Why this small-cap real estate and EPC company is a worthy buy

Both the construction and infrastructure industries have taken off strongly in the post-Covid period. Residential real estate and commercial construction have been on overdrive over the past three-four years. Infrastructure projects such as ports have been in the limelight for a while now and continue to see considerable traction.

As a play on these segments, Man Infraconstruction (Man Infra) has been a key beneficiary of the offtake in the real estate and construction businesses.

The company focuses on residential construction and infrastructure projects (ports). It takes an EPC (engineering, procurement and contracting/construction) approach in its infrastructure business as well as select real estate projects.

In the residential construction segment, Man Infra takes the joint development agreement (JDA), joint venture (JV), development manager (DM) and society redevelopment approaches, which ensure that the upfront investments are minimal and margins are healthy. It is focused on the Mumbai Metropolitan Region (MMR) in its residential towers projects.

At ₹190, the stock trades at 23 times its per share earnings for FY24 and 19 times its likely per share earnings for FY25. This is among the lowest valuation multiples commanded by any real estate or construction company with mid-sized operations. The BSE Realty trades at a PE of nearly 65 times, while most frontline and mid-sized real estate players trade at price-earnings multiples of 30-70 times.

A track record of strong execution of projects, expertise in residential, commercial properties, as well as ports, multiple revenue streams via a low-risk, asset-light business model and a net-debt-free balance sheet are positives for Man Infra. The company has both private and public sector clients.

The stock has corrected about 20 per cent from its recent high and presents a reasonably attractive opportunity. Investors with a two-three-year perspective can buy the shares of the company at the current price.

Between FY22 and FY24, the company’s revenues grew at a compounded annual rate of 43.5 per cent to ₹1,263.5 crore in FY24, while net profits rose at nearly 111 per cent annually to ₹300.4 crore. It enjoys an EBITDA margin of 25.8 per cent in FY24, which is among the best in the industry.

Diversified operating model

Man Infra has been in the construction business for nearly 60 years now. It has specialised capabilities in the ports business. It has helped in the development of eight major ports in India including those of Navi Mumbai, Chennai, Gujarat Pipavav, Mundra and Kochi. It has also been an EPC contractor for leading infrastructure companies and real estate developers.

In the last several years, Man Infra has been able to up its game in the residential space. Projects such as Atmosphere O2, Mulund West (47 storeys – two towers), Aaradhya Highpark, Nr. Dahisar (30 storeys – six towers) and Aaradhya EastWind, Vikhroli (34 storeys) were executed in three-and-a-half to four years.

In the last 10 years, the company has become a reasonably-established player in the MMR, with a presence in the central, eastern, western suburbs and recently in South Mumbai as well.

In all, 17 projects totalling 2.4 million sq ft have been delivered, mostly six months to one year ahead of schedule. Around 90 per cent of its inventory reportedly is sold before even the occupancy certificate is received.

Man Infra receives DM fee for handling and marketing a real estate project. It receives EPC margin for in-house construction and engineering capabilities. The company receives interest margin on funds infused into projects.

In the EPC business, it receives regular EPC margin from the government and private clients. When it professionally manages a site, material and labour of a real estate project, it receives a PMC (project management consultancy) margin.

Revenues from projects executed under the DM model are not reflected in consolidated sales figures, but only the DM fee (12-14 per cent of total project revenues) gets added to the sales and PBT.

For projects executed under the JV model, sales are not reflected in the consolidated revenue figure, but the company’s share of profits gets added to the bottom line.

Thus, in the DM model, all costs and revenues are booked in the landlord’s financials, while in the JV model, all costs and revenues are booked in the SPV, even as Man Infra receives a share of profit based on the extent of its stake in the venture.

This asset-light approach is set to continue for the company. Given the focus on DM and JV-based revenue generation, the top-line growth may not be as robust as in the past few years, though profitability is set to receive a considerable boost given that minimal to no upfront capital commitment is required.

Future potential and healthy financials

Man Infra has cash and cash equivalents of ₹487 crore as of June 2024. Its debt was only ₹33 crore as of June 2024, down from ₹332 crore in September 2022. Very few real estate and construction players enjoy a net-debt-free balance sheet as well as healthy operating margins.

The company has 6.1 million sq ft of carpet area waiting for execution over the next several years. Man Infra’s real estate business itself has a visibility of ₹15,000 crore over the next five-six years, with margins expected to be north of 20 per cent consistently.