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Friday, September 11, 2009

OM Metals Infraprojects Ltd:Future growth prospects and outlook

Scripscan:OM Metals Infraprojects Ltd
cmp:27
Code:531092

Story:India has a huge mismatch in thermal and hydro power capacities. India has total estimated and identified hydro power potential of ~148,700 MW of which only 36,878 MW has been constructed so far, leaving huge untapped hydro power potential. Asper 11th & 12th Five year plan Government of India has planned 45,585 MW (2224MW commissioned till March’09) of new hydro power generation capacity by FY17.To enable better utilization of water resources and irrigation, central Govt has initiated Accelerated Irrigation Benefits Program (AIBP) and allocated Rs.350 bn for FY10.These plans also is expected to lead to a substantial spend towards hydromechanical segment which in turn will provide big opportunity for OMIL.OMIL enjoys a little over 50% market share in hydromechanical segment with over 35years of proven track record. With OMILs efficient service offering across the valuechain in the business enabled it to successfully execute over 50 projects across 18states, including some historic and landmark projects. With every new projectcompletion OMIL continues to strengthen its leadership position and has proven itscredibility as the most preferred vendor/partner.Hydro mechanical projects are of high importance as its efficient implementation is must for not only timely power generation but also for the safety of nearby villages.The tendering follows the ICB (International Competitive Bidding) process. The bidders are evaluated on technical expertise, size and most importantly on thenumber and size of successfully completed similar projects. On the back of OMILsunmatched past track records of successful execution of mega projects the companysuccessfully pre qualifies for all the tenders it bid. At the same time these criteria poseas biggest entry barrier for the new entrants in the segment.OMIL has a strong order book of over Rs.6.2bn, executable over a period of 3-4 yearsproviding a strong visibility of the earning potentials. Furthermore the order book isset to increase substantially just by the fact that NHPC alone is awaiting clearance for6731MW of projects which will pose an opportunity of over Rs. 15 bn - Rs .25 bn ofhydromechanical projects. There is a clear visibility that OMIL will grow over 30%CAGR for next 3 years. On the back of its cost efficient practices, timely execution ofprojects and presence in the entire value chain OMIL enjoys superior margins to itspeers.To explore the newer opportunities OMIL along with a partner has won the tender todevelop Pondicherry SEZ (Owns 18.5%) & Pondicherry Sea Port (50% ownership) on BOOT basis. Apart from these OMIL in a consortium has also won a SRA project in Bandra to develop 0.4mn sqft of construction space where OMIL enjoys 35%ownership. The above mentioned projects are expected to take off in next 12 months.in our projections we have not considered any upside from this vertical, as and when it happens it will lead to further re-rating of the stock.We expect OMIL’s revenue and profits to grow at CAGR of 37% & 23% respectively,between FY09-FY11F. At CMP of Rs27.4 the stock is trading at 8.5x FY10F EPS of Rs 3.2 and 6.9x FY11F EPS of Rs 4, which is at a substantial discount to its peers in the Engineering business. We have not considered any revenue from the potential projects in real estate and infrastructure segment. Given the robust macro outlook, strong order book, market leadership, stringent entry barriers, impressive margins,net debt free balance sheet, strong project execution ability and much cheapervaluations; we initiate BUY recommendation on the stock.

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