Nila Infra is now a pure play affordable housing/infrastructure player with decent pre-qualification and balance sheet.
Nila Infrastructures (CMP: Rs 8, Market cap: Rs 317 crore), a Gujarat-based civic urban infrastructure development company, belongs to the Ahmedabad-based Sambhaav Group. The company is a diversified infrastructure entity operating in Gujarat and Rajasthan.The business
The company has developed a unique business model for construction of affordable housing projects and development of various infrastructure. It undertakes civic urban infrastructure projects such as medical colleges, bus stations, multi-level parking facilities, etc. In addition, it also undertakes commercial and industrial construction works for selected reputed corporate developers. An integrated well balanced business model of construction and development of government and private projects and contracts has turned out to be a prudent hedging strategy.
Asset light infrastructure focused company
The company earlier followed a mixed business model of both infrastructure and real estate. But the management wanted to have focus teams for the two promising businesses and hence demerger was a logical conclusion. That way, Nila Infra could focus, grab and specialise in emerging opportunities in the infrastructure sector. The demerger resulted in creation of an assets-light business and made a strong case for an improved credit profile. The real estate business has been demerged into a separate, independent entity: Nila Spaces. The much agile and nimble footed Nila Infra now has a debt-to-equity ratio of 0.9 times and an interest coverage ratio of 3.9 times.
Huge macro opportunity
The macro opportunity is formidable. Housing is a top priority area of the government as under Pradhan Mantri Awas Yojana, it promises Housing for All by 2022 by building five crore low-cost housing units. Granting infrastructure status to the sector has come as a shot in the arm.
Infrastructure is a key focal area for any government and the impetus is likely to accelerate as urbanisation gathers more steam. Building urban infrastructure, slum rehabilitation, 500 AMRUT cities and 99 Smart Cities are high on the government’s agenda.
While the government initiated supply-side measures, it has simultaneously address the demand-side by boosting affordability with the reduction/subsidy in interest on housing loans, enhancement of ceiling for interest deduction, etc. With implementation of Real Estate Regulatory Authority (RERA) and Goods & Services Tax (GST) Act and substantial reduction in GST rates, activity level can only improve hereon.
Diversified order book
The company’s order book of over Rs 508 crore currently is quite balanced, with a focus on its core competence of affordable housing (59 percent of orders) and balance coming in from other civic urban infrastructure projects. Gujarat accounts for 82 percent of the confirmed unexecuted order book right now and 18 percent accrues from Rajasthan. Entity-wise, Adani Group is a major corporate client.
Manageable working capital cycle
The diversified order profile helps strike a balance in the working capital cycle. While normal engineering, procurement and construction (EPC) working capital cycle varies from project to project, on an average, it would be about three-to-four months. For private public partnership (PPP), their working capital cycle tends to be a bit longer (20-30 days) than a normal EPC order working capital cycle.
The company has been maintaining a very healthy operating margin
In recent quarters, operating margin has been upwards of 18 percent. The management is confident of maintaining margin in the 15-17 percent band. While EPC has a much lower margin than pure PPP or a slum rehabilitation project, the management endeavours to have a judicious mix of various types of projects to maintain margin within the guided band.Shareholders lend comfort
Promoters have a skin in the game with 61.9 percent shareholding and have nil pledged shares. The other prominent shareholders are HDFC Mutual Fund, Elara India Opportunities Fund and Antara India Evergreen Fund.
While the opportunity size is significant, there aren’t too many viable entities left to execute the opportunity as a large number of players are experiencing stress with a fractured balance sheet. Nila Infra is now a pure play affordable housing/infrastructure player with decent pre-qualification and balance sheet. We see the company taking advantage of the macro opportunities, now with a sharper focus on affordable housing/infrastructure business.
Slowdown in inflows due to changes in policies, project-specific execution delays and irrational bidding by competitors remain our investment concerns.
We draw comfort from the current valuation of 12.9 times estimated FY20 earnings.
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