Thursday, October 6, 2011

Ramky Infrastructure - Top pick in mid-cap construction::Nomura research,

Ramky Infrastructure- Top pick in mid-cap construction
Higher growth, stronger cash flow and balance sheet differentiate it from peers

Action: Top pick in mid-cap construction space, financial
performance expected to be better than peers; maintain BUY
We believe Ramky is one of the best mid-cap construction players in
India, with revenue growth (20-25% vs peers’ 5-12%) and ROE (18-19%
vs 4-8%) exceeding our forecasts for peers for FY12-13F. Ramky has a
robust and well-diversified order book (backlog ratio at 4x as of end-
FY11), providing strong visibility for near- to medium-term revenue.
Focus on execution and management of receivables; low capital
intensity of developer business ensures better balance sheet
Ramky’s focus on execution and management of receivables has helped
control working capital, in our view. Its built, operate and transfer (BOT)
portfolio is a good balance of projects of low capital involvement with early
cycle cash flows and those with higher capital investment. The equity
component is only ~9% of BOT project cost, and equity invested to date is
only 24% of net worth (29-42% for peers). We believe future equity
investment can be met through internal accruals. Parent net debt/equity of
0.65x, (vs ~1.0x for peers), presents little equity dilution risk in the medium
term, in our view.
Catalysts: Strong, sustained financial performance as reflected in
quarterly results; management delivering on guidance
Valuation: Attractive considering lower risk than peers
Our PT of INR450 provides upside of 112% from current levels. The stock
is trading at an adjusted FY13F EV/EBITDA (adj for subs) of 3.54x vs our
estimate 5.16x average for mid-cap peers, which we believe is attractive
considering Ramky’s lower risk profile.

The stock is trading at an adjusted FY13F EV/EBITDA (adj for subs) of 3.54x vs 5.16x
average for mid-cap peers under our coverage.
We believe the stock will re-rate; strong, sustained financial performance to be
We believe the stock could re-rate on strong, sustained financial performance as
reflected thus far in the quarterly results. As reported, numbers continue to exhibit better
growth and ROE than those of its peers, and thus we believe the stock should trade at a
higher multiple. The stock has been listed only for ~10 months, and as management
delivers strong financial performance quarter after quarter, we think the stock will
eventually trade closer to our target multiple of 10x.
Risks to our view and price target
CBI investigation on certain investments made by the Ramky Group: The Central Bureau
of Investigation (CBI), at the direction of the Andhra Pradesh High Court, is investigating
certain investments made by some companies in firms owned by Y S Jaganmohan
Reddy, Member of Parliament and son of ex-Chief Minister of Andhra Pradesh, Y S
Rajasekhar Reddy. The Ramky group is one such investor being probed. (Source:
Deccan Herald, 18th July 2011, ‘CBI to issue notices to investors in Jagan’s firms’)
Higher-than-expected slowdown in order inflows could adversely impact earnings: We
build in order inflows of INR50bn in FY12F in line with the inflows in FY11. If order
inflows are lower, it could adversely impact revenues and earnings in FY13F, in our view.
Our analysis indicates a revenue growth range of 15-30% for FY13F for order inflows
ranging from INR30-65bn in FY12.
Execution delays would impact revenue growth: Execution delays due to issues such as
land acquisition, environmental clearances and inadequate client preparedness could
depress revenue growth.
Further rise in interest cost could depress earnings: We have built in an increase of
100bps in average interest costs in FY12F vs FY11. Any increase beyond this could
adversely impact earnings and valuation. We estimate that a 50bp increase in interest
rates would reduce adjusted profit by ~1%.
Deterioration in working capital: A delay in payments from clients could result in
deterioration of working capital, leading to higher debt and interest costs, resulting in
lower profits.
Increase in risk premium could lead to lower valuations: Any increase in the risk premium
for the company on account of macro or company-specific concerns could lead to lower
Overhang of sale of locked shares: Around 11% of Ramky’s outstanding shares have a
lock-in period of one year from the IPO. The lock-in expires in Oct 2011. There is a
possibility that investors would sell the shares after the lock-in period ends, which could
put some pressure on stock price. On the positive side, though, this would increase the
trading liquidity on the stock.

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