Tantia Constructions: Buy

Investors with a two-three year perspective can consider investing in the stock of Tantia Constructions. Strong order book, superior operating profit margins and well-entrenched presence in the eastern region are positives for this company. At the current market price, the stock trades at about 10 times its expected earnings for FY09 – after factoring in equity expansion due to conversion of FCCBs. This is at a discount to similar sized peers.

 

Tantia Constructions is primarily into building railways, roads, bridges and urban infrastructure projects. The company has also forayed into power transmission projects and airport contracts, albeit in a small way. Its current order book of Rs 1,300 crore (about 5 times revenues for FY07), not only provides visibility for earnings growth, but also reflects the company's measured way of taking up projects. For a small company such as Tantia, an order book of 8-10 times annual revenues may increase execution risks, as scaling up of resources in a short span could prove challenging.

 

Tantia's strong presence in the eastern and north-eastern region has two main advantages. There are fewer players interested in bidding in these regions due to difficult terrain. Tantia with its expertise in tunnelling has had an edge in bagging projects in this region. Further, among the various regions in the country, the eastern region holds much potential for infrastructure spending, as it has seen the least amount of development work compared to the other regions. The likelihood of improved spending is already reflected in the increasing budget allocation for the region in recent times.

 

Tantia's presence in the above geography and its strength in high margin businesses such as rail and urban infrastructure had enabled the company to maintain superior profit margins over similar sized peers. While operating profit margins have been in the 10-11 per cent range, the margin surged to 16 per cent in the September quarter. This may be the result of a revenue mix tilted in favour of high margin projects such as rails, as well as an increase in the order size (with a good number over the Rs 100 crore-mark).

 

Tantia's sales growth for the above quarter, however, remained muted and net profits took a dip. While the slowdown in sales may be due to longer duration projects in hand, the net profits largely declined due to higher interest costs, which almost doubled compared to the same quarter last year. We expect funds raised through FCCBs to ease the level of debt on the balance sheet. Nevertheless, increases in raw material and interest costs remain the key risks to earnings. Removal of tax benefits under Section 80 IA may also impact net profits in the short term.