Wednesday, February 3, 2010

ARSS INFRASTRUCTURE PROJECTS LIMITED: STEEP PREMIUM, QUESTIONABLE PROFESSIONALISM - AVOI D.

Orissa based Infrastructure Company; ARSS Infrastructure Projects Limited plans an IPO of Rs 103 crore, by issue of 2.3 million shares of Rs 10/- face value, in the price band of Rs 410-450 per share. The issue opens on 8-02-10 and closes on 11-02-10. IDBI Capital Markets Services Limited and SBI Capital Market Limited are the BRLMs.

PROMOTERS: Anil Agarwal, Rajesh Agarwal, Subash Agarwal, Sunil Agarwal and associates, are the promoters of the Company.

BUSINESS:

The company is engaged in the business of construction activities. It undertakes construction of railway infrastructure, roads, highways, bridges and irrigation projects.
The Company specializes in railway construction projects, which includes earthwork, major and minor bridges, supply of ballast, sleepers, laying of sleepers and rails, linking of tracks etc. Over the years, the Company has diversified its activities into other construction segments. Its clients' list includes Ministry of Railways, State Government of Orissa, Rail Vikas Nigam Limited, RITES Limited, IRCON International Limited, National Thermal Power Corporation, Hindustan Steel Corporation Limited, IOCL and the National Highway Authority of India. The company has predominance presence in Eastern India, particularly in the state of Orissa.
The Company has successfully executed over 77 projects involving construction of approximately 300 km of roads and highways, 200 km of rail tracks, 10 minor and major bridges and other general civil engineering works over the span of seven years.

OBJECTS OF THE ISSUE:
The proceeds of the Issue are intended to be deployed for;
(a) Investment in joint ventures. (b) Funding long-term working capital requirement and (c) General corporate purposes.
The funds requirement and funding plans are based on internal estimates of the Company and have not been appraised by any Bank/Financial institution.

FINANCIALS: 07 08 09 (Rs in crores)
Total Income 143.84 315.41 628.22
Net Profit 10.55 26.84 51.19
EPS (Rs) 10.96 23.54 40.77
Weighted average 30.06



MATTERS OF CONCERN:
1. CARE has assigned Grade 2/5 to the IPO, indicating less than average fundamentals.
2. As of June 2009, the company has debt of nearly Rs 240cr.
3. One of the Promoters of the Company is involved in a criminal proceeding in relation to the murder of one Rubu alias Subash Chandra Das.
4. The Company has defaulted in making payment of interest and repayment of loans amounting to Rs. 24.25 lacs, Rs. 11.78 lacs and Rs. 23.09 lacs during the Financial Year ended March 31, 2006, March 31, 2004 and March 31, 2003 respectively to various banks and/or financial institutions. .
5. The Central Electricity Supply Company of Orissa Limited (CESCO) has disconnected the power supply to one of the Units of the Company, due to default in payment of electricity bills.
6. The crusher unit of the Company at Nityanandpur, Orissa, currently does not have power supply. The Company is required to pay to CESCO, certain amounts due and payable under the bills raised for the purpose of supply of electricity to the said plant.
7. The income-tax authorities have carried out search and seizure operations in the premises of the Company and the residential premises of the Promoters and Directors and during this operation the Company, Directors and Promoters have made certain voluntary disclosures in relation to understatement of income of earlier years.
8. The company faces stiff competition in the construction business, from Tantia Constructions Limited, IVRCL, Kalindee Rail Nirman (Engineers) Limited, Harish Chandra (India) Limited and others.
9. Family owned, controlled business enterprise.

OPPORTUNITIES AND CHALLENGES:
India's infrastructure, which has been expanding at an accelerated pace has slowed down in 2008-09 because of the global turmoil. India’s GDP growth for 2008-09 was 6.7%, down from the 9% average growth experienced over the last three years.
The growing demand of transport, in general, is directly related to the growth of the economy, the mobility of the population and other related factors. Indian Railways has planned to carry the traffic offered by the buoyancy in the economy. The increased output of basic industries such as power, steel, cement, fertilizers etc. is foreseen as necessitating facilities for bulk transport in which the railways have a comparative advantage. The increasing rate of urbanization is also expected to generate demand for a rapid transit system.
Roads, including national highways and state roads, continue to drive construction investments. The key programmes under road development include the National Highway Development Programme (NHDP), Pradhan Mantri Gram Sadak Yojana (PMGSY), and Special Accelerated Road Development Programme.
The growth of the infrastructure industry in India and business is dependent on the establishment of stable Government policies and a prudent regulatory environment. Infrastructure development in India has historically been the preserve of the Central and State Governments. Changes in Government policies, which began in the 1990s, facilitated the entry of private capital into infrastructure and have led to rapid growth in certain sectors. Policy changes in energy, urban infrastructure, and industrial and commercial infrastructure sectors have begun to attract significant private sector interest.
Currently, the Company has a substantial exposure to the Government bodies for revenues and work orders. ARSS derived 73.64%, 72.95 % and 80.96 % of revenues for the periods FY2009, FY2008 and FY2007 respectively and 76.34% of the Order Book as on July 31, 2009 is from Government bodies.

RECOMMENDATIONS:

At Rest 450/- the company demands, P/E of 11.3 on FY 09 net profit. Considering the questionable professional management, the valuation, is on the high side. Investors may stay away from the issue.

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