ARSS Infrastructure Projects Limited is tapping the capital markets to raise Rs 103 crs in a price band of Rs 410-450 from Monday the 8th of February 2010. The issue closes on Thursday 11th February 2010.

Business

ARSS is in the business of construction activities. The company undertakes construction of railway infrastructure, roads, highways, bridges and irrigation projects. The company started off from Orissa and it has eight stone crusher units in the state. Currently the company is operating and executing projects in 14 states in India. The company has developed expertise in railway projects such as earthwork, major and minor bridges, supply of ballast, sleepers, laying of sleepers and rails, linking of tracks etc. ARSS also does construction of roads, highways, bridges, irrigation projects and also EPC for railways.

The present order book is of Rs 2877 crs and 40% of the same is from rail projects while another 40% is from road projects. The order book size of the company is about 4.58 times its sales for the year ended March 2009 and just about 3.5 times its 9 months sales for the period ended December 2009 on an annualised basis. The company typically doubles its turnover in the fourth quarter compared to the previous three quarters. Discounting the same by about 20% we could see a turnover of about 1000 crs for the current year, which would imply an order book of just less than 3 years, or 2.8 times. This shows the robust execution skill of the company. The company bids for projects on a standalone basis as well as through project specific joint ventures with players like RITES, Kalindee Rail Nirman, and Patel Engineering amongst others.

ARSS has completed 86 projects, 300kms of roads, and over 200kms of rail lines till date.  Some key projects under execution include the construction, rehabilitation and widening of Cuttack-Paradeep road in Orissa at a cost of Rs 208 crs, work order for rail infrastructure work of Jindal Steel and Power at Angul which project value of Rs 261 crs does not include the rails which would be supplied by Jindal Steel and construction of new broad-gauge line, bridges and complete infrastructure between Salem-Karur in Tamil Nadu. ARSS has expertise in the railway infrastructure business and this is a key focus area for the company.

Objects of the Issue

Financials

The company has reported revenues of Rs 315.43 crs for the year ended March 2008 and Rs 628.22 crs for the year ended March 2009. The same have almost been achieved in the nine month period ending December 2009 at Rs 610 crs. The profit after tax for the same period is Rs 26.8 crs for March 2008, Rs 51.04 crs for March 2009 and Rs 50.08 for the nine month period ended December 2009.

The revenues have almost doubled from 2009 march numbers over 2008 March numbers. The nine months ended December 2009 show that revenues in nine months are equal to revenues in 12 months of the previous year indicating a 33% growth having been already achieved. The revenues in the fourth quarter are significantly higher than the remaining quarters of the year and to expect that the fourth quarter would see sales of Rs 400 crs or higher would certainly be in place. This would imply a growth of 61% in sales of March 2010 over March 2009. Profit after tax grew by 90% in March 2009 over March 2008, and in nine months ending December 2009 is equal to numbers for 12 months ending March 2009. The net margins are a healthy 8.49% in March 2008, 8.12% in March 2009 and 8.21% in December 2009.

The company’s financials are decent and it has been achieving good margins and excellent growth.

Valuation

Excellent growth rates, decent margins, substantial order book and huge potential all make this business attractive and an excellent investment objective. The EPS for the company on March 2008 profit after tax is Rs 21.34 per share which has almost doubled to Rs 40.66 for the period ended March 2009. Based on nine months numbers for December 2009 the earnings per share is Rs 39.89.

If one were to look at these numbers on an annualised basis the same would be Rs 53.18. If however we were to look at the basis of revenue of Rs 1010 based on the fourth quarter sales and assuming a constant net profit margin of 8.21% the profit would be Rs 82 crs and EPS would be Rs 66.

Recalculating the EPS on a fully discounted basis the share capital of the company would increase from Rs 12.554 crs to 15.066 crs at the lower end of the price band of Rs 410 and to Rs 14.84 crs at the upper end of the price band of Rs 450. The fully diluted EPS at the lower price band for the year ended March 2009 would be Rs 33.88 and at the upper price band Rs 34.39. Similar numbers for nine months ended December 2009 would be Rs 33.24 and Rs 34.39 respectively. If one were to take the estimated profit for March 2010 of Rs 82 crs the EPS would be Rs 54.42 and Rs 55.25 respectively.

Based on these projected numbers the issue price band of Rs 410-450 is offering shares at a price earnings multiple of 7.53 at the lower price band and 8.14 times at the upper price band. These valuations look attractive considering the growth opportunities in the sector. 

SBI has invested in the company’s equity in January 2008 at a price of Rs 315 per share. They hold 10 lakh shares.

Comparison

There are a large number of players in the construction or infrastructure segment considering its size and geographical reach or spread. There are many segments within the same and there are various players who concentrate in their niche segments. ARSS concentrates in the rail and road segments. In the rail segment there are very few players such as Larsen and Toubro and Kalindee Rail. In the road segment there are many players such as Tantia Constructions, Pratibha Industries, Patel Engineering, IVRCL and Nagarjuna Construction amongst others. The last two players are fairly large in scale and operations.

Risks

The company is in the business of construction and is present in 14 states and currently working on about 150 sites. There are a number of cases and legal proceedings pending against the company. There is also a criminal case against one of the promoters of the company. The fragmented nature of the industry and the fact that there is intense competition in the market may affect margins in the near term and thereby affect profitability.

Conclusion

There is tremendous supply of paper in the form of IPO’s these days. The current market sentiment is also down and markets have lost over 10% in the benchmark indices over the last few weeks. Historically retail investors do not apply in issues where the price is above Rs 250-300 simply because the allotment of shares to them is small. This issue being in the price band of Rs 410-450 is likely to see a slightly muted response from retail investors on account of the high price and secondly the current bad sentiment.

As far as the issue is concerned, the company has done well in recent times. ARSS has a healthy order book in excess of Rs 2870 crs, decent net margins of over 8% and a niche segment where it does business for the railway infrastructure. Located with its base in Orissa where it has 8 stone crushers, it is able to procure its materials for construction at cheaper prices.  

All in all a decent issue which is attractive and investors looking to make money must subscribe.  One should expect a return of about 20-30% by the time the March 2010 results of the company are available if not earlier.

SEBI Disclaimer: – I intend to subscribe to the above issue.