Promoted by Bhawanishankar Sharma and his two sons Vikram and Vikas, Supreme Infrastructure is a Mumbai-based small construction company with primary focus on road construction. Traditionally, road construction is a low-margin business. But with presence in quarrying, crushing, wet batch mixing, asphalt and ready-mix concrete (RMC), the company is well integrated to earn healthy margin in constructing roads.
The RMC plants, one at Powai in Mumbai and another at Bhiwandi outside Mumbaiwith, have an aggregate capacity to produce 90 cubic meters of RMC per hour. Another RMC plant, with a capacity of 60 cubic meters of RMC per hour, is being installed at Powai. There is a proposal to set up an RMC unit at Citradurga in Karnataka. This will add another 30 cubic meters of RMC per hour.
The wet mix plant and the asphalt plant are located at Powai. The quarrying and crushing unit is in Bhiwandi. Their current capacity is 80 tonnes an hour of wet mix macadam and 85 tonnes per hour of asphalt, respectively. After meeting inhouse requirement, RMC, wet mix and asphalt are sold to other users.
Apart from setting up an RMC plant to cater to the needs of the National Highway (NH) 4 Western Transport Corridor project in Karnataka, Supreme Infrastructure is constructing a new crushing plant. A Rs 90-crore order for construction of an IT park from Supreme Housing & Hospitality (SHHL), a company set up by promoters, marks Supreme Infrastructure’s foray into construction of office blocks.
To meet the funding requirement for these projects, augment plant and machinery (P&M), and meet long-term working capital requirement, Supreme Infrastructure is tapping the capital market. The company has budgeted Rs 14.33 crore for purchase and upgrade of P&M, and Rs 6.88 crore for buying P&M required for road construction, and Rs 17.90 crore for long-term working capital requirement.
Strengths
The unexecuted portion of the order book was Rs 299.84 crore on 1 August 2007. The current order book stands at Rs 330 crore including RS 30-crore orders for supply of RMC. Excluding the supply order for RMC and Rs 90-crore order for building the IT park, the remaining the orders of Rs 210 crore are for road projects.
Enjoys higher margin compared with peers operating in the same segment despite the construction business largely skewed towards the thin-margin and highly competitive road segment. Has been historically earning a net profit margin of 10%-12% in road projects. The integration into quarrying, crushing, wet maccadam and RMC allows for better margin in road projects compared with peers.
Is registered as class ‘I’ by the public and works department (PWD) of the Maharashtra government and as ‘A’ class contractor by the Bombay Municipal Corporation. Entitled to bid for and accept works and orders as per its bidding capacity.
Weaknesses
Prospects largely skewed on single segment: road construction. About 89% of the current order book (as of August 2007) accounted by three projects: two road projects and another construction of IT park of the promoter group company. Has little experience in executing building construction, specially IT parks.
May have to suffer bad publicity and financial losses due to litigations by environmentalists against its RMC, asphalt and quarrying /crushing activities (which form its backward integration and provide competitive strength) in and around Mumbai.
Till year ending March 2007 (FY 2007) had claimed Section 80IA benefit for Rs 15-crore projects cumulatively. But has stopped claiming the benefit from FY 2008. Has not provided / charged / reversed the Section 80IA benefit claimed subsequent to the withdrawal of this benefit in the Union Budget for 2007-08.
Cash flow from operations has increased to a negative Rs 2.77 crore in FY 2007 from a negative Rs 46 lakh in FY 2006 on account of higher sundry debtors and inventories. Sundry debtors rose to Rs 16.43 crore in FY 2007 compared with Rs 3.79 crore in FY 2006. Inventories were up to Rs 14.05 crore in FY 2007 from Rs 1.82 crore in FY 2006.
Valuation
Sales revenue clocked a CAGR of 67.78% to touch Rs 81.66 crore in FY 2007 from Rs 6.14 crore in FY 2003. EPS on post-issue expanded equity of Rs 13.87 works out Rs 9.2 in FY 2007. The offer price discounts this by 10.3x & 11.7x on the lower and upper price band of Rs 95 and Rs 108, respectively. As comparable peers such as PBA Infrastructure, MSK Projects and Roman Tarmat are available at a P/E of 11.6, 15.7 and 23 times, the issue is reasonably priced.