The Hindu Business Line : ITD Cementation: Avoid

Changes in ownership group have led to a slowdown in operations and affected the company's capital funding process at a time when capital adequacy was a primary qualification in the industry.

THE COMPANY'S order-book is tilted towards transportation projects.

Shareholders can avoid the rights offer of ITD Cementation at an offer price of Rs 490. Weak financial position, growth dented by frequent changes in ownership group over the last decade and the inability to capitalise on business strength are issues that weaken the prospects for the company's earnings growth.

With a 13 per cent annualised growth in sales and negative growth in bottomline over the past five years, ITD Cementation has failed to keep pace with the scorching growth that the construction sector saw in the same period.

ITD Cementation is a construction company engaged in building marine structures, piling and civil engineering works, transportation projects and hydropower projects. The issue proceeds are to be utilised towards purchase of capital equipment, security deposit for lease of equipment and working-capital requirements.

Tenuous financials

ITD Cementation's sales has declined over the past three years. This is in contrast to the doubling or even trebling of turnover showcased by a number of peers. This also reflects the company's inability to fully capture the steady order flow of infrastructure projects into the country. Even assuming that the present unexecuted projects at Rs 1,969 crore is converted to revenue over the next two-three years, the share is likely to trade at about 40 times its likely CY-08 earnings and will command a steep premium to even established players such as Hindustan Construction. While the construction industry is working capital-intensive, reputed players in the field comfortably cover their interest costs by over three times.

ITD Cementation's interest coverage ratio of just about one, with further borrowing on the cards, poses the risk of meeting the cost of an increasing debt burden.

Slowed down by transition

The company has changed hands more than twice, either by direct acquisition of its own shares or through its holding company.

This has not only led to a slowdown in operations but, more important, affected the company's capital funding process at a time when capital adequacy was a primary qualification to make an early bird entry into Government mooted infrastructure projects. This background does not lend confidence to build a case for strong and sustained promoter support for the company.

ITD Cementation's strength lies in the marine, piling and foundations business, which offer attractive margins.

The company's present order-book is, however, tilted towards transportation projects, which account for close to 50 per cent of the order-book. Transport projects, especially roads, typically offer low margins that can only be offset by high volumes or annuity income. The company has, however, not bid for public-private partnership contracts such as build-operate-transfer (BOT) projects that offer large volumes. Any joint bidding with its promoter Italian-Thai Development Public Company (ITD) may aid the company improve margins.

The company's operating profit margins (OPM), fluctuating in the 3-5 per cent range, is among the lowest in the industry. A number of equipment owned by the company are used for piling works that now remain among the subdued activities. Under-utilisation of these assets and leasing of equipment required for highways, bridges and other projects, appear to be reasons for low OPMs.

The proportion of funds from this issue that is likely to go for procuring leases is relatively high compared to the capital expenditure planned. This indicates that the leasing activity is still on and may also drag margins.

Offer details: The rights offer is open from September 27 to October 26. Shareholders are entitled to one share of the company for every four held by them as on September 15. ICICI Securities is the lead manager to this issue, which has an offer size of Rs 56 crore.

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