The Hindu Business Line : Sunil Hitech Engineering: Invest

AN INVESTMENT in the IPO of Sunil Hitech has the potential to deliver returns. The offer is stiffly priced at 20 times its FY-06 earnings, computed on post-offer equity.

However, the asking price pegs the valuation at a discount to peers in the industry such as Petron Engineering and Simplex Infrastructure. Sunil Hitech's good track record in execution and the healthy order-book should offer prospects for growth.

The company's unexecuted order-book, as on November 31, 2005 at Rs 178 crore, close to two-and-a-half times its 2005 revenues, gives earnings visibility.

Most of the orders are scheduled for completion by FY-06 and FY-07. Given its track record of timely execution, a substantial ramp up in revenues of FY-06 and FY-07 canbe expected.

A substantial ramp-up in power capacity is expected over the next few years, both in the public and the private sector. This expands business opportunities for players such as Sunil Hitech.

It is now targeting the EPC (Engineering, Procurement and Construction) business in the captive power plant segment (5 MW to 60 MW).

Industrial investment in captive power plants is picking up. But this is a highly competitive segment as equipment manufacturers too are eyeing the total solutions business.

Over the last two years, Hitech has also taken up contracts of higher value. This serves as a pre-qualification for taking up bigger orders and also hastens the pace of revenue growth.

A track record of timely or early execution of contracts is also a positive when bidding for contracts.

Operating margins at 8-9 per cent are marginally higher than its peers. Hitech owns the equipment used in operations. This strategy offers potential for margin protection as operations scale up.

The existing fleet of equipment can be also complemented with hired machinery with a least overall variable cost structure if there is a substantial ramp-up in business in future.

Sunil Hitech is into erection and fabrication of power plants. It has participated in the civil work for power plants up to 500 MW. Its clients include NTPC, BHEL, Reliance Energy and Skoda Export.

A number of orders received during last year are from BHEL. The funds raised in the IPO would be used to finance its working-capital requirements, buy machinery and repay high-cost debt.

Sunil Hitech's prospects hinge on the power and infrastructure segment. Hence, any delay in finalising and awarding contracts by the Government could be a risk.

However, with a small revenue base and immense opportunities in the private sector, the company could tide over temporary glitches.

Offer details: The company is offering 3.475 crore shares at Rs 100 each. The issue opens on January 30, 2006 and closes on February 3. The offer is lead-managed by Centrum Capital.