(One-time assessment) Ramky Infrastructure IPO Grading Rationale

Ramky Infrastructure Limited

CRISIL IPO Grade 3/5 (Average)
August 16, 2010

Grading summary Contacts:

CRISIL has assigned a CRISIL IPO grade of ‘3/5’ (pronounced "three on five") to
Media
the proposed IPO of Ramky Infrastructure Ltd (Ramky Infra). This grade
Mitu Samar
indicates that the fundamentals of the IPO are average relative to other listed
Head, Market Development &
equity securities in India. However, this grade is not an opinion on whether the
Communications
issue price is appropriate in relation to the issue fundamentals. The offer price
for the issue may be higher or lower than the level justified by its fundamentals.
CRISIL Limited
The grade is not a recommendation to buy, sell or hold the graded instrument, its
Phone: +91-22-3342 1838
future market price or suitability for a particular investor. To arrive at the overall
Mobile: +91-9820061934
grade, amongst various other parameters, CRISIL has considered the
Fax: +91-22-3342 3001
company’s business prospects, its financial performance, management
Email: msamar@crisil.com
capabilities and corporate governance practices.

Analytical
The assigned grade reflects huge infrastructure spending in the country, which is
Tarun Bhatia
expected to continue in the medium term and accordingly, provide huge growth
Director – Capital Markets
opportunities for construction players. The grading further reflects Ramky Infra’s
Phone: +91-22-3342 3226
strong business position in the waste-water segment of the construction
Email: tbhatia@crisil.com 1
business and its good order-book position, which stood at about 4.1 times its
2008-09 revenues. The company’s strong order book of Rs 58 billion (as on Sept
Sudhir Nair
2009) is diversified across segments and geographical regions.
Head, Equities
The grading is moderated by the fact that Ramky Infra is an average player and Phone: +91-22-3342 3526
faces intense competition in the construction business other than the water & Email: snair@crisil.com
waste-water segment. In the build-operate-transfer (BOT) road business, the
company is relatively a new entrant, having completed only one project; CRISIL Limited
therefore, its execution capability remains a key monitorable. Phone: +91-22-3342 3000
Fax: +91-22 -3342 3501
Considering the fast pace of growth in future and geographical diversification of
company’s order book, management needs to further enhance and stream line
Client - servicing
its processes and information systems to support the growth. Mr. Ayodhya Rami
Client servicing
Reddy, the key promoter of Ramky Infra has a major stake in other group
Phone: +91-22-3342 3561
companies, which are in similar lines of business. Although there is a
Email: clientservicing@crisil.com
demarcation of business lines of Ramky Infa and other group companies, few
overlaps in the business operations from past still exist.

For the six months ended September 30, 2009, the company posted revenues of
Rs 7,118 mn, PAT of Rs 278 mn and RoE of 10.8 per cent.

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 (One-time assessment) Ramky Infrastructure IPO Grading Rationale

About the company

Ramky Infrastructure Ltd (Ramky Infra) was incorporated in April 1994 by Mr Alla Ayodhya Rami Reddy and Mr.
Yancharla Ratnakar Nagaraja. Primarily a construction contractor, the company is into construction of water and
waste-water projects, buildings, irrigation and road projects. Ramky Infra’s revenues have registered a CAGR of
30 per cent over the last 3 years (2006-07 to 2008-09), with operating margins at 9.9-10.7 per cent.

In 2006-07, the company ventured into development activity, where it executes projects on public-private
partnership and BOT basis. In the development business, Ramky Infra is involved in development of residential
and commercial real estate, BOT roads, and industrial parks and, to a small extent, operation and maintenance of
bus terminal.

Issue details
Shares offered to public Not available at the time of grading
As per cent of post-issue equity Not available at the time of grading
Object of the issue Investment in capital equipments, working capital requirements, repayment of
loan and general corporate purposes
Amount proposed to be raised Rs 5,300 mn#
Price band Not available at the time of grading
Lead manager Enam Securities Pvt Ltd, Deutsche Bank
# Includes offer for sale amounting to Rs 1,800 mn

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(One-time assessment) Ramky Infrastructure IPO Grading Rationale

Detailed Grading Rationale

A. Business prospects

• Huge infrastructure spending to drive Ramky Infra’s business growth

The robust investment scenario is expected to continue over the medium term. Given Ramky Infra’s focus on
water and waste water, roads, building construction and irrigation, it will benefit from the spending on
infrastructure and industrial sectors. The large investments being made in urban infrastructure as part of the
Jawaharlal Nehru Urban Renewal Mission (JNURM) programme gives the company the opportunity to
enhance its revenues further in this segment.

• Niche player in water & waste-water segment

The company enjoys a strong market position in the construction of water & waste-water plants. Over the
years, Ramky Infra has developed strong engineering and design capabilities in setting up water & waste
water, effluent and sewage treatment facilities.

• Good execution track record

Ramky Infra has a good track record, which is evident from the fact that out of the many projects executed by
it till date, none of the company’s clients have invoked any guarantees or letters of credit. Between 2002 and
2009, the company completed 261 projects across various segments (water & waste water -104, building
construction -82, irrigation- 15, transportation -28, and industrial- 32).

• Strong order book to result in healthy turnover growth

The order book of the company as on September 30, 2009, was over Rs 58 billion, which is spread among
various segments such as water and waste water, irrigation, building construction, roads, industrial and power 3
(T&D) segments. These projects are expected to be executed over the next 3-4 years, and will result in a
healthy growth in turnover. Also, the company has managed to reduce its concentration in south and diversify
geographically, indicating its management’s capability to bag projects across India.

• Average player , faces intense competition in construction business other than water &
waste-water segment
Due to huge opportunities in the construction business, competition is very intense. Also, in segments such as
roads, irrigation, and building construction, the company has no differentiated offerings like it has in the water
& waste-water segment. The company faces competition from localised players as well as large pan-India
players like Larsen & Toubro (L&T), Nagarjuna Construction Company (NCC), IVRCL, Gayatri Projects,
Madhucon Projects, Hindustan Construction Company Ltd (HCC) and Gammon India, among others.

• New entrant in the BOT road business and PPP projects

Ramky infra has increased its focus on the roads BOT business and real estate PPP projects over the last 3-4
years. The company is relatively a new entrant as compared to its peers. Therefore, in order to bag big-ticket
BOT road projects (to qualify net worth and technical criteria), the company has indicated that it would partner
with other construction companies. Ramky Infra has recently completed a BOT road project, and another road
project is nearing completion. Apart from these two projects, it has also bagged four BOT road projects, out of
which two are in the north-east. The company’s ability to execute in challenging areas of the north-east
remains a key montoriable. In the last 3 years, Ramky Infra has executed 5 PPP projects, which include 3
real estate projects, one bus terminal and one road project.

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 (One-time assessment) Ramky Infrastructure IPO Grading Rationale

Ramky Infra is also a late entrant in the BOT business compared to its peers such as L&T, HCC, Ashoka
Buildcon, Madhucon Projects, NCC, Gammon India, IVRCL, KNR Constructions etc., which have been in the
BOT business and PPP projects for more than 8-10 years.

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(One-time assessment) Ramky Infrastructure IPO Grading Rationale

B. Financial performance

In the last three years (2006-07 to 2008-09), Ramky Infra’s revenues posted a CAGR of 33 per cent. Its net profit
rose from Rs 376 mn in 2006-07 to Rs 523 mn in 2008-09. In FY09, Ramky Infra reported an operating margin of
10.2 per cent on a revenue Rs 12,413 mn; the construction business accounted for almost 93 per cent of the
revenues and the development business for the rest.

For the six months ended September 30, 2009, the company posted revenues of Rs 7,118 mn and net profit of Rs
278 mn. Operating margins are expected to be stable on account of increased contribution from the low-margin
roads segment, which would get offset by contribution from the high-margin development business.

While business growth in the construction segment will be robust, RoE will be constrained, due higher equity base
and increase in capital requirements in BOT projects.

Financial performance snapshot (consolidated)

6 months ended 30th
Particulars FY07 FY08 FY09 September 2009
Actual Actual Actual Actual
Operating Income Rs mn 7,036 10,140 12,413 7,118
Operating margin % 10.7 9.9 10.2 9.9
Net profit Rs mn 376 502.5 523 278
RONW % 35.2 18.5 12.6 10.8
Basic EPS Rs 53.8 10.2 10.6 5.6
Net worth Rs mn 2,135 3,317 4,938 5,312
5
No. of eq. shares mn 7 49.4 49.4 49.4
Book value Rs mn 305.0 67.1 100.0 108
Dividend per share Rs 0 0 0 0
Debt/Equity Times 0.8 1.0 1.4 1.7
*Note: Numbers have been reclassified as per CRISIL standards
Source: DRHP

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 (One-time assessment) Ramky Infrastructure IPO Grading Rationale

C. Management capabilities and corporate governance

Ramky Infra’s management team is headed by Mr Alla Ayodhya Rami Reddy, the chairman. He has over 23
years of experience in the field of environmental services, bio-medical and hazardous waste management. He
has worked for Gannon Dunkerly & Co and Reliance Industries Ltd in the past. With growth in revenues and
diversification into different verticals, Mr Rami Reddy provides strategy and direction to the company. The
Ramky group has nearly 20 group companies (some of which are in similar businesses), where the promoter
holds major stakes (refer to the diagram on Ramky group below).

Mr Yancharla Ratnakar Nagaraja has been the managing director (MD) since 1996 and a director since the
company’s incorporation in 1994. He is responsible for the construction business with active involvement in
the tendering process. Management personnel involved in execution also have adequate qualification and
experience.

The management has taken steps to diversify its order book across different segments in various regions.
Also, the management was able to reduce its exposure in the state of Andhra Pradesh in a timely manner,
given the recent adverse political developments in the state.

• Improvement in Information systems

The company has improved its process systems and upgraded its information system to monitor progress of
projects under execution, order inflow and project status. However, considering the fast pace of growth in
future and geographical diversification of its order book, management needs to further enhance and
streamline its processes and information systems to support the growth.
6
• Demarcation of business lines though overlap exists
There is a demarcation of business lines between Ramky Infra and its group companies. The waste-
management business is divided between Ramky Infra and Ramky Enviro Engineers Ltd, while the real estate
development business is divided between Ramky Infra and Ramky Estate and Farms Pvt Ltd. In both these
group companies, Mr. Ayodhya Rami Reddy, the key promoter of Ramky Infra has a major stake.

In the real estate development business, Ramky Infra undertakes all public-private participation (PPP)
projects, while group company Ramky Estate and Farms Pvt Ltd looks after the private sector business.
However, in some PPP real estate projects Ramky Estate & Farms Pvt is the joint development partner along
with Ramky Infra. Consequently, there exists a conflict of interest.

Ramky Infra’s board comprises 9 directors, including two executive directors and five independent directors.
Mr Alla Ayodya Rami Reddy, one of the promoters, serves as executive chairman on the board. The board
also has two nominee directors - one from SAPE and another from IL&FS. All the independent directors have
continued since joining in 2007. Based on our interactions, we believe the involvement of all independent
directors at the board level is at reasonable levels.

Other factors
The IT authorities have disallowed credit under section 80IA of the IT Act relating to infrastructure
development projects against which the company has gone for an appeal. No provision for the same has
been made in the books of account.

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(One-time assessment) Ramky Infrastructure IPO Grading Rationale

Annexure I
D. Business profile
Ramky Infra, promoted by Mr Alla Ayodhya Rami Reddy, was incorporated in April 1994 and began
operations as a small contractor in the water and waste-water segment. The company has grown rapidly in
the last 3 years on the back of large investments in India. Ramky Infra’s revenues have registered a CAGR of
30 per cent over the last 3 years (2006-07 to 2008-09). In 2008-09, construction revenues accounted for
almost 93 per cent of the revenues, with 7 per cent being reported from the development business. The
company derives a large share of its construction revenues from government agencies.

In 2006-07, Ramky Infra ventured into development business, where it undertakes projects on public-private
partnership (PPP) and BOT basis. In this segment, the company will be involved in developing industrial
parks, real estate and roads.

Management and board profile

Ramky Infra’s management is headed by Mr Alla Ayodhya Rami Reddy, the chairman. He has over 23 years
of experience in the field of environmental services, bio-medical and hazardous waste management. He is
supported by Mr Yancharla Ratnakar Nagaraja, who has been the MD since 1996 and a director since the
company’s incorporation in 1994.

Ramky Infra’s board comprises 9 directors, including two executive directors and five independent directors.
Mr Alla Ayodya Rami Reddy, one of the promoters, serves as executive chairman on the board. The board
also has two nominee directors - one from SAPE and another from IL&FS. Four of these independent
directors have been appointed in October 2007. All the independent directors have continued since joining in 7
2007. Based on our interactions, we believe the involvement of all independent directors at the board level is
at reasonable levels.

Shareholding pattern
Pre-IPO

Promoter 
group Investors
84% 15%

Others
1%

Source: DRHP
# Number of shares to be offered through IPO is not available

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 (One-time assessment) Ramky Infrastructure IPO Grading Rationale

Annexure II: Profile of the directors

Name of directors Designation Age Qualification Date of joining Key position held/experience
Mr Alla Ayodhya Executive chairman 46 Masters degree in civil April 13, 1994 M/s R K Constructions
Rami Reddy engineering - Osmania Desgn: Partner (July 1988-Sept 1992)
University Gannon Dunkerly & Co., Reliance
Industries Ltd.
Desgn: Engineer (1984-1988)
Mr Yancharla Managing director 47 Bachelor's degree in civil April 13, 1994 Navega Engineers Pvt Ltd
Ratnakar Nagaraja engineering - Karnataka Desgn: Design and Structural Engineer
University (Aug 1988-Sept 1992),
M/S Madanlal Steel Ltd,
Desgn:Site Engineer
(Sept 1985-Aug 1988)
Mr Rajiv Maliwal Non-executive 49 Bachelor's degree in Director w.e.f Sabre capital
director (nominee mechanical engg (honours) December, Desgn: Managing Director (Since
of SAPE) - Birla Institute of 2006. 2002)
Technology and Science, Standard Chartered Bank
Pilani. Masters degree in Desgn: Global Head Private Equity &
business administration E-Commerce (Prior to 2002)
from IIM, Bangalore
Dr Archana Niranjan Non-Executive 44 Masters in business Director w.e.f IL&FS Investment Managers Ltd
Hingorani director (nominee administration and Ph.D in December, Desgn: Executive Director ( since
of Tara India) finance from University of 2006. 1994; in various capacities)
Pittsburgh
Mr Kamlesh Shivaji Independent 49 Chartered accountant Director w.e.f KHIMJI KUNVERJI & CO., Chartered
Vikamsey director March, 2007. Accountants
8 Desgn: Partner (since 1982)
Also served on various expert
commitees set up by Finance Ministry,
Reserve Bank and SEBI. Also served
on steering committee of United
Nations. President - ICAI and part-time
member of IRDA
Dr V Murahari Independent 66 Bachelor's degree in civil Director w.e.f Practicing consultant in highways and
Reddy director engg - S V University, October, 2007. buildings
Tirupati. (Since July 2002- till date)
Andhra Pradesh Road Development
Corporation.
Desgn:Managing Director (2001-2002)
Dr P G Sastry Independent 72 Masters in civil engg - IIT Director w.e.f Environmental Appraisal Committee,
director Karagpur. Doctorate in October, 2007. Min. of Environment and Forest, GoI.
engg from Technical Chairman (Jan 2005-Mar 2007),
University, Dresden, Member & later Vice-Chairman
Germany. (Jan 1996-Jan 2005)
Mr P V Narasimham Independent 68 Masters degree in Director w.e.f Chairman and Managing Director, IFCI
director economics - Andhra October, 2007. (July 1998-Sept 2001).
University Associated with RBI and IDBI in
various capacities.
Mr V Harish Kumar Independent 43 Bachelor's degree in Director w.e.f Harish Kumar & Associates
director commerce - Bombay October, 2007. Corporate and Legal Consultants -
University. Practising corporate lawyer. (since
1998)
Source: DRHP

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(One-time assessment) Ramky Infrastructure IPO Grading Rationale

Ramky Group

Ramky Infrastructure Ltd Ramky Enviro Engineers Ltd Ramky Estate and Farms Smilax laboratories Ltd
Inc . year – Apr 1994 Inc. year – Nov 1994 Pvt Ltd Inc . year – Oct 2004
Promoter holding – 84 .1% Promoter holding – 94.9% Inc. year – Aug 1995 Promoter holding – 83.7 %
Investors ( Sabre and IL &FS) – 14 .8% Rev –1,723
, PAT -129 , TNW -736 Promoter holding – 79.7% Rev –627 , PAT -20 , TNW -157
Rev -12,454, PAT - 523, TNW-4,938 Rev –305 , PAT -25 , TNW -84

Contracting Segments Real estate Formulation and bulk

- Water & waste water - Solid waste mgmt Development drugs
- Building construction - Industrial waste mgmt - Land banking and real - Anti-ulcers
- Irrigation - Hazardous waste mgmt estate development for - Anti-psychotic
- Roads (cash contracts ) - Bio-waste mgmt non-government entities
- Others - Municipal waste mgmt
- Renewable energy mgmt
Developer
-Industrial parks (PPP )
-Roads (BOT )
-Others

Mumbai Waste Management Ramky Energy & Environment Tamil Nadu Waste
Ltd Ltd Management Ltd
Inc. year – Sept 2001 Inc . year – Feb 2006 Inc . year – Oct 2002
Promoter holding – 74 % Promoter holding – 100 % Promoter holding – 100.%
Rev –495 , PAT -190 , TNW - 760 Rev – 107, PAT - (20) TNW
- (26) Rev –82, PAT -20,TNW -48

Segments Segment Segments

- Industrial waste mgmt - Industrial waste management - Hazardous waste mgmt
- Hazardous waste mgmt - Power generation - Industrials waste mgmt
9

Rev -Revenue ; PAT -Net profit , TNW -Tangible net worth , Note : All financial numbers pertain to 2008 -09

Disclaimer
A CRISIL IPO grading is a one-time assessment and reflects CRISIL’s current opinion on the fundamentals of the graded equity issue in
relation to other listed equity securities in India. A CRISIL IPO grading is neither an audit of the issuer by CRISIL nor is it a credit rating.
Every CRISIL IPO grading is based on the information provided by the issuer or obtained by CRISIL from sources it considers reliable.
CRISIL does not guarantee the completeness or accuracy of the information on which the grading is based. A CRISIL IPO grading is not
a recommendation to buy / sell or hold the graded instrument; it does not comment on the issue price, future market price or
suitability for a particular investor.

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transmitters / distributors of CRISIL IPO gradings. For information on any IPO grading assigned by CRISIL, please contact ‘Client
Servicing’ at +91-22-33423561, or via email: clientservicing@crisil.com.

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