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A contrarian in the construction space?

Can an infrastructure company make an attractive surplus to draw investor attention?

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Mudar Patherya
What makes the space increasingly attractive is reprioritisation of road building by the new government and a return to the "real EPC"

Can an infrastructure company make an attractive surplus to draw investor attention?

I ask this because most analysts say construction companies should be avoided for reasons of poor cash flow, erratic order books, asset-heavy business models and vulnerability to economic slowdowns.

Curiously, the one company that appears to be cocking a snook at the 'Shun the construction company' club is unlisted Udaipur-based G R Infraprojects Limited. The quality of the numbers it has reported in the wobbly past two years has got me to rethink my bias.

Just consider. An earnings before interest, taxes, depreciation and amortisation of Rs 110 crore in 2013-14 as compared with Rs 118 crore in 2012-13; an interest cover ratio of more than five in 2013-14, compared with more than 13 in 2012-13; and profit of Rs 70 crore in 2013-14, against Rs 83 crore in 2012-13.

On the face of it, a decline in numbers because certain customers couldn't pay up, which has typically given an economic slowdown.

The other way to look at it is, if this is what the company reported in possibly its worst year, when most peers had losses on their books, G R Infraprojects must be an interesting contrarian.

Here are some realities that make it so. One, the company has focused singularly on road building, resulting in economies of scale, brand and competence, on the one hand, and the ability to engage in diverse roles (construction, contracting and build-operate-transfer (BOT)).

Two, the company is singularly focused on completing projects either on schedule or even ahead. The 48-km Meghalaya road project was allotted for 36 months but completed in 24, which resulted in accelerated cash flow, a Rs 45-crore incentive (on a Rs 225-crore project) and a reduction in the budgeted interest outflow.

Three, the company is a selective bidder for BOT projects, which by virtue of accelerated completion kick-started revenues and profits, contrary to the prevailing perception that such projects destroy balance sheets, with excessive debt for nominal revenues. Here also, the cumulative targeted completion time of 84 months was shrunk to 48 months, converting what would have been millstones into attractive monetisable assets.

Four, a core construction capability (as opposed to sub-contracted delegation) that makes it possible to accurately assess, compute, plan and deliver in engineering, procurement and construction (EPC) projects, and create profit-generating BOT assets for the long term.

Five, a conservative estimation capability, coupled with a commitment to over-perform; the BOT projects have generated 10 per cent more than estimated revenues. The Rs 335-crore Ringus-Sikar project was estimated at Rs 250 crore for banks and the company completed the project at an even lower cost.

Six, the ability to stay true to its required internal profitability benchmarks, as opposed to a compulsion to acquire projects at any cost. This made it possible for each project to contribute to the bottom line.

What makes the space increasingly attractive is reprioritisation of road building by the new government and a return to the "real EPC", where construction companies need to estimate all inputs (including engineering) across a project's life cycle, strengthening the case for brands such as G R Infraprojects and bringing some sheen back to an otherwise troubled sector.

The author is a stock market writer, tracking corporate earnings and investor psychology to gauge where markets are not headed

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First Published: Jan 05 2015 | 12:17 AM IST

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