Low valuations, pick-up in order flows, healthy margins and a strong presence in the higher-margin water and irrigation segment make the stock of construction contractor Unity Infraprojects an attractive buy for investors with a two/three year perspective.

At Rs 69, the stock of Unity Infra trades at a modest 5.7 times the trailing 12- month earnings and 4.7 times the estimated earnings for FY-12, at a slight discount to peers such as Pratibha Industries. However, given its small-cap status, investors are advised to limit portfolio exposure to the stock.

Following stalled execution and drying up of fresh orders, stocks of construction companies fell steeply in the second half of FY-11. However, a few companies have seen a revival in order inflow over the past few months.

Unity Infra's current order book stands at Rs 3,600 crore, at 2.2 times the FY-11 revenues. While the order book is flat (Rs 3,548 crore at end-June 2010), the past three months alone have seen inflows of over Rs 530 crore. Further, the average size of orders is over Rs 100 crore.

Diversified presence helped the company tide over the slow order flows from the roads segment, whose share in the order book dropped to 4 per cent at end-May 2011 against 24 per cent a year earlier. This drop was compensated by the irrigation segment, where the order book contribution jumped to 46 per cent from 28 per cent in the year-ago period. The rest of the order book is made up by civil constructions such as industrial plants and buildings.

With awarding of road projects now gathering steam, Unity Infra could see orders growing at a healthy pace. Irrigation and water projects could see support from government spending programmes. Established relationships with State and municipal bodies could help the company win repeat orders in this segment. The company has also begun to scale up to a developer from being a pure contractor.

Revenues and net profits have clocked a three-year compounded annual growth of 26 per cent and 16 per cent to Rs 1,702 crore and Rs 94 crore respectively in FY-11. Operating margins have held at 14 per cent over the past three years. However, high interest costs proved a drag, resulting in net margins languishing at 5.6 per cent. Debt-equity ratio is also high at 1.3 times, though interest cover has been maintained at just over three times. The working capital cycle has also been maintained even as prolonged monsoons delayed project execution in the latter half of FY11.

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