Unity Infraprojects: BUY :: Business Line

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Infrastructure player Unity Infraprojects has pulled through tough times in the construction sector, with a revival in order inflows and easing debt burden. It has also firmed up presence as a developer of road projects, a step up from the pure construction contracts it has been executing hitherto.

At Rs 45, the stock trades at 3.2 times its trailing 12-month earnings, at a discount to peers such as JMC Projects. Estimated price-earnings multiplefor 2012-13 stands at 3.1 times. Investors can buy into the Unity Infra stock, but are advised to limit exposure given its riskier small-cap status.

PICK UP IN ORDERS

So far this fiscal, Unity Infra has secured Rs 988 crore in new projects, two of which are medium-sized ones to develop roads on a build-operate-transfer (BOT) basis. These projects aid the company’s move up the value chain from being a pure construction contractor into the more lucrative development business. The two orders are in addition to a BOT road project secured last fiscal.

As of end-May, the company’s order book amounted to Rs 4,200 crore or 2.1 times the trailing four-quarter revenues. With an average execution period of 24 months, the order book offers good medium-term revenue visibility.

The company is also the lowest bidder for projects worth Rs 1,000 crore. With these projects, order inflow in the first four months of this fiscal almost equals that secured for the entire previous fiscal.

DIVERSIFIED ORDER BOOK

Just under a third of orders come from the building segment, with government contracts for structures such as hospitals and educational institutions forming the bulk. About 23 per cent of the order book in high-margin water contracts. The remaining order book comes from the road segment, primarily on account of the recently-secured road projects.

A diversified order book helps tide over hiccups in orders in specific segments. For instance, awarding of projects is currently higher in the roads space than others. The 13 per cent order book share the segment had in May last year has jumped to almost half this May.

In the same vein, with awarding of road contracts being lacklustre for much of last year, the company made up by securing contracts in the water space.

Over the past three years, revenues and net profits have grown at a compounded annual 22 per cent to Rs 2067 crore, and 14 per cent to Rs 104 crore.

MARGINS MAINTAINED

However, with rising steel and cement prices in the past few quarters, input costs have spiked. As a proportion to sales, material costs stood at 43 per cent for 2011-12, up from the 37 per cent in the previous fiscal. Input costs are likely to remain high.

Even so, operating margins are healthy at 16 per cent for 2011-12, only slightly below the 16.5 per cent for the year before. The company compensated high material costs by controlling staff and other construction costs.

Margin pressure also came in from interest costs. As a proportion to sales, interest costs stayed above 6 per cent till the December 2011 quarter. Interest cover too hovered just over 2 times. But the company worked on improving working capital cycle to reduce working-capital credit and save on interest.

Efforts paid off towards the end of the fiscal, with the interest-to-sales ratio falling below 5 per cent and interest cover improving to 2.8 times in the March 2012 quarter. Debt-equity, though, is still high at 1.2 times.

A reduction in interest rates could help improve net margins from the current 5 per cent.