Unity Infraprojects

Investors with a two-three-year perspective can buy the stock of Unity Infraprojects (Unity). Primarily a construction contractor, Unity’s project portfolio comprises infrastructure and civil contracts. At Rs 479, the stock trades at 8.8 times its trailing 12 month per share earnings, at a discount to peers such as Ahluwalia Contracts and Patel Engineering.
Trading well below its IPO price in 2006, the company now asks for far more reasonable valuations. Besides, a diverse and growing order-book, increase in infrastructure contracts, and steady margins have improved its earnings prospects over the last couple of years.
order composition
Order-book size has almost doubled in the first half of FY-10 to Rs 4,040 crore, up from the 12 per cent growth of FY-09, indicating increasing ability to secure a larger number of contracts. At 39 per cent, civil contracts spanning townships, hospitals, airports, commercial and residential buildings, make for the bulk of the order book. 15 per cent comes from the transportation space, where the company undertakes construction contracts for road widening, micro tunnelling and road development. Water supply and irrigation contracts account for the balance. The order book, at 3.1 times FY-09 sales, has an average execution period of around 30 months, allowing medium-term earnings visibility. There is also an almost even split maintained between private and government contracts over the past three years allowing the spreading of risk while maintaining the ability to capitalise on opportunities thrown up by both segments.
Contribution of civil contracts has reduced in favour of those in the infrastructure space; transportation made up a mere 5 per cent of the order-book in FY-07. This segment, especially micro tunnelling , may see more activity in the coming quarters and help support profit margins.
The company will remain focussed on urban infrastructure; schemes such as JNNURM leave ample opportunities. Unity will also move into electrical contracts.
Combined bids
Unity does not have projects on a build-operate-transfer (BOT) model. Instead, it bids in consortium with developers as a preferred engineering procurement construction (EPC) contractor. It, however, does not have in-house design capability and outsources the same. Unity also undertakes projects on a joint-venture basis, securing last week an Rs 1145-crore water supply tunnel project with IVRCL Infrastructures and Projects.
Such partnering with varied developers, while helping the company secure larger orders or enter new geographical areas, may eventually provide it with technical qualification to bid on its own. The company has earlier partnered Nagarjuna Constructions, Patel Engineering and Pratibha Industries, among others. Unity also has interests in real-estate development which is not a significant contributor to revenues and plans to go slow on these projects.
Maintained margins
Compounded annual growth rate of sales and net profits over a three-year period stand at 85 and 84 per cent respectively. The company kept up sales growth of 28 per cent for the first half of FY-10 compared with the same period in FY-09. Net profits similarly increased 11 per cent.
Operating margins have hovered around 14 per cent over the past three years and into the first half this year as well. With price escalation clauses in 85 per cent of the contracts, the company appears to be able to maintain margins at this level.
Debt on books has seen massive increases, standing at Rs 432 crore as of March ’09 against Rs 90 crore seen two years ago; interest costs almost doubled in FY-09 over FY-08. Gross margins are, thus, left at 10.6 per cent for FY-09 against the 11.6 and 12.4 per cent in FY-08 and FY-07. Margins have remained lower in the first half of FY-10 than the same period in FY-09.
However, share of interest costs in sales has remained at 2.5 to 3 per cent, suggesting debt has helped generate sales.
Net profit margins were 6.2 per cent for FY-09, down 100 basis points from that in FY-08, slipping to 6 per cent for the first half of this year. The company can raise up to Rs 250 crore through a Qualified Institutional Placement issue; if undertaken, it could help trim debt and boost margins.
Concerns
Given the sluggish climate of FY-09, some projects have been delayed, albeit no outright cancellation of projects. The company is also highly concentrated in the West, primarily in Maharashtra and Mumbai with close to 58 per cent of contracts in the west.
via BL