Report On ERA Constructions

TWENTYFIRST CENTURY SHARES AND SECURITIES LTD.
Era Constructions (BUY) June 05, 2007
C.M.P: 365 (5.8X08E) Target Price (12 months): Rs. 500
Investment Argument:
Era Constructions is engaged in diverse areas such as power projects, infrastructure, institutional & industrial complexes and turnkey projects and is set to benefit in a major way from the expected growth in the infrastructure sector. Its order book is Rs.1800 crores – 1.5 times its consolidated FY07 revenues – to be executed over the next 15 months. ECIL expected to significantly increase its order book in the near future, which provides a clear visibility in revenue growth for the next few years. The company is also foraying into real estate which is expected to unlock significant value for the company going forward. We expect the company’s revenue growth to be robust. We recommend a BUY with a one year target price of Rs.500 implying an upside of 35% from the current levels.

Key investment positives:
Good revenue visibility: Increased focus of government on infrastructure and robust order book of Rs.1800 crores is likely to drive revenue growth for the company for the next few years. The management has indicated that it plans to add orders worth more than Rs. 3000 crores to its order book during the current fiscal.
Robust Financial Performance: The company has shown a consistent revenue growth in the past two years.
Consolidated Numbers (Rs. Cr) FY05 FY06 FY07 FY08E
Net Sales 310.84 376.21 1200 1440
Other Income 2.07 2.11 13.95 0
Total Income 312.91 378.32 1213.95 1440
Total Expenditure 262.75 326.45 928.6 1100
EBIDTA 50.16 51.87 285.35 340
Interest 9.94 9.95 46.17 55.5
Depreciation 3.47 3.47 8.17 16
PBT 36.75 38.45 231 268.5
PAT before minority interest 27.15 27.8 160.7 188
PAT after minority interest 27.15 27.75 120 145
DEPS 14.31 21.5 57.15 63

Improving margins: Operating margins of the company are continuously improving due to a diverse mix of projects in different segments such as power, railways, roads and industrials. Power and industrial projects enjoy higher operating margins. Going forward, infrastructure and power projects are expected to contribute to 50% of the company’s revenues.

Scaling up the value chain: The company has recently set up a 50,000 metric ton facility to manufacture pre-engineered building (PEBs) materials plant at Pant Nagar (Uttaranchal) through a separate entity Era Metals. Era Constructions will have a 48% stake in Era Metals and the remaining will be held by promoters and associates. Rapid growth in the end user industry of ‘pre-engineered’ building is likely to lead to the industry growing from INR 4.5 billion in 2005 to about INR 25 billion by 2011. With more than a third of its order book coming from building structures, ECIL’s foray into the PEB segment is likely to help it move up the value chain. We expect accretion of significant business opportunity from this business foray on third party front as well as captive construction business.

Real estate Foray: ECIL’s increased focus in the real estate space through its 51% subsidiary Era Infrastructure (India) Ltd (EIIL) is likely to lead to significant value unlocking. With primary focus on tier II and III cities through 16 projects on the anvil, EIIL has a land bank of over 300 acres.

Saved from impact of Section 80IA (Source: BSE announcements): In the Union Budget 2007-08, it has been clarified that tax benefits under Section 80IA will not be applicable for construction companies that are carrying out only civil construction projects. Their effective tax rate would also go up in future estimates. However, the negative impact of Section 80IA will not be seen in case of Era Constructions since it had been paying full tax in past years.


Risks & Concerns:

Slowdown in debtor realizations: Any kind of delay in clearances of payments might impact the company's performance.

Small size might become a constraint: The small size of the company might become a constraint in bidding for bigger projects. But with increased net worth, it will be in a right position to individually bid for projects.

Outlook:
Strong growth in construction business supported by ramp-up in pre-fabricated construction businesses and value unlocking in the company’s real estate business are likely to act as multiple value creation triggers over the next few years.

Valuation:
At the current price of Rs 365, ECL currently trades at 5.8 x FY08E. We believe that ECL is a good long term investment, hence we recommend a “BUY” with a 1-year price target of Rs. 500. Our target provides an upside of 35% from current levels.
Analyst: Akhil Reddy.



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