ARSS Infrastructure Projects IPO analysis

Focused on rail and road infrastructure

Of the Rs 2877.53-crore unexecuted order book, 41% comprises railway projects, 41% road projects, and 3% irrigation

Promoted by Subhash Agarwal of Bhubaneswar and his three brothers, ARSS Infrastructure Projects (AIPL) provides construction services for railway infrastructure, roads & highways and irrigation projects. Originally incorporated in May 2000 as ARSS Stones, the company changed its name to ARSS Infrastructure Projects in May 2005. Initially, it took up railway contracts mainly in and gradually expanded to zonal jurisdictions of East Coast Railway, South Eastern Railway, South East Central Railway, Southern Railway and North Western Railway. Its expertise in railway construction projects extends to earthwork, major and minor bridges, supply of ballast, sleepers, laying of sleepers and rails, and linking of tracks. Over the years, it has diversified its field of activities into other construction segments such as development and construction of roads, highways, bridges, irrigation projects, and EPC activities for railways. AIPL has crusher plants at six locations in various districts of Orissa and necessary equipment required for quarrying and crushing granite stone to produce required sizes of rock products for railway track ballast or highway work or any other civil construction work.

Some of the standalone and joint venture projects currently being executed include the Rs 208- crore Cuttak-Paradeep Road construction and widening project, the Rs 261-crore rail infrastructure work for Jindal Steel & Power's Angul project, and construction of roadbed including minor & major bridges, facilities and general electrification works on the Haridaspur-Paradeep new broad-gauge (BG) line.

Strengths

Strong unexecuted order book of Rs 2877.53 crore as on 10 January 2010 and significantly diversified order book comprising 41% railway projects, 41% road projects, 3% irrigation projects, and balance others. Moreover, orders from government and government entities amounted to 87.5% of the order book as on January 10, 2010.

Has successfully executed over 86 projects involving construction of over 200 km of railway tracks, 300 km of roads & highways, 10 minor & major bridges and other general civil engineering works over nine years. Given the strong investment lined up in the country, both in the road sector as well as by the Railways including the dedicated rail freight corridor project, is well positioned to capitalise on it.

Has strong relationship with clients such as Rail Vikas Nigam, RITES, and various departments of the Orissa government. About 73.11 % of its order book as on 10 January 2010 comprised repeat orders.

Weaknesses

There are a number of pending litigations against the company and/or the promoters and group companies, including a criminal case.

Has expanded its presence and pursued orders outside Orissa like Chattisgarh, Rajasthan, Jharkhand, Haryana and Tamil Nadu. Still, contracts outside Orissa are limited.

Had negative cash flow from operating activities in the fiscal ended March 2008 (FY 2008) as also nine months ended December 2009.

Valuation

AIPL's revenue grew 99% to Rs 624.38 crore in FY 2009 and net profit was up by 90% to Rs 51.04 crore. The EPS for FY 2009 works out to Rs 33.9 and Rs 34.4 on post-IPO equity at the lower and upper price band, respectively. The P/E works out to 12.1 times and 12.9 times on the lower and upper price band, respectively. This is comparatively higher than players such as PBA Infrastructure and MSK Projects, which quote at P/E of 6.8 times and 10.8 times their FY 2009 earning. However, the offer is at a discount to J Kumar Infrastructure and Tantia Constructions which quotes at 12.3 and 13.7 times of their FY 2009 earning. But the scrip is offered at 9.3 times to 10.0 times the annualised EPS of 44.3 to 45.0 for the nine months ended December 2009 on the lower and upper band.