ARSS Infra – Stock to buy

December 22, 2012   ·   0 Comments

ARSS, an emerging player in the construction industry, is largely engaged in road and railway projects. is one of for 2013.  It primarily focuses on Eastern India with operations in  Orissa, Chhattisgarh, Uttar Pradesh, etc. Beginning as a small contractor in  Orissa, it has now emerged as a well-established pan-India construction player.  The company registered close to 100% revenue CAGR during FY05-FY10 backed by increasing investments in Orissa and strong order inflows.

Read: Highest Dividend paying companies for investors for 2012

 

Key Features:

1)   High operating margins:

Low competition + backward integration = high margins  

ARSS primarily focuses on Eastern India with Orissa comprising~ 50% of its  current order book. Like many eastern states, Orissa has its own problems in  terms of landscape and social stability. The difficult operating environment lowers competition in these regions as large contractors (focussing on the southern and western parts of the country) prefer to stay away from these regions. Given lower competition, contractors operating in these regions, like ARSS, enjoy higher margins.  

 

2) Revenues are expected to log a three-year CAGR of 28%

We  expect  revenues  to  grow  at  a  three-year  CAGR  of  28%  to  Rs  21.1  bn  in FY13.  ARSS’ PAT is expected to grow at 24% CAGR to Rs 1,706 mn in FY13,

primarily driven by a strong growth in revenues. EPS is expected to nearly  double from Rs 61 in FY10 to Rs 115 in FY13.

 

3) Strong order book – 3.4x FY10 revenues

ARSS’  order  book  of  ~  Rs  34  bn  translates  into  3.4x  FY10  revenues,  which

provides a strong revenue visibility for the next three years. ARSS also has L1 projects worth Rs 5 bn, which provides further revenue visibility. 

 

4) ARSS has a strong execution track record with more than 10 years in the  construction business. Till date, the company has executed more than 80 projects across India; it has executed 200 km of rail track projects and constructed over 300 km of roads and highways.

 

5) Great Future Prospect:

  • Order flows to remain robust; benefitting from government’s thrust on infrastructure. 
  • Significant investments by state governments
  • Sizeable opportunities in railways and urban infrastructure

6) Lower Employee Cost and Overhead cost compared to peers

 

Read: Stock which eroded 99% from its highs 

Key Risks:

1)   Slowdown in order intake

2)   Sustainability of higher margin

3)   Delay in execution of projects

Read: Investment opportunity one shouldn’t miss 

Valuations – the current price has ‘strong upside’ 

CRISIL Equities has used the price-to-earnings ratio (P/E) method to value the  contracting business. Stock is trading at 47 Rs. Right now. Book value of the stock is 390 Rs. which make the stock as safe investment. I recommend stock as “Strong Buy”. ARSS Infra can be currently valued as penny stock.

Personal disclosure: I am planning to buy 1000 shares at 45 Rs. and will keep the stock for next 5-6 years.

Rajesh Singla

Rajesh is the founder & CEO of Stockssavvy, Stocks analyst,financial advisor by choice,software engineer by fate,biker,gamer,cricket lover n enthusiastic person. He believes in doing things not just to get by but to get Ahead...

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