The Hindu Business Line : Tantia Constructions: Invest at cut-off

INVESTORS with a penchant for risk can consider investing in the public offer of infrastructure player Tantia Constructions. At the price band of Rs 45-50, the company's share will trade at 12-14 times its expected FY-06 earnings on a fully diluted basis.

The price-earnings multiple is at a discount to that of similar-size players such as Valecha Engineering and MSK Projects. A strong order-book, a diversified business profile and strategic joint ventures offer visibility to Tantia's earnings growth. A rise in raw material costs and execution capability are the key risks to the offer.

Profile

Tantia Constructions builds highways, bridges, railroads and airports. It also develops townships, ports and is into power transmission. The company's shares are listed on the Calcutta and Delhi Stock Exchanges.

The company plans to list the existing and new shares offered at the Bombay Stock Exchange. It plans to raise about Rs 10 crore through the offer, the proceeds of which will be used to procure capital equipment needed for construction work, meet long-term working-capital requirements and repay unsecured loans.

Diversified order-book

At Rs 817 crore, Tantia Constructions' orders on hand are nine times its FY-05 revenues. This order-book position indicates revenue growth for the next couple of years despite a flat trend over the past three years.

The order composition is well-diversified over various segments such as roads, rail and urban development projects. This is likely to mitigate the risk of slowdown in revenues from any segment.

Strong footing

Tantia Constructions is a Kolkata-based company with a strong presence in the eastern parts of India such as Assam and Mizoram. These areas are relatively less penetrated in terms of infrastructure development and hold potential for more business. The Budget has also increased allocation for the eastern region. With a presence in these areas, the company holds an edge over its peers for future projects. At the same time, the political risks associated with execution of projects are also quite high.

Tantia Constructions has experience in railway infrastructure; 29 per cent of its orders are from this segment. This business profile is slightly varied from a majority of listed construction companies thus placing the company in a better position to bag projects in the space.

Tantia Constructions has joint venture contracts with companies such as IVRCL Infrastructures and Subhash Projects, and this is likely to improve its recognition and technical qualification for future projects.

Financials

The operating profit margin (OPM) has been above the 9 per cent-mark for the past three years. For the nine months ended December 2005, the OPM stood at 13.8 per cent.

Any entry into the public private partnership model, especially for roads, may see the OPM decline slightly. It is, however, likely to remain above the industry average, given the diversified revenue sources. The company has traditionally been highly geared. This situation is likely to ease, as the equity expansion would bring the debt-equity ratio to 1.3.

Risks

A rise in raw material prices is likely to have a high impact on smaller construction companies such as Tantia Constructions, which cannot command escalation clauses in all contracts. This is likely to hit the bottomline.

High order-book for a small player adds the risk of executing projects on time. Any delay in order-book conversion can dent revenue growth.

Tantia Constructions is a smaller player compared to frontline infrastructure companies such as Hindustan Construction or Nagarjuna Construction and the company's stock faces the possibility of higher volatility in the event of a market downturn. The modest pricing for this offer is the key attraction. The listing on the BSE may also result in better price discovery.

Offer details: The public offer is open from March 27-31. Microsec Capital is the lead manger to the issue.

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