Unity InfraProject - High rise opportunity

Ali On Content / 12 Sep 2011

Rising above the dismal state of the sector, Unity Infraprojects is looking at exponential growth in the next few years. The company is also realigning its business focus to drive revenues.

While most infrastructure companies are in the news for not being able to keep their topline growth intact, Unity Infraprojects is one company which is in the news for exactly the opposite reason. The company, very recently, set a sales target of Rs 5000 crore by FY14, from the present level of Rs 1700 crore. In a scenario where most players are worried on the business front due to spiraling interest rates, slower rolling out of infra projects due to delay in government approvals and, of course, drying up of long-term money for infra projects, has made topline growth hard to come by. In this backdrop, Unity plans to roughly triple its turnover in the next three years, and hence calls for a closer look. We caught up with the Managing Director and the CFO at their central Mumbai office, and had a detailed discussion on the company’s future strategy, to understand where the company is headed.

Changing DNA
In order to grab a larger pie of infra projects, Unity has changed its business focus. The company has mainly been concentrating on ‘Building’ as its main vertical for the last 30 years. It has now restructured its business to drive revenues, dividing it into three verticals: ‘Building’, ‘Water’ and ‘Transport’. “This is the first year of the reorganisation, and in the next one year, we intend to convert these verticals into SBUs, where they would have their profit and loss account and balance sheets”, reveals Abhijit Avarsekar, VC, MD and CEO of Unity. This is no mean task for the company, as this restructuring has been done when the industry is passing through tough times, with the order book position of many players growing at a slower pace. In fact, Unity Infra’s order book has hardly grown in the last one year or so.

As of March 2010, it was at Rs 3477 crore and in March 2011, it stood at Rs 3500 crore. In August 2011, this was at Rs 3854 crore. The company claims to have a good pipeline of orders, and hopes to close the year with a fig-ure of Rs 5000 crore, of which Rs 3000 crore would be accounted for by the ‘Building’ vertical, and the balance would be spread equally over the two new verticals. According to the management, the company presently has L1 status of Rs 1500 crore in the ‘Building’ segment (which means that the company has quoted the lowest amount for the project in its bid, and hence there is a bright possibility of bagging the contract), L1 of Rs 450 crore in the ‘Water’ vertical and a Rs 400 crore L1 plus order book in the ‘Transport’ vertical.

The company has a daunting task in terms of achieving the targeted turnover. Its order book position has to improve smartly, and needs to touch Rs 5000 crore by the end of the year, as it takes 24-30 months for orders to get executed. The faster the company is able to add figures to its order book, the brighter are the chances that investors will believe it can achieve Rs 5000 crore turnover by 2014.

Positive News On Real Estate Assets
Unity also has four subsidiaries, viz. Unity Realty And Developers, Unity Infrastructure, Unity Telecom Infrastructure and Unity Middle East. Of these, only Unity Telecom, which is into telecom towers, is generating revenues (Rs 59 crore in FY11). In the real estate business, the company has a land bank of 22 acres (2.54 million sq. ft. of saleable area) in Bangalore, 25 acres (three million sq. ft.) in Kolkata, 2.60 million sq. ft. in Nagpur and a 7.5 lakh sq. Ft. IT Park in Goa. Its total investments till date are to the tune of Rs 150 core. However, due to a lull in the realty sector, the projects have not been yielding returns for the company.[PAGE BREAK]
However, real estate does not seem to be a focus for the company, and it is now scouting for like-minded equity partners to develop its land bank. The management informs us that “talks are in an advanced stage of discussion” for joint development of the real estate project. In fact, the management also indicated to us that they are open to selling the land bank if the offer is lucrative and would plough money back into the business. If this happens, the counter would be re-rated, as the real estate business has been a dampener for the company’s financials.

Financial Performance
The company’s financial performance has been quite good. Its topline as well as bottomline have consistently improved in the last decade, and it has one of the best EBITDA margins in the industry. For the year ended March 2011, the company reported consoli-dated sales of Rs 1772 crore, against Rs 1525 crore reported during the previous year, up by 16 per cent. Net profits stood at Rs 96 crore, against the previous year’s figure of Rs 85.63 crore, up by 12 per cent. In the first quarter of the current year, Unity reported a topline growth of 10 per cent, while the bottomline remained at almost the same level. One of the reasons for their bottomline to remain subdued is the higher interest cost. The company’s interest cost is on the rise, and this year it would touch Rs 100 crore, as against Rs 83 crore last year. This is one major area of worry for investors.

Valuations
There are a few things that are good with the company. No shares have been pledged by the promoters, there has been a declaration of 50 per cent dividend for the last year (it has been paying dividend consistently since listing) and there has been an increasing FII holding in the company, which stands at 12.2 per cent as of June 2011. Also, the company’s valuation is quite low, with the scrip available at less than four times P/E ratio. In fact, this is the lowest P/E company amongst all infra companies.

On the other hand, the company needs to do a few things that can help re-rating on the bourses. It must show some action on its order book position for the market to believe that the Rs 5000 crore target is feasible. It also needs to prepare a road map to reduce its debt, which is at Rs 869 crore (as of March 2011), with the debt-to-equity ratio standing at 1.3x. The company must aggressively sell its real estate to repay its loans, so that it can reduce its interest outgo. Last, but not the least, it needs to interact more often with investors, to make people aware about its financials and business plan.

In the year 2011, the company’s scrip has fallen by more than 50 per cent, and we don’t expect the scrip to fall further from the present level. This means that the downside possibility from the present level of Rs 50 is very low. We advise our readers to go for the scrip in small lots, with a price target of Rs 70 in the next one year.

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