Mumbai, Maharashtra India (PressExposure) February 23, 2011 -- CRISIL Equities has assigned a CRISIL IER fundamental grade of 2/5 (pronounced two on five) to ARSS Infrastructure Projects Ltd (ARSS). The grade indicates that the company's fundamentals are `moderate' relative to other listed equity securities in India. CRISIL Equities has assigned a valuation grade of 5/5, indicating 'strong upside' from the current market price of Rs 651 (as on February 02, 2011). Our one-year fair value of the stock is Rs 919. The grades are not a recommendation to buy, sell or hold the graded instrument, or a comment on the graded instrument's future market price or its suitability for a particular investor.
The assigned fundamental grade reflects ARSS' strong position in the railway and road segments, focusing largely on Eastern India, particularly Orissa. ARSS is a leading infrastructure player in Orissa with first mover advantage in the railway segment. The grade also factors in the healthy order book of Rs 34 bn (3.4x FY10 revenues), which provides sufficient revenue visibility for the next two-three years. The grade has also considered ARSS' ability to generate higher operating margin, backed by in-house quarry mines and crushing plants across its area of operation - a distinct advantage over its peers. The grade is supported by the strong outlook for the domestic construction industry driven by the government's thrust on infrastructure development. CRISIL Research estimates infrastructure investments to double to Rs 28,349 bn during FY11-15 from Rs 14,642 bn in FY06-10.
The grade is constrained by ARSS' stretched working capital given its higher inventory days, which is consequently straining its financials as ARSS needs to raise debt to fund its working capital requirements. ARSS' overall debt has jumped from Rs 6.1 bn in FY09 to Rs 8.4 bn in FY10. The grade also factors in location-related risks faced by ARSS as it majorly focuses on Orissa where in the past there have been disruptions by certain anti-social groups. Regulatory and policy-related challenges like land acquisition and environmental clearances also pose a threat to speedy execution of projects. The grade also factors in competitive risks from entrenched big players in other parts of the country as ARSS expands its focus beyond Orissa. Also, execution risk in the recently bagged bus terminal project in Orissa - the first in kind project for ARSS - moderates the grade. The grade has factored in past income tax-related and other litigations against ARSS and its promoter.
CRISIL Equities expects ARSS' revenues to grow at a three-year CAGR of 28% to Rs 21 bn in FY13 backed by a healthy order book and expected strong order inflows. PAT is expected to grow at a three-year CAGR of 24% to Rs 1.7 bn, primarily on account of strong growth in top line. EPS is expected to double from Rs 60.7 in FY10 to Rs 115 in FY13.
Valuation grade (5/5 - the current market price has strong upside) CRISIL Equities has used the price-to-earnings ratio (PER) method to value ARSS. At the current market price, the stock is trading at a low P/E of 6x FY13 EPS. We have valued the stock at a P/E of 8x. Based on FY13 EPS of Rs 115, we arrive at a fair value of Rs 919 per share for the company.