Ramky Infrastructure Analysis – Good Sector and Company but Valuation leaves Little for Investors

Ramky Infrastructure is another Indian Construction Company that is raising Rs 530 crore ($115mm) from the primary market with Rs 180 crore being sold by existing shareholders.The company operates in a number of different construction sectors with focus on water and waste management projects and buildings.It is diversifying into the development space as well though revenues from this segment currently are insignificant.It has a diversified presence across the country with most of its revenues 82% coming from government and multilateral agencies.Like other companies in this sector the working capital requirement is very high and margins are quite low.That said the return on networth is quite decent.Here is a quick analysis of the pros and cons

Pros

1) Growth – This is the biggest selling point for the company growing at above 50%+ CAGR both on the topline and bottom line for the past few years.The Order Book has grown rapidly as well which means in the future it should keep up the pace

2) Sector – The Construction Sector in India accounts for 11% of the GDP and with growing emphasis on Infrastructure with estimated $500 billion to be spent in the next 5 years,companies in this sector are expected to keep up the good times.

3) Water and Waste Focus – The company is good in the Water and Waster Related Sector which has relatively lesser competition and is growing at a rapid pace as well

Cons

1) Valuation – The Valuation of the company is not cheap at around 3x P/B and around 28-30x P/E .But with companies of the same quality going in for around the same if not higher valuations,why would the company sell the shares at a discount.This however does not make it better for investors who get very little for investing in a newly listed company.This stock is an unlikely candidate to be multibagger

2) Negative Cash Flows – The High WC Requirements of the Sector and Fast Growth has meant that the Operating Cash flows of the company have been negative in the last 3 years.

Summary

The Company and the Sector in which it operates is a good one,however the Valuation has discounted most of the good things about the company.The company has very little to be negative about except the high working capital ,negative cash flows and the like.But that is a feature of the Construction Sector rather than anything negative about the company.The high valuation given to the issue makes it avoidable given better opportunities in the Indian market.