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You are here : IndiaNotes >> Research & Analysis >> Companies >> Ramky Infrastructure Ltd. >> Research

Ramky Infra: Clouded by uncertainty, initiate sell

Punit Jain | 13 Jul, 2012  | Follow Author | Add to my Favourites 


Ramky is a diversified infrastructure mid-cap firm. The focus areas are water solutions, sewage, roads, bridges, industrial parks, etc. FY12 revenues are 3884 cr. & PAT 260 cr.  The growth figures are Sales (40.3%), EBITDA (47.6%), Net Profit (46.4%) and EPS 46% over 5 years CAGR. Net Debt at 1840 cr (D/E 1.47) is within limits.

On the other hand, the share has performed very badly with an  80% fall since the IPO. The fall in the infrastructure sector over the last two years has had a disproportionate effect on this stock. A CBI investigation of Ramky Group about projects awarded during 2004-2009 by the AP Govt. and rumors of linkage to an AP politician have pulled down this stock to tragic levels.

CMP: Rs 90.3
                                  
Small Cap – Market Cap:  520 crores
                              
Advice:  Sell on any rally, as stock is Risky

Targets: Unpredictable


Ramky Infrastructure Ltd – Description and Profile

- Ramky is an infra and construction firm with an environment focus. FY12 revenues are 3884 cr. & PAT 260 cr. 

- The 2,916 full-time employees are engaged in projects for Water (supply, storage, treatment), irrigation, Roads & Bridges, Buildings, Industrial parks and power distribution.

- The order book of 13,703 crores (3.5 times current revenue), is split by vertical as per Chart 1. 

 
Chart 1 – Ramky Current Order Book
- Customer segments are State Govt 59%, Private sector 29%, Central Govt 10% and PSU 2%

- Prestigious projects include:

1. Hyderabad Ring Road, a 150m road cum area development corridor with 8-lane controlled access expressway. 

2. 80 MLD Sewage Treatment Plant at Airoli, Navi Mumbai, bagged an Urban Infrastructure Excellence Award given by CNBC TV18 & Essar Steel.

3. Construction of one of the Asia’s largest sewage treatment plants (172 MLD) with uplift an aerobic sludge blanket process, at Nagole Hyderabad. 

4. Construction of Gandhi Medical College and Hospital Complex in Hyderabad.

- Core strengths: 1) in-house design and engineering team that specializes in designing Water and Waste Water projects 2) Qualified / experienced employees and proven management
 
- The Chairman / founder is AA Rami Reddy, and the MD is Y R Nagaraja.

- Shareholding pattern is: Promoters – Individual/Corporate 66.8%, MFs/ DII 7.2%; FIIs 2.1%, Individuals retail & HNI 6.7% and Bodies Corporate plus others 17.2%. Thus Promoters hold a clear majority stake – a good sign.

- Many of the project payments are made at project execution milestones, so revenues are lumpy. Newer projects in Roads and Power transmission involve upfront payment of premium to government, so revenues start only once Toll collection starts, while construction is internally funded.

Events, News and Strategies

- Ramky was awarded two major projects under the National Highways Development Project (NHDP).

Six laning of Agra - Etawah Bypass section of NH-2, to be executed as BOT (Toll) basis on DBFOT pattern. The Concession period is 30 years, including construction of 910 days and cost is Rs.1207 Crores.

Four Laning of Hospet – Chitradurga section of NH-13 in Karnataka under NHDP on DBFOT/BOT basis. The Concession period is 25 Years, including construction of 910 days, and cost is Rs 1033.65 Crores

- CBI is investigating Ramky Group and Ramky Estates and Farms about projects awarded during 2004-2009 by the Andhra Pradesh Government. The allegations include political clout used in awarding projects by former CM YSR and son JaganMohan Reddy. The share recently tanked following the arrest of Jagan Reddy in a disproportionate assets matter. Ramky is cooperating with the team in their investigation.

- In April ’12, CRISIL revised its credit rating outlook on the long-term bank facilities to ''Negative'' from ''Stable'', while reaffirming the rating at ''CRISIL A+''; the rating on the short-term bank facility has been reaffirmed at ''CRISIL A1''.

- Promoters have been increasing shareholding in the past year as per BSE reports on Insider Trading.

- Mutual funds holding of this stock have fallen from 3.1m shares in Dec ’11 to 1.9m in Mar ’12. There seems to be a thumbs down from this category of investors

Strategies executed:

- Competition is intense across all business segments. To handle this, Ramky has executed the following strategies:

- With a substantial experience portfolio, Ramky is now bidding for high value projects in the construction business to benefit from economies of scale. It is diversifying the construction business into more complex projects, with higher contract value and better margins.

- It is enhancing its project planning and design capabilities. All employee adds are supervisory level and above.

- Smart sourcing – using subcontracting of low-end project work, strategic imports and also in house manufacture where appropriate.

- Sustained investment in equipment and fixed assets, to achieve higher operating margins. 

- Structurally, Ramky executes projects either directly, or through SPVs created for specific Road or Infra project. There are 19 subsidiary companies per this structure. 

- From a dominant projects base in Andhra Pradesh, it has consciously expanded into a pan-India presence. The five Zonal Offices and three Regional Offices located in the business hubs of Indian give RIL the ability to execute projects in any region of India and even in UAE & West Africa. But international revenue is only 1%.

Industry Note:


- Ramky is aiming for a share of the massive infra push by the Indian govt, envisaged in the 11th and 12th Plan. 30% of this is expected to be funded by private sector capital.

- This is a crowded space. There are over 60 listed peers in the Construction & Contracting – Civil sector, not including conglomerates.

- In roads, competition includes Reliance Infra, Jaypee Infra, IL&FS Transp, GMR Infra, Lanco Infra, L&T, IRB, IVRCL, Ashoka Buildcon, etc. Industry estimates are that 90 firms are pre-qualified for prestigious NHAI projects. Many more are present in buildings, Power - Transmission/Equipment, etc sectors.

- For road construction projects were earlier awarded to the lowest cost bidder, with Govt. paying to bridge project viability. Today projects are awarded to the bidder that pays the highest premium to Govt. This is due to intense competition, and higher traffic volume projection on Highways. Roads sector has seen high competition, and is now poised for a 2-3 year period of consolidation. High competition drove infra firms to bid aggressively for new projects. Many firms in this sector have overstretched their balance sheets and may default on payments/ restructure debt/ sell assets. 

- Ramky has entered into power transmission sector where there are many entrenched players in a market that is currently flat. Also Power sector suffers from systemic issues like weak finances of state electricity boards, and fuel linkage issues. As a result many plants are underutilized today. Margins will be stretched here.

Stock Valuation, Performance And Returns 

                             

Fig 2 – Investments and Returns


- Ramky had its IPO in Sept’10, with pricing at Rs 450; subscription was fair at 2.9 times and collected 530 cr.

- From its IPO price of 450, the stock rose to 460, its all time high. Thereafter the fall has been continuous and the CMP of 90.3 is near the all time low of 88.5. The share has fallen 80% in these 21 months, causing tremendous value destruction for shareholders. 

                   

Fig 3 – Quarterly Sales and Profits

- Dividend was 45% in 2011, at a dividend yield of 4.8%. However, this was a maiden dividend, so we do not have history of steady dividend distribution.

- As compared to share price, for a 5-year period the growth figures are Sales (40.3%), EBITDA (47.6%), and Net Profit (46.4%) CAGR, see Fig 3. The Q4 of every year is higher due to government client customers.

- We can see from the Consolidated EPS and Debt Equity – Fig 4, that EPS has grown steadily, at 46% CAGR. The Debt Equity has not risen beyond 1.52.

               
Fig 4 – EPS and Debt Equity

- Consolidate Cash Flow is available for the Financial periods after listing and is negative, while showing some improvement.

               
 
Fig 5 – Cash from Operations

- An important ratio for Ramky is the Orders Booked to billing ratio (BTB). This has fallen, but is still quite comfortable (Fig 6).  Order Booked position at Ramky is 13703 cr, providing 3.5 years visibility. 

                
Fig 6 – Orders Booked to Billings chart

- The Price and PE Chart of Ramky, Fig 7, indicates that IPO in 2010 was at high valuations. Further, in the next 2 years, the share price has shown a disappointing downward trend. Today the PE of Ramky is 2.0 times, (this is based on Consolidated EPS), below the industry average of 12.5.

- In Fig 7 we can see that the average PE in the last 2 years has been 7 times. PE has today fallen to very low levels in the valuation range.

              
Fig 7 – Price and PE Trends

- The view of the EPS charts in Fig 8 shows that EPS has been flat to gently rising for the last 2 years.

- The EPS of Ramky is expected to stay in the trend line range in Fig 8.

              
Fig 8 – Price and EPS Trends

- In the last 2 years the Infra sector itself has not done well. However, comparing the index with Ramky share, Fig 9, we see that the index has fallen by 15.7% while Ramky has fallen 80%.
 
- ROCE and RONW is 18-19%, these are good ratios.

- PEG is at 0.17 – indicates undervalued status.

               
Fig 9 – Comparison with CNX Infra Index

Risks:
 
- Persistent rumours of political connections and is under investigation by CBI. The price has got hammered due to this news in the last 3 months. Detailed in section ‘Events, News, Strategies’.

- Ramky states a business objective as ‘to build more complex and multi-disciplinary projects’. Complexity by itself is not a virtue, and in this case makes understanding the Ramky business model more difficult.

- The firm is spreading itself thin across a too many sectors - Water (supply, storage, treatment), irrigation, Roads & Bridges, Buildings, Industrial parks and power distribution. Recent management comments include Railway projects as a new area.

- The sector is government dependant. 

- Interest rates increases in the Indian economy are certainly impacting the balance Sheet of Ramky.

Opinion, Outlook and Recommendation

- The Indian infrastructure sector is critical to the GDP growth, and a lot of resources will be poured into development over the next few years. Ramky straddles this across a number of sectors. Ramky appears to have good financials over the last 3-5 years.

- However the consistent fall in share price is not explained by fundamentals, the overall market sentiment, or even the infrastructure sector performance. Current valuations are highly stressed, and the market is awaiting political and investigation outcomes rather than any business achievements.

- Ramky is a Sell for the long-term investor due to the consistent fall in market prices and political cloud over the firm, all of which can extend or reverse unpredictably.

- At some point in time, the share should start rising again, to achieve some reasonable valuations after the excessive fall, but this is neither predictable nor advisable for investors to aim for


The author can be contacted over email at punit.jain@jainmatrix.com


For more information, please contact media@valuenotes.co.in


Disclaimer: The author has taken due care and caution to compile and analyze the data. The recommendations are his/her personal views. He/she shall not accept any liability whatsoever arising from the use of any of the above content. Sources have been mentioned at relevant places in the article. In spite of this, the author does not guarantee the accuracy, adequacy or completeness of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. The author does not hold positions in the stock.



 
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About Punit Jain

The author has a firm called JainMatrix Investments (www.jainmatrix.com) which offers an Investment Advisory Service. He can be contacted at punit.jain@jainmatrix.com


For more information please write in to editor@indianotes.com

Disclaimer: The author has taken due care and caution to compile and analyse the data. The opinions expressed above are only the views of the author, and not a recommendation to buy or sell. Neither the author nor IndiaNotes.com accept any liability whatsoever arising from the use of any of the above contents.






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