Man Infraconstruction

Man Infraconstruction is coming out with its maiden public offer of around 5.63 million equity shares of the face of value of Rs 10
each. The issue is being made through a 100% book-building process in the price band of Rs 243 to 252 per share. The issue includes 9.72 lakh equity shares reserved for anchor investors, which has already been subscribed by a clutch of institutional investors at the upper price band.

The issue represents 11.4% of the post-IPO equity capital of the company and the promoter’s stake in the company will decline to 63.5% after the IPO. The main objective of issue is to raise funds for augmenting the company’s equipment bank. Access of in-house construction equipments is a key competitive advantage in the construction sectors and the issue proceeds will help the company more than double its stock of equipments. This in turn will significantly increase its project execution capabilities and the gains will visible from the second half of the next financial year.

At the offer price, the issue price works to be around 16-18 times the company’s estimated earning per share for FY10 and is expensive compared to the current valuations of its listed peers, such as Ahluwalia Construction, J Kumar and Supreme Infrastructure among others.

Business: The company provides construction services to four sectors namely, port infrastructure, residential and commercial real estate, industrial projects and road and highways infrastructure. During the first nine months of current financial year, port projects account for 30% of the company’s contract revenues and balance coming primarily from real estate projects.

Going forward, the company’s business is expected to get skewed towards the real estate sector even more as residential projects accounts for 83% of the its outstanding order book with another 10% coming from commercial projects. As of December 31, 2009, the company has a total order book of Rs 2,020.9 crore.

The order book is around four times its estimated revenues for FY10 and will provide good earning visibility for the next two-three years. In the residential sector, over a quarter of the order book is accounted for by residential projects under Slum Rehabilitation Authority in Mumbai.

Among individual clients, DB Realty, which recently came out with its IPO, is its single largest customer accounting for nearly one-third of Man’s order book. Such a high client and sectoral concentration makes it a riskier bet than its listed peers most of whom have a fairly diversified customer base across various verticals. Real estate projects face much greater interest rate and finance risk and are prone to getting delayed.

The company counters this and says that most of its real estate clients are large reputed developers with a track record of completing projects on time. Second, real estate projects enable it to earn substantially higher operating margin —30 % in FY10 — nearly double that of EPC contractor focussed on infrastructure sectors.

Finances: In the past three years, the company’s net sales and net profit jumped five times to reach Rs 500 crore and Rs 74 crore, respectively in FY09. In the first nine months of FY09, the company reported a 21% decline in revenue, which, the management claims, is due a shift to material free contracts that reduces the rupee value of the contract. The IPO proceeds will enable the company to bid for bigger contract and help diversify in the infrastructure sector including BOT projects.

Valuiations: Given its risk profile, the issue looks expensive compared to its listed peers and risk-averse investor may give it a miss. There are cheaper and more juicer options available in the secondary. Bulls may, however, bid for the issue given that the company is debt-free , has strong cash flows and a dominant presence in the fastgrowing Mumbai-Pune real estate market.
~ET