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Monday, February 20, 2006

B.L. Kashyap and Sons


Steep price

Focusing on commercial and residential construction

B L Kashyap & Sons (BLK) constructs hospitals, hotels, industrial plants, IT/ITES campuses, malls and multiplexes. It is also undertakes turnkey residential and corporate projects including external finishing and fittings. The company provides furnishing and fittings fit outs through its subsidiary BLK Furnishers.

In the corporate sector, BLK has constructed projects for Escorts, Great Eastern, IBM, Hughes Software, Microsoft, Oberoi Hotels, Taj Hotels and other blue-chip companies. In the residential sector, the company’s projects for developers encompass multi-storeyed complexes, mainly in the northern and southern states.

Residential projects form about 32% of BLK’s order book, while corporate projects about 14%. Other projects (malls and multiplexes) comprise about 54% of the order book. The order book on 30 September 2005 stood at Rs 579 crore. Another Rs 300-crore orders were added till 31 December 2005, translating into orders worth 2.8x FY05 total sales.

Vinod, Vineet and Vikram Kashyap are the promoters of BLK. They have also promoted brokerage houses BLK Financial Services and BLK Securities.

BLK proposes to use the proceeds of the current issue for (a) investment in plant and machinery, (b) setting up a factory under its subsidiary BLK Furnishers, (c) acquiring land for storage of equipment used for construction work; and (d) financing long-term working capital.

Strengths

  1. The up-trend in housing, retailing & ITES sectors augurs well.
  2. As the private sector is the major clientele, default or delay in payment is not likely to be a problem.

Weaknesses

  1. BLK is at the lower end of the construction value chain, thereby susceptible to competition from the unorganised sector.
  2. The investment of Rs 20 crore to set up a factory for the manufacture of kitchen cabinets, doors, door frames, wooden flooring and other furnishings, through subsidiary BLK Furnishers, looks unconvincing. Furnishings form only a small part of total contract and can be outsourced in a construction project.

Valuation

With a price band of Rs 625 – 700, BLK’s PE for FY 2005 works out to be 62.7 – 70.2 times FY 2005 earnings and 26.1 – 29.3 times H1 FY 2006 annualised earning on the post-diluted equity (with greenshoe option).

TTM PE for the construction sector is 32.3. However, BLK cannot be compared with civil construction companies like Gammon, Hindustan Construction, Nagarjuna Construction, Patel Engineering, and IVRCL, which enjoying PE of 30 and above. Ansal Housing, which is a developer, is trading at a TTM PE of 16.8 times. However, BLK is not a developer but only takes up construction activities for residents and companies. Still, the price band looks steep.

BLK made a preferential allotment of 80,000 equity shares to a group company of the merchant banker at a price of Rs 400 on 14 October 2005.