>TANTIA CONSTRUCTIONS LIMITED (FINQUEST)

Investment Rationale

■ Strong order flows after a pause in FY09
TCL started FY10 on a strong note with order inflows of INR 2.8 billion in1HFY10. We expect order book to reach INR 18.5 billion (up 8.8% YoY) and INR 19.6 billion (up 5.8% YoY) in FY10E and FY11E respectively, due to strong L1 profile (INR 1.0 billion) and fresh bidding of INR 63.0 billion in FY10. This is in sharp contrast to FY09 where the company saw a mere 2.1% YoY growth in its year end order book.

■ Increase in ticket-size of project
Over the years TCL's average ticket size of projects on hand has increased from INR 200 million to about INR 600 million currently. We expect this to touch INR 1000 million in next 3 years. We believe this will impart more scalability to the topline as the company will be able to derive higher revenue with limited number of projects to handle. This along with huge order book (4.4x FY09 sales) will result in a sales CAGR of 32.9% during FY09-FY11E.

■ Margins to remain healthy
TCL has progressively invested in captive equipments & machinery, resulting in a fall in contract
operating expenses as a percentage to sales from 58.3% in FY07 to 47.6% in FY09. As the company continues to invest in machinery as a policy to reduce dependence on sub-contractors,
we expect the contract operating expenses to fall further in FY10E and FY11E. The company
also has a Price-Variation-Clause in all its projects, cushioning its margins. We expect the
company's EBITDA margins to remain at current levels (~13%) in FY10E and FY11E.

■ Investing in equipment and machinery
The company commissioned a milling factory engaged in environment friendly bitumen recycling near Kolkata for optimised cost of road building using a state-of-art Writgen machine. The company is currently executing a pilot road project using this technology. Any similar orders received by the company will lead to material decline in the contract operating expenses, thus enhancing its margins. We have not accounted for additional fall in contracting expenses due to this.

■ Entering new business - Industrial Fabrication
TCL has started making railway wagons since March 2009 to cash on the opportunities thrown open by the Indian Railways' thrust on improving goods transport infrastructure. The company has supplied about 100 wagons to public sector company Braithwaite & Co and currently has orders of 50 wagons a month. According to the management, it enjoys a healthy ~15% operating margins in this business. However, we do not expect any significant contribution from this vertical till FY11E.

■ Valuation
In view of the company's diversified portfolio, increased investments in infrastructure and its strong order book, we expect TCL to report an EPS of INR 15.7 and INR 22.6 for FY10E and FY11E respectively. It is currently trading at 4.9x its FY11E EPS. Given revenue growth visibility for next two years and healthy margins we believe the valuations are attractive. We initiate coverage with a BUY rating on the stock with a target price of INR 158 (FY11E PE multiple 7x).

To read the full report: TANTIA CONSTRUCTIONS