BUY Era Constructions - Read analysis

Investor can consider fresh exposures in the stock of Era Constructions (Era). The stock trades at a price earnings multiple of 10 times its expected 2006-07 per-share earnings. Our view is based on the healthy order flow, better than expected earnings numbers for the first quarter and substantial expansion in operating profit margins.

The recent expansion in equity will also prepare it for entry into BOT (build, operate transfer) projects. The company has forayed into making of pre-engineered building materials that could help protect margins and improve its earnings growth. Its foray into newer business segments such as real estate and BOT projects could diversify growth avenues but would also carry an element of risk.

Construction stocks were the worst hit during the recent correction and they have been laggards compared to other sectors in the recent pull back despite good performance and healthy order flows. Era trades at a discount compared to most other construction stocks in its peer group and has potential for appreciation.

Era has been receiving a flurry of orders from the power and railway sectors apart from industrial civil structures in the last three-four months. Quite a few of them are large-sized orders. The total orders received in the first quarter are close to Rs 275 crore, almost equal to 2005-06 revenues. The order book to sales ratio at four times is comparable to other players in the sector. The robust order flow in the first quarter reinforces the growth prospects.

Operating profit margins have shot up sharply due to increase in volumes and execution of contracts where the clients supplied raw materials. Though this may not be sustainable, its backward integration into pre-engineered building could help it protect margins to some extent. The scope for such products also holds promise.

Era has raised capital to meet pre qualification requirements for entry into BOT projects. Though competition is stiff in this segment, with tie-ups with bigger players, even a marginal share of these projects could improve revenues. Margins, however, are lower in this segment.