CRISIL maintains fundamental grade of 4/5 to Era Infra Engg

Era Infra Engineering Ltd’s (Era’s) Q4FY12 revenues were in line with CRISIL Research’s expectations due to higher trading revenues, which came as a surprise. However, contracting revenues were below expectations due to execution hurdles in a few projects. EBITDA margin beat our expectations owing to lower-than-expected contribution from the low-margin road segment but earnings were in line due to higher-than-expected interest and depreciation costs. Era received orders worth ~Rs 22 bn in the past three-four months, taking its order book to ~Rs 100 bn (2.3x FY12 revenues). We have lowered our earnings estimates as execution of some of the key projects is expected to be extended by six-nine months. We maintain our fundamental grade of 4/5. However, working capital management and pending equity infusion of Rs 5.2 bn in the BOT projects over the next two years is a monitorable.

Q4FY12 and FY12 result analysis
• Revenues grew 21% y-o-y to Rs 14.4 bn in Q4FY12 following the execution of existing orders and ~19% revenue contribution from the trading segment (trading contributed 2% in Q4FY11). The contracting segment’s revenues were flat y-o-y at Rs 11.3 bn. FY12 revenues grew 13.6% y-o-y to Rs 43.5 bn; contract revenues were flat y-o-y at Rs 36.3 bn, trading revenues grew from Rs 6 bn in FY11 to Rs 55 bn in FY12.

• EBITDA margin improved 240 bps y-o-y in Q4FY12 to 17.5% due to higher margins in the contracting segment and decline in contribution from the low-margin road segment. FY12 EBITDA margin grew 40 bps y-o-y to 19.1%, above our estimate of 18.1%.

• Interest cost increased by 43% y-o-y to Rs 1,270 mn in Q4FY12. This coupled with the decline in other income resulted in PAT declining 20.4% y-o-y (adjusted for forex loss of Rs 75 mn) to Rs 547 mn. EPS was Rs 3.0 compared to Rs 3.8 in Q4FY11. FY12 PAT declined 18.4% y-o-y to Rs 2,017 mn, mainly due to higher interest costs.

Key developments
Construction of Gwalior Bypass, Hyderabad Ring Road and West Haryana projects are almost complete and these expected to receive commercial operation date (CoD) by June- July 2012.

Earnings estimates revised downwards
After factoring in execution delays in some of the road projects and lower-than-expected order intake in FY12, we lower FY13 revenue estimate by 11% to Rs 43.1 bn. EBITDA margin is unchanged but PAT is lowered by 28% to Rs 1,531 mn and EPS revised by 22% as we now assume additional debt funding of Rs 3 bn vs. earlier expectation of equity dilution. We introduce FY14 estimates expect revenues to grow 11% y-o-y to Rs 47.8 bn with slight decline in EBITDA margins. PAT is estimated to decline 2.9% y-o-y to Rs 1,486 mn.

Valuations: Current market price is aligned
We continue to value Era by the sum-of-the-parts method. We have rolled forward our projections by a year to FY14. We lower the P/E multiple to 9x from 11x after factoring in high gearing of 2x and funding risk of Rs 3 bn. Accordingly, we revise the fair value to Rs 145 per share from Rs 170. At the current market price of Rs 139, our valuation grade is 3/5.

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