Unity Infraprojects: Sell

In the rally that took off last year, Unity Infraprojects was swept to the wayside even as other infrastructure and construction stocks soared.

At ₹26, the stock is up just about 4 per cent in the past one year compared to its multi-bagger peers.

Unity Infra is weighed down by high debt and slow execution, resulting in falling revenue and net losses, even though the order picture is good.

Even if the economic recovery leads to a revival in the construction and infrastructure sector, the company may take a long time to recover to the growth path. Investors can therefore sell their holdings in the Unity Infra stock. Its current EV/EBIDTA is at 8.1 times.

The bulk of Unity Infra’s order book is in construction — building schools, factories, hostels, residential and commercial towers. The rest is taken up by the water segment, such as dams and tunnelling, and transport projects such as flyovers, roads and bridges.

The company’s dependence on the building segment has been heavy. In the two previous financial years, the building segment made up over half the order book and accounted for 60-70 per cent of revenue.

Poor performance by this segment impacts revenues to a large extent. In 2013-14, for instance, the segment’s revenues shrunk 25 per cent even as water and transport posted growth of 9 and 25 per cent, respectively. Unity’s order book has been declining over the past three years, with orders flowing in primarily from the building segment. The current order book, at ₹3,354 crore, covers Unity’s trailing four-quarter revenue about 2 times. This does offer near-term revenue visibility.

Execution hiccups that Unity suffered resulted in slowing revenues.

From the December 2013 quarter to the June 2014 quarter, revenues staged ever-sharper declines from 5.9 per cent to 38 per cent. Unity Infra’s working capital cycle is also getting longer, from around 200 to 240 days in the past year.

The company has five toll-road projects taken on as a developer. Only one of these has achieved financial closure, despite having been bagged over a year ago.

With higher prices of inputs such as bitumen and cement, raw material costs have been rising. As a proportion to sales, material costs moved higher; in the June 2014 quarter the figure was 51 per cent against 45 per cent the year ago. The March 2014 quarter’s 54 per cent ratio was 2 percentage points higher than a year ago. But Unity did manage to keep other expenses such as staff costs under control.

Operating profit margin dropped to 9 per cent in the past two quarters from 13-15 per cent in earlier times.

Lower oil prices could mitigate higher cost of materials such as bitumen in the coming quarters.

However, any saving on costs is likely to be consumed by the high interest outgo. Unity Infra’s debt has been on the rise.

In 2013-14 alone, debt jumped 57 per cent, after a 36 per cent rise in the preceding year.

The consolidated debt-to-equity ratio has risen to 2.8 times, with the cover available for interest dipping to 1.3 times. In the June 2014 quarter, interest cost accounted for 25 per cent of sales.

Debt could move even higher once financial closure is achieved for its other toll road projects. Interest rates may not correct quickly either.

Funding trouble could prevent Unity from taking on bigger or more number of projects even if the opportunity arises.