>OM METALS INFRAPROJECTS LIMITED (SUNIDHI)

Investment Rationale

■ Robust growth from Hydropower
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. As per 11th & 12th Five year plan Government of India has planned 45,585 MW (2224 MW commissioned till March’09) of new hydro power generation capacity by FY17.

■ Government push to Irrigation
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.

■ Market leadership & proven track record in Hydro mechanical segment
OMIL enjoys a little over 50% market share in hydromechanical segment with over 35 years of proven track record. With OMILs efficient service offering across the value chain in the business enabled it to successfully execute over 50 projects across 18 states, including some historic and landmark projects. With every new project completion OMIL continues to strengthen its leadership position and has proven its credibility as the most preferred vendor/partner.

■ Stringent prequalification pose as major entry barrier
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 the number and size of successfully completed similar projects. On the back of OMILs unmatched past track records of successful execution of mega projects the company successfully pre qualifies for all the tenders it bid. At the same time these criteria pose
as biggest entry barrier for the new entrants in the segment.

■ Huge order book and high margins provides future growth visibility
OMIL has a strong order book of over Rs.6.2bn, executable over a period of 3-4 years providing a strong visibility of the earning potentials. Furthermore the order book is set to increase substantially just by the fact that NHPC alone is awaiting clearance for 6731MW of projects which will pose an opportunity of over Rs. 15 bn - Rs .25 bn of hydromechanical 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 of projects and presence in the entire value chain OMIL enjoys superior margins to its
peers.

■ Diversification towards other businesses to exploit the opportunities
To explore the newer opportunities OMIL along with a partner has won the tender to develop 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.

■ Valuations
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 cheaper
valuations; we initiate BUY recommendation on the stock.

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