The Hindu Business Line : PBA Infrastructure: Invest

INVESTORS can subscribe to the initial public offer of PBA Infrastructure. A comfortable order book and consistent financial track record are positives for this construction company that operates in the roads and bridges sector.

Experience in road projects coupled with an expanded equity base may see the company qualify for the current spate of highway and road projects.

At the offer price of Rs 60, the share is valued at 12.5 times its FY-05 earnings on the post-offer equity base. The price earnings multiple is at a significant discount to other small players such as Valecha Engineering and MSK Projects.

Profile

PBA Infrastructure is a construction company engaged in building roads, dams, runways and bridges.

The company plans to raise Rs 30 crore through this offer, the proceeds of which will be used for investments in build-operate-transfer (BOT) projects, purchase of construction equipment and to fund working capital requirements.

Post-offer, PBA's equity base will expand to Rs 13.5 crore and its net worth will be over Rs 50 crore.

PBA Infrastructure has a comfortable order book of Rs 564.01 crore which is about 4.5 times its FY-05 revenues. The order position does not include any BOT projects. The following factors are likely to ensure a comfortable earnings position from the current operations:

Its registration as a Class 1A contractor with Maharashtra and with the Municipal Corporation of Greater Mumbai is likely to ensure regular flow of contracts.

PBA has also bagged orders from State and Central Highways Departments thus obtaining pre-qualification for similar projects.

The huge outlay in the Tenth Five-Year Plan for roads is likely to ensure steady order flows. Maharashtra has an outlay of Rs1,870 crore for roads and highways. The company has an edge in the State in the smaller orders, given its success with such projects in the past.

BOT projects may augment earnings

So far the company has not handled any public-private-partnership project. The low equity base has been a deterrent despite the company's technical qualification in the road sector. If the company manages to forge strategic joint ventures with an experienced player for bidding, the expanded equity base may help it bag a few of the many orders from the State and Central Highways Departments.

BOT models have now evolved as investment options with attractive returns. If PBA ventures into this segment, it is likely to accelerate its earnings growth. A successful entry in the segment may not, however, immediately improve the bottomline as revenues from such projects tend to show only over a period.

Financial position

In FY-05, PBA's turnover grew 6 per cent. The bottomline, however, went up 35 per cent. Escalation clauses included in most projects have ensured that raw material cost hikes do not hit profit margins. The company expects a 25 per cent increase in its topline this fiscal.

PBA's debt-equity ratio will be 1.5 times post offer. The current position is 3 due to high short-term debt towards contract advances and working capital requirements.

Risks

PBA Infrastructure is a small player and is likely to face stiff competition from established players in the BOT field. The success of the company's foray into large BOT projects depends on its capability to enter into strategic joint ventures, which willlead to sharing of revenues and lower profit margins. The bulk of the company's orders are derived from government agencies. Any delay in realisations caused by the adverse fiscal position of the State is likely to affect PBA's debt position. Much of the company's revenues comes from roads, highways and bridges. Diversification is a vital factor for de-risking in the construction sector. The concentration of business may enhance risk, as order flows and margins would then depend on just one segment.

The modest pricing for this offer is its key attraction. Investors can consider setting a target return for this stock and exiting their holdings if these are met shortly after listing.

Details of offer

The offer is open from October 24 to 28. Keynote Corporate Services is the lead manager to the offer.

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