Udayshivakumar Infra

Karnataka focused construction player

Healthy order book at about 7 times of FY22 sales provides revenue visibility

Udayshivakumar Infra is engaged in the business of construction of roads in the State of Karnataka, Constructions of Bridges across Major and Minor Rivers, Railway Over Bridges (ROB), construction of Major and Minor Irrigation and canal projects, Industrial Areas, based in the State of Karnataka.

The company along with the erstwhile partnership firm (i.e. M/s. Udayshivakumar), have executed various projects in the State of Karnataka and it have completed 30 projects [including 16 roads, 5 bridges, 6 irrigation and 3 civil construction works] having an aggregate value of Rs 684.68 crore. Moreover it is currently (as on December 31, 2022) executing 30 ongoing projects which include 10 roads, 7 smart roads, 1 bridge, 8 irrigation projects, 3 civil construction works and 1 toll plaza with an aggregate order book value of Rs 853.8775 crore. Further, as on December 31, 2022, it also have new work orders allotted (but work not yet started) comprising of 14 roads, 1 toll plaza and 1irrigation works with an aggregate order book value of Rs 436.5098 crore.

The company has recently been awarded a project by the Government of Karnataka for mining and extraction of iron ore from the land taken on lease by Government of Karnataka. Further, in the year 2022 and 2023, it had entered into an arrangement with National Highways Authority of India wherein it were engaged as a fee collection agent for the Halligudi (Hallikeri, Karnataka) toll fee plaza and Bankapur (Karnataka) fee plaza, respectively.

Based on its technical and financial capacity as on Dec 31, 2022, the company is pre-qualified to bid independently on projects tendered by departments of Central Government and State Government and other entities, of contract value only up to Rs 250.50 crore for EPC contracts and Rs 956.2998 crore for BOQ contracts.

Have strong construction equipment/machinery and manpower. The company as of Dec 31, 2022, has a strong equipment base comprised over 215 construction equipment and vehicles. The fleet comprises 111 construction equipment, 46 dumpers, and 51 other construction vehicles.

To meet its captive requirement the company has backwardly integrated and have set up 7 RMC plants (including one leased by the company from brother of the promoter). The ready-mix concrete manufacturing units are located at Belgaum (Karnataka), Haveri (Karnataka), Shivamogga (Karnataka), Davangere (Karnataka), Chitradurga (Karnataka), Belkore Village, Haveri (Karnataka) and Vijayapura (Karnataka). It also has 1 stone quarry owned by Udayshivakumar Stone Crusher. As on December 31, 2022, it has 52 skilled and 120 on-site workers such as drivers, JCB operators, helpers etc for executing various projects.

After meeting captive requirement, RMC from its plants are sold to other small contractors, commercial and residential builders for their construction projects. The company also sells excess construction material such as M-sand, jally, steel, cement etc., purchased by the company. The sale of products (excess RMC from its backward integrated RMC plants and excess construction material) have accounted for about 9.63% of sales in FY22 and 22.8% in H1FY23.

The Issue and object of the issue

The Issue comprises of fresh Issue of equity shares aggregating upto Rs 66 crore. Of the net proceeds from the Issue about Rs 45 crore will be used to fund incremental working capital requirements of the company and balance towards general corporate purposes.

Strength

Order book as end of December 31, 2022 aggregate to a value of Rs 1290.3873 crore spread across 46 work orders. Order book is about 7 times of its FY22 sales. Of the order backlog 34.46% (or 444.6998 crore) is Roads; 17.77% (or Rs 229.33 crore) is smart cities, 4.70 % (or Rs 60.65 crore) is Bridges; 31.01% (or Rs 400.15 crore) is irrigation, 5.58% (or Rs 71.97 crore) is civil construction and 6.48% (or Rs 83.59 crore) is collection from toll plaza.

In-house integrated model reduces dependence on third party suppliers for key raw materials such as Metal, Jelly, Ready Mix Concrete, construction equipment and other products and services required in the development and construction of projects. Its integrated business model facilitates execution of projects within scheduled timelines.

It has sufficient track record and experience in undertaking BOQ and EPC.

Weakness

It generates its entire revenue from projects which have been set-up in the State of Karnataka. Execution track record and order on hand are largely confined to the state of Karnataka and the ability of the company to bid, win and execute orders in other states of the country has to be seen. Moreover any blacklisting by Government of Karnataka or delay in awarding of projects in that state may severely hamper the performance of the company given concentration of project to one state.

Majority of the revenue of the company comes from projects awarded by municipal bodies/local authorities in the state of Karnataka. In FY22 and H1FY23 about 79.3% and 75% of revenue come from municipal bodies/local authorities, 9% & 6.3% from Karnataka State Government, 11.7% and 18.8% from Central Government. Given weak financial conditions of local bodies/municipal corporations and larger dependence on state/central government for resources may delay payments and timely execution of projects.

The company has rising pending GST recovery from the Government projects which were Rs. 34.31 crore (17.72% of revenue) as of March 31, 2020, Rs. 42.63 crore (20.26% of revenue) as of March 31, 2021, Rs. 45.95 crore (24.75% of revenue) as of March 31, 2022, and Rs 42.61 crore (39.95% of revenue) as of September 30, 2022. In percentage terms of its top line, it has risen from 17.72% for FY20 to 39.95% for H1 of FY23.

The mining project is yet to initiate and the company have limited experience in these business verticals and therefore it cannot assure that it will be successfully be able to execute the work accorded to the company in the projects. Similarly the company has no prior experience in fee collection agent or toll plaza management/operation.

Contingent liabilities, that have not been provided for were Rs 64.77 crore as end of Sep 30, 2022.

The company have availed vehicle loans from John Deere Financial India, SREI Equipment Finance and Hinduja Leyland Finance and had opted for moratorium benefits as part of the reliefs offered by the Reserve Bank of India and the Central Government during the COVID-19 pandemic.

The infrastructure sector, including for BOQ and EPC contracts, is competitive and highly fragmented. These competitive factors may result in reduced revenues, reduced margins and loss of market share.

Promoter of the company holds interest in one of the Promoter Group entities (MARUTHI Industries), which is authorized to undertake business activities which are similar to the business conducted by the Company. However the Promoter Group entity is yet to commence its business operations and if does there will be conflict of interest.

Valuation

Sales for the fiscal ended March 2022 was down by 12% to Rs 185.63 crore. With OPM expanded by 210 bps to 13%, the operating profit was up 5% to Rs 24.13 crore. The PBT was up 18% to Rs 16.01 crore gained by higher other income and lower interest cost. The EO expense was nil against an EO expense of Rs 1.26 crore. Thus PBT after EO was up 30% to Rs 16.01 crore. Eventually the net profit was up 30% to Rs 12.15 crore.

For half year ended Sep 2022, the company reported a net profit of Rs 10.02 crore on a operating revenue of Rs 106.61 crore.

The EPS for FY2022 based on post issue expanded equity is Rs 2.2. The PE on upper price band of asking price works out to about 15.9 times.

In comparison, relatively large infra construction companies (in size interms of STO) such as KNR Construction, HG Infra Engineering, IRB Infra and PNC Infratech are quoting at a PE of 19.9, 13.3, 45.3 and 13.2 times of their FY22 consolidated EPS.

EV/Order Book for the company was about 1.66 times in comparison to 11.3 times, 5.9 times, 15.7 times and 7.2 times in case of KNR Construction, HG Infra Engineering, IRB Infra and PNC Infratech.