Strong order book, capex will help Era grow 50% a year

Era Infra Engineering is an engineering, construction and services conglomerate. In over two decades of existence, this Delhi-based company has executed several large-scale projects including highways,  railways, airports, industrial and power projects, and development of both residential and commercial projects.

Business
Era is positioned in all major verticals of infrastructure development, such as construction & contracts,  engineering procurement construction (EPC), ready mix concrete (RMC), equipment management, pre-engineering buildings, real estate, hospitality and entertainment. It eyes irrigation, Ports and hydropower too.

Construction & contracts is the key division for Era.  Along with trading activities, it contributes over 90% to revenues. The division has executed a large number of infrastructure projects in the last two decades.

Currently, in the power sector it is executing projects for NTPC, Bhel and Indian Oil, etc. It is executing various stadium projects for the central public works department in preparation for Commonwealth Games. For the Railways, it is constructing road beds, bridges, tracks, signalling systems, etc, besides projects for Delhi Metro and at Churchgate station. Apart from works for Airport Authority of India at Pune, Raipur and Indore, it is doing projects for SAIL, office complexes at Gurgaon Raipur etc, residential complexes and hospital projects.

The firm’s EPC and build-operate-transfer (BOT) divisions are engaged in projects on turnkey basis. EPC focuses on highways, metro railways, power, bus terminal, underground parking, airports, pipelines and irrigation etc. Major projects being undertaken include Gwalior bypass projects, Hyderabad outer ring road project, Bahadurgarh -Rohtak highway & bypass project and the Delhi Metro tunnel. These projects are to be completed in next 9-12 months.

The equipment management division provides good technology equipment even for high-end construction. It has four hubs, at Mumbai, Kolkata, Delhi and Hyderabad, from where equipments on lease are made available to customers.

The RMC division is meant to provide clients with high-tech concrete solutions.

Investment rationale
Era has a healthy order book position. At Rs 7,500 crore, the current order book offers revenue visibility for next 2-3 years. It holds the L1 position in another Rs 2,500 crore worth of projects that will further strengthen its order book position. With the government’s emphasis on infrastructure development that holds the key for future growth, the expenditure on this sector is likely to increase.

This will open more opportunities for Era Infra. National highway projects alone are likely to offer an opportunity for Rs 700 crore orders in the next one year, from which Era will derive its share. The company has a strong presence in the power construction space that is growing. Era’s present order book from the power sector stands at 23% of total orders.

Era has a well-diversified portfolio. While it has completed projects and has prequalification bids for various verticals, it plans to venture into new verticals such as irrigation, ports and hydropower. Some hydropower contracts are expected this year. Contracts from ports and irrigation verticals will be looked into from next year.
Era has massive expansion plans and has allocated a capex of Rs 600 crore for current and next fiscals, according to Joy Saxena, CFO, Era Group. Of this, Rs 400 crore is for equipment division. Saxena said Rs 150 crore worth of equipment has already been purchased and the rest will be purchased over a period of time. Remaining Rs 200 crore is for other divisions.

The RMC business is being further strengthened. Saxena said they plan to add 40-50 plants for this business over three years. The distribution of ready mix concrete will be through its already existing four hubs.

Era’s construction business enjoys good margins riding on raw material being supplied by clients for most projects. Equipment leasing, through its equipment management division, is also a high-margin business. The RMC business is expected to break-even by the next fiscal.

Concerns
Construction companies have seen margins being impacted with rise in commodity prices. Thus any steep rise in commodity prices can impact the estimated margins. Any delays in projects or deviation in government policies too can impact estimated revenues.

Valuations
Era’s topline at the end of second quarter almost doubled year on year, to Rs 835.38 crore, over Rs 418.93 crore in the same quarter last year. Operating income grew a robust 79.6% to Rs 160.96 crore. Operating margins were slightly lower at 19.27% with increasing direct expenses. Net profit at Rs 63.57 crore grew 82%, though more fixed assets with higher interest and depreciation costs led to a reduction in profit margins by 90 basis points. The strong order book position is likely to improve. Capex plans and expansion in all business divisions are set to meet the expected compounded annualised growth rate of 50% between FY09 and FY11. The stock offers prospects for investors with a medium-to-long-term investment horizon.