ARSS Infrastructure - IPO

 

 

After an analysis of ARSS Infrastructure's business and comparing it with its peers, the issue appears very attractively priced

 

IPO details

Price Band: Rs 410-450
issue size: Rs 103 crore
Date: Feb 8 - 11

ARSS Infrastructure carries out activities such as laying new rail tracks, construction of rail and road bridges, signaling/telecommunication work for railways, widening of roads, strengthening and repair of railway infrastructure, highways, bridges and irrigation projects. It began as a construction company catering to railway infrastructure projects, operating mainly in Orissa. It subsequently expanded its activities to other parts of the country. Over the years, the company has developed considerable expertise in railway construction projects, which include major and minor bridges, laying of sleepers and rails and linking of tracks.

   The net issue represents around 16.67% of the post-issue equity capital of the company at the upper price band. Out of the Rs 103 crore which the sale of shares is expected to bring in, Rs 5 crore will be used for investment in joint ventures, Rs 86 crore will be utilised for funding long-term working capital requirement and the remaining will be kept aside for meeting other general corporate purpose expenses.

   An analysis of the company's business and a comparison with its peers seems to indicate that the issue is very attractively priced. Investors are advised to subscribe to the issue.

BUSINESS:

As of January 10, 2010, the company has an order book of Rs 2,877 crore, equivalent to 4.6x its FY09 contract income. This indicates strong future revenue stream. The company has acquired the necessary equipment to execute these orders spanning over 18-24 months. ARSS has established itself as an infrastructure player through joint ventures with established partners and has developed an extensive experience in rail projects. Its revenue mix includes 46% from railways, 33% from roadwork and the balance from irrigation projects and others. However, this skews the revenue mix towards one segment. Going ahead, the share of roads is expected to increase slightly, according to the current order book. SBI is a major investor with a 7.97% holding in the company. Some of the major projects executed so far aggregate to Rs 1,284 crore.

FINANCIALS:

Over the past two years, orders from railways grew 89% while the company has been in this business for the past nine years. In FY09, the total income stood at Rs 628 crore with a net profit of Rs 51.2 crore. Its revenues grew at a CAGR of 116.7 % for the period FY07- FY09 and profit after tax grew at a CAGR of 120 % over the same period. The company is expected to complete projects worth Rs 994 crore by FY10. Going ahead, the company would look at diversifying its revenue stream and also increase the share of irrigation projects apart from roads. It has managed to improve its ratio of net working capital to sales from 0.53 in FY08 to 0.43 in FY09. This shows faster cash generation by the business. The company has a debt of Rs 370 crore on its books.

VALUATIONS:

Post the issue; valuation of the company comes to 6.61x to 7.14x of its annualised earnings of FY10. The fact that almost half of its annual profit is generated in the last quarter would further lower its pricing. The company has a significant presence in railway contracts and there are not many players, other than L&T, in this segment. On a TTM basis, L&T is trading at 10.69x. Thus ARSS leaves enough scope of upside for the investors. The fact that the company's networth will increase after the issue, growth in revenue will be good. Moreover, as government spending on infrastructure is bound to increase and with an established track record of executing government orders, the future for ARSS looks bright.