The Company has clients like NHPC, Rajasthan Govt., Madhya Pradesh Govt., and Andhra Pradesh Govt. About 65% of its turnover is from hydro-mechanical works, with Auto (Toyota dealership in Jaipur), and Real Estate accounting for other 18% and 9% respectively.They also have a four-star hotel in prime locality in Jaipur and a Cineplex in Kota, which is leased to INOX.
Below are the business economics (all figures in Rs cr) of a representative hydro-power project and an irrigation project. The cost structure and profitability of the two are remarkably similar, except a small rise in selling and establishment expenses in Irrigation pojects (usually allotted by the state Governments, requiring much more greasing).
The Company's order book size for hydro-mechanical works is Rs 652cr, of which Rs 425cr are un-executed orders to be completed in FY12 and FY13. NPV of the hydro-mechanical order book can be put at Rs 83cr.
Strong but steady diversification: The Company made a foray into lucrative civil construction business by acquiring two projects in JV format during 2010 - a dam in Rajasthan and another one in MP. The total order book is Rs 566cr, of which Rs 484cr is to be executed during the next three years. The Company has a 50% share in both JV's - one with Subhash Projects, and another with SEW. The NPV of these projects work out to Rs 90cr.
Infrastructure Development: The Company has entered a 49:51 JV with Subhash Projects for Rs 300cr Jaipur-Bhilwara two-lane toll road. The project is entitled for a Rs 100cr deficit financing from the government, and is projected to enjoy cash flows of Rs 19cr from FY14 onwards. The concession period is 20 years. The NPV of the project is Rs118cr at a discount rate of 12%. The Company is also developing an 856-acre multiproduct SEZ (19% stake) and a port in Puducherry (50% stake) in JV format with Subhash Projects (300-year concession agreement signed with Puducherry Govt). The combined NPV of the two projects is expected to be Rs 800cr (@12% discount rate). Om's stake can be valued at Rs 208cr.
Real Estate Development: The Company seems to be having a lack of direction here. It had a sparing presence, having developed Om Enclave in Kota and owning land assets at quality locations. It decided to up the ante, however, by acquiring a 4.75 acre land parcel in a prime locality in Jaipur for Rs 166cr (registration charges included). The price paid is a hefty one, as our research suggests the Company will need to price the apartments at Rs 4,500 per sq ft to make a nominal profit of 15% (not accounting for opportunity cost of Rs 166cr used for acquisition). The price of 4,500 per sq ft is a hefty ask even for a prime locality in Jaipur, as Som Dutt builders had a tough time initially in marketing their project (in Civil Lines, also a prime location in Jaipur) at Rs 3,500 per sq ft. Yet, we feel that real estate risk is spread across thinly amongst salable assets. The Company's land bank is valued at Rs 529cr (it is a conservative estimate as we have toned down the value of the recently acquired Jaipur prime land by 20% and used lower estimates for other holdings).
Operational Assets in Real Estate: Company owns a Cineplex in Kota (annual lease income: Rs 1.3cr), a four-star hotel in Jaipur (annual income: Rs 6cr), and a 9,500 sq ft office complex in Delhi (its head-office). The combined value stands at Rs 50cr.
The Company's valuation of assets and order book after adjusting for debt of Rs 57cr (~Rs 1149cr) is almost 3x its current market capitalization. The valuation does not take into account the expected surge, civil construction will provide to company's top-line, once it starts bidding for them on its own in FY12. In terms of cost, civil construction projects are a multiple of ten of the hydro-mechanical works projects. They can easily push order book size to Rs 2,000cr or more. The Company is also looking to acquire a small civil contractor in Rs 200cr - 300cr range to further hone its capabilities in bidding for such projects. One concern in such transactions is the price paid for the seller, however, we believe Om has shown prudence in handling any strategic tie-ups and as such, is not expected to overpay.
Purely based on the value of assets, the Company is under-priced to an extent of 60%. We can expect a 4x surge in stock price in a 3-4 year horizon based on Company's current standing.
An estimated P&L (based on conservative estimates) leads to an expected turnover of Rs 661cr in FY15 and a PAT of Rs120cr. A 12x multiple suggests an exit value of Rs 1440cr during 2014-15 period.
Environment Management: The Company is in hydro-mechanical contracting for the last 20 years. The Company has long established relationships with PSU's including with NTPC and NHPC. The Company enjoys good relationships with both Congress and BJP, it has got competitive contracts in Madhya Pradesh and Rajasthan. It can fruitfully expect to monetize these relationships in the years ahead. The Company has built a solid relationship with Subhash Projects with about six projects in JV. Subhash relationship establishes the Company's ability to exploit the opportunities in an advantageous manner.
Our only concern with Om is its real estate inclination. The investor should keep a watch for any uptake of a fancy project, which can severely dent company's capital structure. The Company raised Rs 120cr through QIP route in 2008, a part of which were used for funding enhanced working capital needs and a part for acquiring Jaipur real estate. We do believe however, that prudence shall govern any future decision
regarding real estate forays as the Company has avoided recklessness in the past.
We also believe that the Company shall be better off, hiving Om Toyota into a separate entity. The dealer-ship business is a very low margin business and is expected to be a loss making proposition this year due to expected production cuts by Toyota. Moreover, it does not enjoy any synergies with the Company's existing businesses. The hiving-off of Om Toyota can free cash of up to Rs 15cr and bring in a similar amount.
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