ARSS Infrastructure Projects: Must Subscribe

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.

Price Band Rs 410 – Rs 450
Issue size in Rs Rs 103 crs
Offer size in shares 25,12,195 Shares at Rs 410 -22,88,889 Shares at Rs 450
QIB’s 15,07,317 Shares at Rs 410 – 13,73,333 Shares at Rs 450
Non Institutional Investors 2,51,219 Shares at Rs 410 – 13733 Shares at Rs 450
Retail Investors 7,53,659 Shares at Rs 410 – 6,86,667 Shares at Rs 450
Marketcap post issue Rs 617.71 crs to 667.93 crs
Book Running Lead Manager IDBI Capital Market Services Limited
SBI Capital Market Services Limited
Syndicate Members Enam Securities Private Limited
Almondz Global Securities Limited
Sunidhi securities and Finance Limited
Isssue Opening Date Monday 8th February
Isssue  closing date Thursday 11th February
IPO Grade 2/5 by CARE indicating below average fundamentals
Pre-Issue Capital 1,25,54,000 shares
Post-Issue Capital 1,50,66195 shares at Rs 410 and 1,48,42,889 at Rs 450 per share

 

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

Investment in Joint Ventures 5.00 Crs
Funding long term Working Capital Requirements 86.00 Crs
General Corporate Purposes X
Public Issue Expenses X
Total 103 Crs

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.

Performance of Newly Listed Shares 6th Feb 2010

Name Date of listing Issue Price closing  price closing price gain loss  change over
6th Feb 29th Jan over week  lssue price
JSW Energy 4th Jan 100 109.50 106.65 2.67 9.50
Godrej Properties 5th Jan 490 469.40 475.65 -1.31 -4.20
DB Corp 6th Jan 212 240.05 245.90 -2.38 13.23
MBL Infrastructure 8th Jan 180 206.55 209.05 -1.20 14.75
Infinite Computer Solutions 3rd Feb 165 207.00 NA 25.45 25.45

NTPC FPO response

NTPC-logoNTPC’s Follow on offer opened yesterday and the Institutional portion was bid one time at Rs 209. Retail investors who are being offered shares at the floor price of Rs 201 are effectively being offered shares at a discount of Rs 8 to the current market price. The retail portion is huge and 14.28 cr shares are being offered in this category.

The total shareholders of NTPC are about 8.25 lakhs. If we are to assume that the average application size of retail shareholder would be about Rs 45000, we are talking of an application for 224 shares. Taking this as a base it means that you would need 6.375 lakh applications to subscribe the retail portion one time. Similarly as of now the HNI’s believe that their category which is for 6.12 cr shares or Rs 1230.12 crs will not be fully subscribed or there would be plenty of shares available for subscription.

The same feeling is being expressed by some QIB’s and they are betting on the retail portion and HNI portion being unsubscribed which would help them to get shares at a price which is below the current book of Rs 209 for QIB’s being made.

At the close of bidding on the first day the bids received in the QIB category were as follows: –

QIB at Rs 210 23.81 lac shares
QIB at Rs 209 2183.54 lac shares
QIB at Rs 208 168.27 lac shares
QIB at Rs 207 96.62 lac shares
QIB at Rs 206 50.00 lac shares

If one were to add all the bids then the total bid in the QIB category is for 31.90 cr shares against an allocation of 20.40 crs meaning at the current book the QIB portion is 1.5492 times. The retail and HNI who are to bid at the floor price have so far bid for 29.57 lakh shares out of the 2040 lakh shares reserved for them. It is a practice in India that retail and HNI always bid on the last day in the last few hours. This issue will be no exception.

An arbitrage opportunity is also happening where HNI’s are bidding for the shares of NTPC and selling the Marc h future of NTPC at a premium to the price at which they would get allotment but at the discount to the current market price. March futures are trading at Rs 205-205.50 which spot NTPC is trading at Rs 208.75-208.90.

There is a strange coincidence happening this Saturday the 6th of February, where trading will happen in our markets on Saturday for two hours. I believe there will be action focused in this special trading session on NTPC in the futures market based on the subscription.

I reiterate my stand in the article written yesterday that retail investors must subscribe this issue and that HNI’s who are trying to lock in a mere 4.5 to 5 Rs may be missing out on a much bigger run.

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