ARSS Infrastructure: Sound Base

ARSS Infrastructure Projects has entered the capital market from 8th Feb 2010 to 11th Feb 2010, with a public issue of Rs. 103 crores in the price band of Rs. 410 to Rs. 450 per share.

The company is a construction and contracting company with main presence in railway and roadwork. As at 10th January 2010, the total order book of the company was at Rs. 2,878 crores, of which railway orders were of Rs. 1,184 crores and road orders were of Rs. 1,164 crores. The company has executed orders for Indian Railways, Orissa Govt., RITES, IRCON, NTPC, NHAI, IOC, Vedanta Group and JSPL.

For FY09, the total income of the company was at Rs. 628 crores with net profit being placed at Rs. 51 crores resulting in an EPS of Rs. 40.60. The company has posted a CAGR of 117% in its revenue and 120% in its PAT over period between FY2007 to FY2009. For 9 months ending Dec. 09, the total revenue of the company was placed at Rs. 610 crores with PAT at Rs. 50 crores resulting in an EPS of Rs. 40 for the period. As fourth quarter of the company, as well as of the industry is always better, it should be able to post a topline of close to Rs. 860 crores and PAT of Rs. 70 crores which should result in an EPS of close to Rs. 48 for FY10 on the expected expanded equity base of close to Rs. 15 crores.

The company has been commanding better PAT margin of close to 8.20% largely due to focus on railway projects, where profit margin is better, due to the edge and specialization which the company has in executing such projects. The proposed IPO may result in a dilution of close to 16% to 18%, depending on the discovery of the price band. Also, as the company has orders in hand of Rs. 2,878 crores, same are likely to get executed in next 2 years which hints for a growth of over 30% over next 2 years. This should therefore be EPS accretive as dilution under no circumstances is likely to be over 20%.

The issue at the upper price band of Rs. 450 is discounting FY10 earnings of the company by less than 10 times while at the lower band of Rs. 410 it will be less than 9 times. Similar companies in the secondary market are ruling at a PE of over 12 times. So issue seems to be having scope of appreciation on listing and going ahead. It would be prudent and extra sweeter if book is discovered at lower end, giving better margin of safety to the prospective investors.

Hathway: No Way

Hathway Cable & Datacom is entering the capital market from 9th Feb 2010 to 11th Feb 2010 with a public issue of 2.78 crores equity shares of Rs. 10 each, in the band of Rs. 240 to Rs. 265 per share. The issue comprises fresh issue of 2 crore equity shares and an offer for sale of 77.50 lakh equity shares, by 2 investors.

The company is a cable television services provider and cable broadband service provider offering analog and digital cable television services, across 125 cities and towns, with about 13.47 lakh subscribers for analog cable television and 10.02 lakh digital cable television subscribers, as on 30th November 2009.

The company has been consistently incurring losses on the net level from FY05 onwards till 6 months ending 30-09-09, and the total net losses incurred in these 5 and half years have been at Rs. 304 crores. Though the topline of the company has been showing an improvement having moved to Rs. 673 crores in FY09, from Rs. 209 crores in FY05, but what is the point, if net losses are also on an increase with rise in topline. Net loss of Rs. 36 crores in FY05 has moved to Rs. 63 crores in FY09 and to Rs. 42 crores in 6 months ending 30-09-09. This means, the business of the company is like two railway tracks, which looks meeting at a distance but never meet.

Also, this company can more strictly be compared with Den Networks, a company recently went public and share now ruling at Rs. 186. This company has similar business model, similar business objectives going ahead but on a much larger scale. Though, this company has presence in 77 cities for analog and 37 cities for digital, but have cable television in about 10 million homes and about 3 lakh digital cable television subscribers, as of Dec. 08. Due to this, even its topline is quite respectable at Rs. 725 crores for FY09 with net loss of just Rs. 15 crores. For 9 months ending Dec. 09, its topline is at Rs. 633 crores, with net profit of Rs. 13 crores. Also, this company does not have baggage of past losses and debt. Even equity base of the company is reasonable at Rs. 132 crores against expected equity base of Rs. 143 crores, post IPO, of Hathway.

Hathway is mainly giving exit to its PE investors and alongwith this, raising about Rs. 500 crores, as its existing debt equity ratio is already over 1:1, as of date. Post IPO, even at the lower band, its market cap will be about Rs. 3,500 crores and EV will be about Rs. 4,000 crores, against market cap of Rs. 2,500 crores of Den Networks.

So by any standards the issue is not worth considering, as comparable peer with better fundamental is available at Rs.186.

Just give a pass to the issue as it is highly expensive and proposed IPO proceeds will go in blackhole.