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G. Madhan

Focussed on the road sector.

INVESTORS can continue to retain their holdings in the stock of Valecha Engineering. The company's focus on infrastructure projects, particularly roads, its robust order-book position and improving revenue growth augur well for its earnings growth.

Fresh exposures, however, need not be contemplated in the stock, considering the rich valuation it has managed vis-à-vis its peers.

Demand drivers in place

Valecha Engineering's earnings hinge on the execution of infrastructure projects, particularly roads and tunnels, as a major portion of the company's revenue comes from this area.

The company has successfully completed several road projects, including the Guwahati bypass project, awarded by National Highway Authority of India (NHAI).

The company recently bagged a Rs 90-crore order from the NHAI for constructing a 150-km highway between Satara and Kol in Maharashtra.

Given that 85 per cent of the projects of North-South/East-West corridors are yet to be contracted, the demand for the company's services could be strong. However, due to the inherent nature of road projects, the profit margins are likely to be narrow.

The company also has expertise in constructing canals, flyovers, dams and airports. Its expertise in building canals may also aid growth, given the government's focus on irrigation projects.

Robust order book

The company's order-book is at Rs 200 crore. It has also pre-qualified itself for projects worth Rs 5,000 crore. Considering the strong order-book position, the company's topline growth prospects appear encouraging. Valecha recently entered into a joint venture with the Ukraine-based UKR Metrotunnelbud, which has expertise in constructing underground metro lines.

This strategic tie-up should be useful in the long-term as it will enable the company bid for projects involving complicated tunnel work.

Margins under pressure

In 2003-04, the company's revenue rose 92 per cent, over the previous year. While profits at the operating level rose 23 per cent, those at the net level were up 26 per cent. Margins remained subdued. At the operating level, they fell by about six percentage points to 10.5 per cent and at the net level by 2.3 percentage points to 4.4 per cent.

The sharp drop in margins may be due to the sharp increase in the cost of key raw materials, particularly steel, in the last one year.

Any further increase in cost can impact the margins adversely, particularly if the projects do not have in-built escalation clauses.

Rich valuation

The stock, which trades only on the BSE, hovers at eight times its FY'04 earnings. The stock valuation is on the high side compared to its peers. However, considering the strong earnings potential, shareholders can retain their holdings in the stock.

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