Company Update: Tantia Constructions (TCL)

(BSE: 532738 | NSE: | ISIN: INE388G01018)

Tantia Constructions (TCL) has established expertise in infrastructureconstruction with a diversified presence in railways, roads, marine activity, urban development and power, among others. At the current price of Rs 111, TCL is trading at 13.6x on FY07 EPS of Rs 8.2. We are positive on the stock from a long-term perspective for the following reasons: a) The company has a Rs11.8bn order book which is spread across diverse segments and is expected to be executed in 2-2 ½ years, reflecting strong revenue visibility, b) It also plans to bid for BOT road projects, which will enlarge its order book substantially, and c) TCL operates in high-margin infrastructure segments, recording an EBITDA margin of 12.3% during FY07, which we believe will be sustained, going ahead.

Company profile

TCL, an Kolkata-based construction company, has over four decades of experience in the infrastructure sector. The company has a diversified business model with a presence in railways, roads, marine activity, urban development, power and various other infrastructure-related segments. From an initial focus on government projects in eastern India , the company has expanded into other states and also to neighbouring countries like Bangladesh , Nepal and Bhutan . TCL is now placing a strong emphasis on bagging larger projects in all its business segments, besides foraying into BOT road projects.

Business update: We participated in a conference call with the company on 19 June 2007 and present the key takeaways below.

Strong order book

TCL has a strong order book of Rs 11.8bn which is to be executed in 2-2 ½ years. The order book comprises 40 contracts, of which two are worth more than Rs 1.5bn, while five are valued at ~Rs 1bn each. The company’s net worth hasexpanded to Rs 830mn as at end- FY07, which will enable it to bid for orders from Rs 2bn-2.5bn. TCL is in the L1 stage with respect to orders totalling Rs 3.1bn. Of these 80% comprise urban development, while 20% are from the industrial sector. The company’s order book is 4.4x FY07 revenues (excluding the L1 order), which signifies strong growth visibility over the next two years.

Entry into BOT projects: Plans to bids for two BOT The order book currently does not include any BOT projects, though the company

projects shortly plans to enter into this segment shortly with bids for two such projects on the anvil. This will lend a boost to earnings considering that all future big-ticket road projects are expected to be conducted on the BOT model.

Operates in higher margin segments

The company operates in segments such as railways, urban development, roads, power and civil works, which typically offer higher operating margins. During FY07, TCL recorded an operating margin of 12.3%, and expects to maintain its margin in the range of 12-13% going ahead

Capex plan of Rs 250mn-300mn

The company has a gross block of Rs 560mn and expects to incur capex of Rs 250mn-300mn in FY08, to be funded via an FCCB issue. The funds raised will also be used to repay equipment finance loans and help improve the asset turnover ratio.

Higher revenue share from road projects during Q4FY07: Road projects contributed a During Q4FY07, TCL’s revenue increased by 53% YoY to Rs 1bn against Rs

larger share of revenues during 657.8mn in the same period last year. The operating margin improved to 10.7%Q4FY07 in Q4FY07 as against 8.2% in Q4FY06. However, this was less than the averagemargin of 12% recorded for the fiscal because of the higher revenue share of road projects. The operating margin for road works is typically 300-350bps lower than that of railway and urban development projects. Net profit in Q4FY07 rose19.7% to Rs 51.1mn against Rs 42.7mn in the same year-ago period.

Tax benefit under Sec 80IA booked during FY07

In FY07, sales increased by 51.6% to Rs 2.5bn against Rs 1.6bn in FY06. The operating margin expanded 120bps to 12.3%. Net profit increased by 55.7% to Rs 131.4mn against Rs 84.4mn in FY06. TCL has booked the benefit of tax exemption under section 80IA of the Income Tax Act, totalling Rs 35mn in FY07, (and Rs 15mn in previous years). During the FY08 budget, the finance minister had reversed this exemption for construction companies with retrospective effect. However, a petition has been filed against the decision, and a ruling is awaited. While TCL is confident that the ruling will come out in favour of construction companies, a negative outcome will adversely affect its profitability.

Outlook

We maintain a positive long-term view on TCL: Order book offers high revenue At the current price of Rs 111, TCL is trading at 13.6x on FY07 EPS of Rs 8.2.visibility while BOT project bids Considering the company’s strong order book position which points to highindicate strong growth potential revenue visibility over the next two years, its diversified business model, highoperating margin, and foray into BOT projects, we are positive on the stock from a long-term perspective.

Stock Reach

Investment in equity shares has its own risks. Sincere efforts have been made to present the right investment perspective.The information contained herein is based on analysis and up on sources that we consider reliable. I, however, do not vouch for the accuracy or the completeness thereof. This material is for personal information and I am not responsible for any loss incurred based upon it.& take no responsibility whatsoever for any financial profits or loss which may arise from the recommendations given in this blog.