Saturday, February 21, 2015
Infrastructure is one sector where majority of investors are bullish, especially after the formation of new government in Centre . It is true that, in a developing country like India , growth potential of companies operating in this sector is immense. But when we look through an investor’s point of view , potential of sector alone is not enough to make an easy choice.
Strength of balance sheet is equally important . During last few years , projects of many companies stuck at various stages not only due to economic recession but also on account of slowness in decision making process of government authorities. Because of such delays , funds of even large companies operating in this sector stuck at different projects and they forced to borrow more and more to keep afloat and working capital requirements. Such a situation deteriorated the health of almost all companies - except few biggies- and make a choice from small caps space more difficult.
In this situation ,While selecting an infrastructure developer for investment , the main points we need to pay maximum attention are their order book position , ability for execution and the strength of promoters/investors financial muscle . Based on all these parameters , I have only one choice from the universe of small caps space – IL&FS Engineering and Construction .This is the same infamous Maytas Infra , the company owned by the same promoters of Satyam Computer . After the Satyam fiasco , Satyam went into the hands of Mahindra and this one goes to Infrastructure Leasing & Financial Services Limited (IL&FS). Later this company renamed as IL&FS ENGINEERING AND CONSTRUCTION COMPANY LTD.The promoters , IL&FS is jointly owned by Housing Development Finance Corporation Limited (HDFC) ,Central Bank of India (CBI), Unit Trust of India (UTI), State Bank of India, Life Insurance Corporation of India, ORIX Corporation - Japan and Abu Dhabi Investment Authority etc... .Pedigree of these firms and their ability to raise funds (if necessary) is known to all of us . I believe, promoters of this company is in a better position in case of financial muscle in comparison with the other private promoters of similar infrastructure companies.On the execution side also IL&FS is well experienced and having capability to handle large projects from concept to execution stage.
The Real Attraction
The major factor distinguishing this company from other infrastructure developers is the the interest of world’s largest construction firm - Saudi Binladin Group ( SBG) – in it. I am not sure , how many of you are aware about the sheer size of Saudi Binladin Group. Its turnover is almost three times of the turnover of our construction conglomerate Larsen and Toubro. ( For more information about SBG , click HERE ) . After the take over of IL&FS Engineering by IL&FS from the old promoters( Raju Family) , Saudi Binladin Group ‘s investment arm SBG Projects Investments Ltd took 20 % stake in this company . Later raised their stake to the current level of 27.89. Now in a recent development , they are again going to subscribe additional shares to take their stake to 32.88 % . Some shares are also allotting to IL&FS ,and post allotment both IL&FS and SBG will hold equal stake in this company . ( Currently IL&FS is the largest share holder with 29.76 % stake and two directors representing SBG in IL&FS board)). SBG ‘s increasing interest in this company is an extremely positive point . The amount raising through this preferential issue is mainly meant for the redemption of 5300000 redeemable preference shares due for redemption on 25 March 2015 ( extended from September 2014). Both of these partners taking their interest beyond India and formed a subsidiary in the name of Maytas Infra Saudi Arabia ( MISA) last year( 55 % stake held by IL&FS Engg and remaining with SBG) and now they are getting new orders from abroad too.
About Order Book Position and Financial Numbers
Among the listed companies from infrastructure space ,IL &FS Engineering is the one received large number of orders in recent times . Its current order book position is close to 10000 Cr ( Ten Thousand Crore) , which is more than three times of company's last year turnover and it giving enough visibility for next few years .( Some Details HERE) .We must realize that these orders are secured by the company even when the entire infrastructure sector is going through tough times. In addition to this , Saudi Bin Ladin Group’s influence and reputation in Middle East countries also helping company's subsidiary Maytas Infra Saudi Arabia ( MISA) to secure more orders in recent times .In latest December quarter Company reported a turnover of Rs.676 Cr ( Last year same period Rs.466 Cr) and a net profit of Rs.76 Cr (Last year same period Rs.58 Cr loss) . - Link to latest result HERE- .But out of this Rs.76 Cr NP , an amount of Rs.53 Cr ( Rs.16 Cr) is one time income . After deducting this amount , still company turned to profit from loss .I am not claiming this company will dramatically turn into huge profit within next few quarters but I feel , with the strong and increasing support of word’s largest construction firm and well experienced and reputed Indian promoters , IL & FS Engineering to emerge as a star in Indian Infrastructure space within few years is a good possibility.
IL&FS’s familiarity and project execution experience in India and Saudi Bin Ladin group’s financial muscle ,technical perfection and ability to handle projects with large size makes this company as the first preference from small cap infra space. On one side , this company’s total debt is less than Rs.2000 Cr where some of well known listed infra companies holding a debt of more than 25000 Cr in their balance sheet. On the other side , ability of promoters of other companies to raise further funds are very pathetic compared with this company which is backed by India’s major banks and world’s largest construction firm. Company extended an amount of Rs.323 Cr as inter corporate deposit to Satyam Computer during the time of old promoters( Raju Family) . Fate of this amount is still pending and the new promoters( IL&FS) expecting fair chance to recover the same . As a note to December quarter result , company indicated that this amount shown as “ Amounts Pending Investigation Suspense Account “ in the books of Tech Mahindra . If IL&FS can recover this amount plus interest , it will be an additional relief for the company .For the nine months ended December ,company paid an amount of Rs.198 Cr as interest alone . I believe , in future , management will take prompt action to reduce this debt burden either through a rights issue or further preferential issue . Such an issue may expand its equity but I feel it can be justified by the cost saving as reduction in interest payment.Recent Price Movement and my opinion.
Ever since this company reported its turnaround performance in December quarter , its stock price is in an upswing and appreciated decently in recent times .Because of this reason , low risk investors may wait and test your luck for a correction ( Though I am not sure whether any meaningful correction is possible in it at this moment, especially at a time some positive announcements are expected in upcoming budget by next week and company planning to redeem part of OCCRPS in near future ) . Others can consider this stock which is still available a rate almost 50 % discount to the first open offer price of Saudi Bin Ladin Group and IL&FS which happened at a price of Rs.195.72 . Investing in potential turnaround companies and make multi bagger returns is an art of testing patience too . Those who are in a hurry and need updates on a weekly basis can also skip this stock.I believe risk reward ratio is still favorable for genuine long term investors .This is my preferred pick from Infrastructure space due to more than one reasons. Stock listed in both exchanges and trading around Rs.98
Link to the website of Company HERE
Link to the website of Saudi bin Ladin Group HERE
Disc: Holding shares in IL&FS Engg
Posted by VALUEPICK at 6:45 AM