Maytas Infra - IPO Note

Promoted by B.Teja Raju (son of chairman of Satyam Computer Services), Maytas Infra (formerly Satyam Construction private limited) is a Hyderabad-based construction and infrastructure development company. Its business is divided into two parts: Construction contractor undertaking projects on a contract basis and infrastructure development involving identifying, sourcing, developing, and operating projects in infrastructure sectors.

In the construction business, the focus is on irrigation, roads and bridges, and buildings infrastructure sectors. Recently, the construction portfolio has been diversified to include civil construction in the power, industrial structures, oil and gas infrastructure, and railway sectors.

Maytas Infra is identifying suitable partners and positioning to exploit the expected opportunities in water and waste-water management, special economic zones, urban infrastructure, ports and airport sectors.

The current IPO is to fund purchase of construction equipment, invest in associate companies and meet other project-related investment commitment.

Strengths

• End June 2007, the order book was Rs 3589.32 crore. This is about 4.6 times consolidated revenue in the year ending March 2007 (FY 2007). The execution period for the order book is 18-36 months. The pending orders are for constructing roads (31%), buildings (13%), railways (5%), high-margin projects comprising irrigation (37%), power (5%) and oil and gas (9%).

• Of the pending orders, about 70%-80% of the contracts provide for price escalation. Thus, margin is to a great extent cushioned against variations in input costs.

• Infrastructure development business has equity interest in 11 projects ranging from 19.5% to 50%. Of these projects, six are road, four power and one port.

Weaknesses

• Although the first stage of the Gautami power station project in Andhra Pradesh with equity interest of 19.5%, has been completed substantially in September 2006, it has not commenced commercial operations due to the unavailability of natural gas.

• Maytas Holdings, a promoter group company, has applied for the registration of the Maytas trademark and service mark. Has not permitted the use of the trademark for real-estate development. One of the related companies has exclusive rights to use the Maytas trademark for real-estate development. The promoter group has about 41 companies.

• For the KVK Nilachal power station project in Orissa, with equity interest of 50%, the current coal supply is not sufficient to operate the plant at its contracted capacity. The project consists of 2 x 300 MW coal-based thermal power plant. KVK Nilachal Power currently estimates that a 300-MW power station will require 1.59 million tonnes of low grade thermal coal to maintain 80% plant-load factor (PLF). Till date, coal linkage of only 1.2 million tonnes has been obtained.

Valuation

Between FY 2003 – FY 2007, unconsolidated revenue has shot up from Rs 118.13 crore to Rs 601.01 crore. In the same period, operating profit margin OPM has improved from 5.1% to 16.1% due to increase in investment in equipment and manpower, leading to reduction in subcontracting of jobs. Thus, unconsolidated net profit has increased at much faster pace: from Rs 0.32 crore to Rs 55.01 crore. This growth has also been boosted due to increase in profit from participation in unincorporated joint ventures undertaking larger contracts.

There are two sets of consolidated financial statements: one as per tow accounting standards (AS). As per AS-23 (which is intended to be followed), consolidated profit is lower and debt/equity ratio is 1.9:1. As per AS-27 (which the auditors want to adopt), consolidated profit is higher and so also the debt/equity ratio. As per AS-27, consolidated net profit is Rs 52.9 crore and EPS Rs 9. According to AS- 23, consolidated net profit works out to Rs 48.77 crore and EPS Rs 8.3. However, since the intention is to follow AS-23, we have used EPS of Rs 8.3 for valuation. At the offer price band of Rs 320-Rs 370, the P/E range is 38.6-44.6, respectively. The TTM P/E of Construction - Civil / Turnkey – Large is 44.2.