversifying the construction business into more complex projects, with higher contract value and better margins.
  • Enhancing its project planning and design capabilities. Hiring – all employee adds are supervisory level and above.
  • Smart sourcing – subcontracting of low-end project work, strategic imports and also in house manufacture where appropriate.
  • Investments in equipment and fixed assets help achieve higher operating margins.
  • Structurally, Ramky executes projects either directly, or through SPVs created for specific Road or Infra project; so there are 19 subsidiaries.
  • Thrust on pan-India presence, with 5 Zonal and 3 Regional offices and UAE & West Africa, though international revenue is only 1%.

Industry Note:

  • There is a massive infra push by the Indian govt, envisaged in the 11th and 12th Plan, 30% of which is expected to be funded by private sector capital.
  • This is a crowded space. There are over 60 listed peers in the Construction & Contracting – Civil sector, not including conglomerates.
  • In roads, competition includes Reliance Infra, Jaypee Infra, IL&FS Transp., GMR Infra, Lanco Infra, L&T, IRB, IVRCL, Ashoka Buildcon, etc. Industry estimates are that 90 firms are pre-qualified for prestigious NHAI projects. Many more are present in buildings, Power – Transmission/Equipment, etc sectors.
  • Roads sector is now poised for a 2-3 year period of consolidation. High competition drove infra firms to bid aggressively for new projects. Many firms in this sector have overstretched their balance sheets and may default on payments/ restructure debt/ sell assets.
  • Ramky has entered into power transmission sector where there are many entrenched players in a market that is currently flat. Also Power sector suffers from systemic issues like weak finances of state electricity boards, and fuel linkage issues. As a result many plants are underutilized today. Margins will be stretched here.

 Stock Valuation, Performance and Returns

Ramky had its IPO in Sept’10, with pricing at Rs 450; subscription was fair at 2.9 times and collected 530 cr.

Ramky - Equity performance, JainMatrix Investments

Fig 2 – Ramky – Equity performance, JainMatrix Investments

  • From its IPO price of 450, the stock rose to 460, its all time high. Then the fall was continuous and the CMP of 90.3 is near the all time low of 88.5. The share has fallen 80% in these 21 months, causing tremendous value destruction, Fig 2.
Ramky, Quarterly Revenue and Profits, JainMatrix Investments

Fig 3 – Ramky, Quarterly Revenue and Profits, JainMatrix Investments

  • Dividend was 45% in 2011, at a dividend yield of 4.8%. However, this was a maiden dividend, so we do not have history of steady dividend distribution.
  • As compared to share price, for a 5-year period the growth figures are Sales (40.3%), EBITDA (47.6%), and Net Profit (46.4%) CAGR, see Fig 3. The Q4 of every year is higher due to government client customers.
  • We can see from the Consolidated EPS and Debt Equity – Fig 4, that EPS has grown steadily, at 46% CAGR. The Debt Equity has not risen beyond 1.52.
Ramky, EPS and DE ratio, JainMatrix Investments

Fig 4 – Ramky, EPS and DE ratio, JainMatrix Investments

  • Consolidate Cash Flow is available for the Financial periods after listing and is negative, while showing some improvement y-o-y. See table 5.
31-Mar-10 31-Mar-11
Net cash generated by/(used in) operating activities -169.93 -111.77
  •  An important ratio for Ramky is the Orders Booked to Billing ratio (BTB). This has fallen, but is still quite comfortable (Fig 6).  Order Booked position at Ramky is 13,703 cr, providing 3.5 years visibility.
Fig 5 - Ramky - Orders Booked to Billings, JainMatrix Investments

Fig 6 – Ramky – Orders Booked to Billings, JainMatrix Investments

  • The Price and PE Chart of Ramky, Fig 7, indicates that IPO in 2010 was at high valuations. Further, in the next 2 years, the share price has shown a disappointing downward trend. Today the PE of Ramky is 2.0 times, (based on Consolidated EPS), below the industry average of 12.5.
  • In Fig 7 we can see that the average PE in the last 2 years has been 7 times. PE has today fallen to very low levels in the valuation range.
Ramky - Price to PE ratio, JainMatrix Investments

Fig 7 – Ramky – Price to PE ratio, JainMatrix Investments

  • The EPS chart, Fig 8, shows that EPS has been flat to gently rising for 2 years.
  • The EPS of Ramky is expected to stay in the trend line range in Fig 8.
Ramky - Price and EPS Chart, JainMatrix Investments

Fig 8 – Ramky – Price and EPS Chart, JainMatrix Investments

  • The Infra sector has not done well recently, but a comparison with CNX Infra index, Fig 9, shows the index has fallen by just 15.7% while Ramky has fallen 80%.
Ramky and CNX Infra Index, JainMatrix Investments

Fig 9 – Ramky and CNX Infra Index, JainMatrix Investments

  • ROCE and RONW is 18-19%, these are good ratios.
  • PEG is at 0.17 – indicates undervalued status.

Risks:

  • Persistent rumours of political connections and investigation by CBI. The price has got hammered due to this news in the last 3 months. Detailed in section ‘Events, News, Strategies’.
  • Ramky states a business objective as ‘to build more complex and multi-disciplinary projects’. Complexity by itself is not a virtue, and makes understanding the Ramky business model more difficult for investors.
  • Diworsification: The firm is spreading itself thin across too many sectors – Water (supply, storage, treatment), irrigation, Roads & Bridges, Buildings, Industrial parks and power distribution, and recently Railway projects.
  • The sector is government dependent, for orders and payments.
  • High interest rates in India are certainly impacting the firm.

Opinion, Outlook and Recommendation

  • The Indian infra sector is critical to the GDP growth, and a lot of resources will be poured into development over the next few years. Ramky straddles this across a number of sectors. Ramky also appears to have good financials over the last 3-5 years.
  • However the consistent fall in share price is not explained by fundamentals, the overall market sentiment, or even the infrastructure sector performance. Current valuations are highly stressed, and the market is awaiting political and investigation outcomes rather than any business achievements.
  • Ramky is a Sell for the long-term investor due to the consistent fall in market prices and political cloud over the firm, all of which can extend or reverse unpredictably.
  • At some point in time, the share should start rising again, to achieve some reasonable valuations after the excessive fall, but this is neither predictable nor advisable for investors to aim for.

JainMatrix Knowledge Base:

See other useful reports

  • KEC International – LINK
  • BGR Energy Systems – LINK
  • IRB Infrastructure Developers – LINK
  • Adani Port: Infra play at good valuations – LINK

Disclosure: It is safe to assume that if the JainMatrix website recommends a stock, the researcher has already invested in it.

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