Niraj Cement Structurals (NCS) is a Mumbai-based small engineering and construction company. It is mainly into road construction and intends to raise around Rs 61 crore for capital equipment and working capital purposes. The company has executed most of its projects on a sub-contracting basis, where margins are relatively lower. The issue of low margin and high debtor days diversified themselves towards bidding directly for road projects but jointly with big construction players. Currently, revenues generated in joint venture projects, where equity participation is less than 100%, contributed just 10% of the total revenues in FY2007-08.
Majority of the company’s revenues come from government contracts. The cement structural segment, as the company’s name reflects, is contributing a negligible portion of the total revenues. The order book size as per the Red Herring Prospectus is Rs 660.29 crore. NCS’ scope of work in the order book, considering joint ventures and less than 100% equity participation, the actual order book in the hands of NCS is Rs 477.48 crore. Nonetheless, the order book size is healthy considering a higher order book/sales ratio of around five times. The completion period for most of the projects are between 18 and 24 months. Currently, it is executing projects in Orissa and Maharashtra, other than Mumbai being its main area.
Objectives and financials
Presently, the company is using ready mix concrete equipment (RMC) for captive purpose. From this public issue, it would buy additional RMC equipment for commercial use. It intends to invest Rs 21 crore to buy RMC equipment and Rs 18 crore for working capital purposes. The point to note here is the company has not provided the details for the remaining funds. Post-issue closing, if the price is fixed at the upper band, then this amount (Rs 22 crore) is slightly more than the funds allocated for buying capital equipment.
The company’s financial performance has not improved in the last two years. Net profits have actually gone down from Rs 7.79 crore in FY05-06 to Rs 6.52 crore in FY07-08. The revenues were up from Rs 70.39 crore to Rs 92.86 crore, showing a growth of 32% in the same period.
The revenues of the company more than doubled in FY05-06 as compared to FY04-05 and profits jumped almost six times.
The margins had been volatile and were in the range from 7% to 11%. If one looks at the five years data, the net profit margins have slightly gone down and currently it is at 7%.
Valuations and concerns
The pricing of the issue is comparatively less attractive if one compares with the peers in the construction industry. The fully diluted earning per share for FY2007-08 is Rs 6.30. Considering the upper and lower price band the price earning multiple is at 30.11 times and 27.73 times respectively. P/E of Valecha Engineering is 9.62(x), C&C Construction 8.93(x), while BSEL Infrastructure, MSK Projects stand at 19.99(x) and 15(x) respectively. One of the most critical concerns faced by the company is that margins will get hampered due to the removal of tax benefits under section 80-IA of the Income Tax Act, relating to infrastructure development projects. In addition, it also has to pay a one-time payment of tax with retrospective effect from the financial year 2000-01 as announced in the budget 2007-08. The payment of one-time tax payment may be one of the reasons why the company has not disclosed the details on the remaining issue proceeds. Investors must consider the above factors before investing.