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G. Madhan

INVESTORS can stay away from the initial public offering (IPO) of MSK Projects (India) considering the relatively high offer price, the inconsistent earnings record and the high business risk involved.

MSK Projects is in the business of constructing roads, bridges, industrial structures and buildings. It plans to raise Rs 24 crore through this IPO.

The funds are to part-fund two of its Build-Operate-Transfer (BOT) road projects in Madhya Pradesh — the Hoshangabad-Harda-Khandwa and the Raisen-Rahatgarh stretches. The total value of these projects is Rs 146.1 crore.

MSK Projects has completed about 45 per cent (in km terms) of the former and about 25 per cent of the latter.

About 57 per cent of the total value of these projects will be funded through the subsidy offered by the Madhya Pradesh Government.

The offer price of Rs 40 discounts the likely per share earnings of FY'05 by about 10 times.

This is demanding, considering that well-established peers such as Nagarjuna Constructions, IVRCL Infrastructures and Madhucon Projects command a PE multiple of between five and seven.

Higher business risk

The business risks for MSK Projects also appear high as a sizeable portion of its revenue is derived from one segment — toll-based BOT road projects.

Of the total Rs 140.8 crore worth of order (as of mid-June 2004), 98 per cent is from BOT road projects.

The subsidy offered by the Government and the assurance for periodic increases in toll rates (7 per cent in the case of the Hoshangabad-Harda- Khandwa project and 9 per cent for the Raisen-Rahatgarh stretch), is a reason for comfort.

The history of poor collections from the various toll-based road projects pegs up the risk.

The toll collections from the roads constructed by the company's joint venture — Bharatpur bypass and Sikar bypass — have nt matched the projections made.

The company attributes this to the non-enforcement of the notification issued by the Government by allowing commercials vehicles to pass through the cities concerned, instead of using the bypass.

The company's net worth, one of the key pre-qualification criteria for bidding for large projects, is relatively low at about Rs.45 crore. A large net worth is imperative as, increasingly, the road packages offered under the National Highways Authority of India has become bigger in size and value.

Hence, the company's ability to scale up its revenue will be limited. Besides, given the stiff competition in this sector, margins from these projects could be under pressure.

Issue highlights

MSK Projects is offering 60 lakh shares of Rs 10 at a premium of Rs 30. The minimum application size for retail investors is 125, and in multiples of 125 subject to a maximum of Rs 50,000.

Fifty per cent of the issue will be made available for retail investors.

The post-issue equity of MSK Projects will be Rs 12.1 crore. The issue closes on October 8 and the lead manager is Chartered Capital and Investment.

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