The Hindu Business Line : Era Constructions: Invest

AN INVESTMENT in the equity offer of Era Constructions can be considered. At an offer price of Rs 72, the stock is valued at 10 times the expected FY-06 per share earnings on the post-issue equity base.

The industry average price-earnings multiple is about 15 times for FY-05, in line with the current PEM. The positive factors are the robust order-book position, improving fundamentals and accelerated infrastructure growth in the country.

The offer price is at a discount to the current market price of Rs 88. The stock that traded at about Rs 39 in June 2004 has rallied to Rs 88.

It appears to have benefited from the re-rating of construction sector stocks in the bourses over the past year.

Era's profile

Era is engaged in diversified construction activities such as runways and cargo complexes of airports, power projects, commercial and residential buildings and urban infrastructure development in the domestic market.

Majority of the funds from the issue is to be utilised towards augmenting long-term working capital requirement and procurement of plant and machineries.

Order-book

Era's order-book position as of May 30, 2005 stands at Rs.554 crore. It is also pre-qualified to bid for projects worth Rs 250-300 crore.

A bulk of the order book is in the nature of civil works and urban development. Considering the revenues of Rs 156 crore for FY-05, the order-book position is quite comfortable. NTPC, state and central Public Works Department and Power Grid Corporation are some of its major clients, for which it has projects on hand.

So far, the company has not capitalised on the immense opportunities in the road and highway infrastructure.

According to the offer document, it has entered into a memorandum of understanding with Ashoka Buildcon to enable itself to make a foray into roads.

This buoyant segment can add to the order flows in future.

Thrust on infrastructure

The strong emphasis on infrastructure creation by Central and State Governments has brought about a sustained inflow of orders for construction companies over the past couple of years. More orders in road, power and hydel sectors may be in the pipeline.

Era is already qualified to do power projects owing to its vast experience in the sector. In the road segment, it is planning a foray with the help of strategic alliances.

Although there are well-established players in the field, even a modest success rate can considerably improve the company's order-book position.

Financial performance

For FY-05, the fundamentals were fairly strong, with top line growth of 43 per cent and operating profit growth of 68 per cent over the previous year. But the financial performance has reflected a fluctuating trend in the past five years.

The company's operating margin in FY-05 was 9 per cent.

This is more or less in line with the margins of the peers, given that the construction sector is a low margin industry with material costs forming at least 40-60 per cent of the total operating costs.

Post-issue, debt equity ratio stands at 0.71, with long-term debt at 0.4 times equity. This ratio is in tune with the second rung peers in the sector.

The present interest coverage ratio of the company is 2.3 times, lower than some of its peers.

The robust order-book, coupled with the improving financial performance, appear to be positive factors for Era's earnings growth in the medium term.

Risks

Steep increase in the raw material costs such as steel and cement — a risk common to the construction industry — could dent the company's margins. Steel prices have ruled firm and are likely to maintain this trend over the near future.

Any significant increase in debt can affect the bottomline, though the company's debt levels are in line with its peers now.

Offer details

Of the offer of 68.33 lakh shares, 28.5 lakh shares are being offered to the public.

The offer opened on June 24 and closes on 29. UTI Securities is the lead manager to the issue.

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