Man Infraconstruction Ltd (MInfra) is a mid-sized construction company specializing in residential buildings (83% of the orderbook) in Mumbai and Pune. MInfra has an orderbook of around Rs2,000 crore. Going ahead, we believe that the company’s growth would be muted as revenue growth would taper on a high base and will post subdued compounded annual growth rate (CAGR) of 17.5% over FY2009-12. Margins are expected to be under pressure owing to change in the orderbook composition towards the low-margin real estate segment and intensifying competitive pressures.
Also See Man Infraconstruction: Issue Details (Graphics)
MInfra being mainly dependent on the real estate sector is exposed to the trials and tribulations of the sector. In fact, this was primarily why the company turned in poor performance for the first nine months of FY10, posting a fall of around 14% on the revenue front.
The company registered 13% growth in profit mainly on account of the 700 basis points hike in earnings before interest, tax, depreciation and amortization (Ebitda) margins to 32%.
Additionally, MInfra’s orders from the sector are heavily dependent on one firm, DB Realty Ltd (around 60% of orders). We acknowledge the fact that the relationship between MInfra and DB Realty is not of near future but we prefer companies having diversified presence so that in times of slowdown they are better placed.
Hence, we are not enthused by MInfra’s geographical (Mumbai and Pune), segmental (real estate) and client (DB Realty) centric business model.
MInfra has been clocking high Ebitda margins and much above peers in the range of 24-25%, barring the first nine months of FY10.
However, we believe that the company will not be able to sustain such high margins as there has been a structural shift in its orderbook composition. For instance, in FY09, the high-margin business as well as the company’s forte, the port infrastructure segment, contributed 41% of revenue. However, the company’s current orderbook is skewed towards residential construction work, which is not only a low-margin business, but highly competitive too.
MInfra’s main client, DB Realty, has also been successful in raising funds to the tune of Rs1,500 crore via an initial public offering (IPO), which augurs well for MInfra. We have accordingly factored in MInfra’s order inflow in our model. On the operating front, however, as mentioned earlier, we have factored in a sharp dip in margins. As a result, we estimate the company to report subdued profit CAGR of a mere 8% over FY2009-12.
On the valuation front, the IPO is available at a price-earnings multiple of 11-12 its estimated FY12 earnings on the lower and upper price bands, respectively, which is at a premium to listed firms. Moreover, due to the concentrated nature of business and subdued earnings growth, we believe the stock should trade at a discount to its peers. Hence, we recommend an avoid to the issue.