On firm ground

Huge opportunities, diversified portfolio, strong order book and good track record augur well for ARSS Infrastructure.

Of late, small infrastructure companies, too, are attracting investors’ attention as many of them have strong order books, fairly diversified portfolios and reasonably good execution capabilities to scale up their businesses. Also, since the opportunities in the infrastructure sector are huge, smaller companies are most likely to benefit from increased order inflow and good revenue visibility.

ARSS Infrastructure Projects is one such company, which is coming out with an IPO to raise funds to the tune of Rs 103 crore. While the company was predominantly operating in eastern India (mainly in the state of Orissa) undertaking activities related to the railways infrastructure, its effort to diversify into other regions and segments is paying off.

Well diversified
Although the company’s core competence remains to be in railways related projects, it has successfully diversified into other infrastructure segments as well. Currently, railway projects account for 41 per cent of its order book, while another 40 per cent is due to road projects. Although irrigation projects account for just 2.5 per cent of the company’s order book, it should improve as ARSS enhances focus on this segment.

ROBUST MARGINS
in Rs crore	FY07	FY08	FY09	9MFY10*
Sales	134.0	315.0	628.0	610
OPM (%)	14.5	15.5	16.2	18.8
Net profit	11.0	27.0	51.0	50
Net profit (%)	7.9	8.5	8.1	8.2
RoNW (%)	36.8	27.2	34.4	25.2
* for 9 months ending December 2009                  Source: Company, RHP

So far, the company has executed over 60 projects involving construction of 300 km of roads and highways, 200 km of rail tracks and, 10 minor and major bridges. In terms of the regional diversification as well, the company has undertaken projects in about 12 states. As a result of this the eastern region now accounts for only 35 per cent of the order book.

Vast opportunities
Considering its execution capability and experience, the company is further increasing its presence in the other states and also looking for the opportunities in the road segment. The company will be using Rs 86 crore of the IPO proceeds to fund its growing working capital requirements as well as investing into special purpose vehicles (SPVs). Availability of funds will improve the company’s ability to bid for larger projects. The company has been bidding for the projects on standalone basis as well as with domestic and international joint venture partners on project specific basis. The company is further looking for alliance with foreign and domestic players to bid and qualify for larger projects.

Besides the above factors, higher spending in the infrastructure projects in the country will also contribute to the company’s growth. Particularly in the railways, which is relatively a higher margin business and where there is low competition and good opportunities, the company should benefit in the years to come.

During the 10th five year plan, India’s expenditure on railways was about $31 billion, which has more than doubled to an estimated $66 billion for the 11th five year plan ending March 2012. The company has been very successful in getting orders in the railways segment. Its current railways order book is about 7 times 2008-09 revenues from the railways segment and has grown at 89.4 per cent annually in the last two years. 

Valuations
In terms of revenue growth, the company has strong visibility given its large order book of Rs 2,877 crore, which is about four times its 2008-09 revenue. So far, for the 9 months ended December 2009, the company has reported revenues of Rs 609 crore and is expected to close the current fiscal year with a topline of Rs 871 crore as fourth quarter typically accounts for higher revenue. Taking this into account, its EPS works out to about Rs 48 (on post-issue capital).

At the upper band of offer price of Rs 450, the issue is priced at 9 times its 2009-10 estimated earnings, which is reasonable. Thereafter, one can assume a 30 per cent growth in earnings next fiscal year on the back of strong order book, which is executable over the next two years. Based on estimated 2010-11 EPS of Rs 62, the IPO becomes attractive at a PE of 7 times.