(Price: Rs.498 , FY09E- P/E 8.7x BUY, Target Price: Rs.609)

Unity Infrastructure Projects Ltd. (UIPL) is a small size engineering & construction company providing integrated engineering, procurement & construction services for civil construction & infrastructure projects. The company is carrying out its projects in 11 states across India and also in Nepal. The company has two 100% subsidiaries:

(a) Unity Reality Developers Ltd. — for real estate development

(b) Unity Infrastructure Assets — for undertaking BOT projects

Having consolidated its position in infrastructure space, especially in the areas of transportation engineering, Irrigation & water supply, industrial structures and airports the company is now focusing on real estate & BOT projects in a big way. Driven by strong growth in construction business coupled with good potential seen in real estate business we expect revenues and net profit for the company to grow by 54% & 37% respectively over the period FY06- FY09E.

Investment Positives:

Strong Order Book in the construction segment

Unity Infrastructure Projects Ltd.’s construction business comprises of 2 segments viz: Civil Construction (comprising of commercial & residential buildings, Airports, Railway Stations) and Infrastructure segment comprising of Transport & Irrigation & Water Supply.The current order book of UIPL is Rs 21.7 billion (as on Dec’06) with civil projects accounting for about 75.6%, irrigation & water supply accounting for 17.2% while transportation segment accounting for 7.3%. The company is also looking for entry into BOT & BOOT projects through its wholly owned subsidiary Unity Infrastructure Assets which would further increase company’s profitability.

Ability of the company to undertake projects on a Turnkey & design-build basis by providing a range of specialized construction & operational services enables the company to command higher margins at the EBITDA levels. With increased order book size & company’s venture into higher value added business the EBITDA margins are excpected to increase.

Good growth seen in infrastructure segment Infrastructure segment is expected to be on the exponential growth in the next few years. Government plans to infuse about US $ 320 bn for building & upgrading India’s infrastructure. Private participation is being seeked by the Government through BOT & BOOT projects across sectors. Investments are increasing in civil construction segments like Airports, malls etc. UIPL’s vast experience in infrastructure & civil construction projects would help the company to bid for & secure more complex & profitable infrastructure projects. The company also plans to expand its activities in other areas like hydropower & port projects. Hence, we see a good growth for the company with the growing economy of India in the coming years.

Focusing on BOT projects

With increasing opportunities in the BOT segment, UIPL has forayed into this segment by floating a 100% subsidiary Unity Infrastructure Assets. The Government has planned a number of projects across sectors, such as roads, water supply, power & real estate on BOT & annuity basis. UIPL plans to bid aggressively for the BOT projects going forward. BOT or annuity projects generally provide better operating margins because of the added overall control of projects costs that can be exerted by the contractor. Up till now the company has successfully procured Rs 940 million water supply project from Ulhasnagar Municipal Corporation in 50:50 JV with Pratibha Industries Ltd. We believe UIPL is well positioned in the construction & infrastructure space and would be able to bag major orders in the BOT & BOOT segment.

Strong focus on Real Estate Development to drive business growth

With the exponential growth in the economy opportunities in the real estate segment are growing rapidly. The promoters through their group company have had previous experience in the real estate sector having built prominent residential apartments in the city of Mumbai. Looking at the opportunity, UIPL has recently forayed into real estate development. The company has formed a 100% subsidiary, Unity Reality Developers Ltd. for its real estate development projects. For real estate projects, the company is focusing more on projects on contract basis where the margins are good rather than building on its land bank. UIPL hasrecently bagged Rs 430 million commercial complex projects from India Bulls where the land belongs to India Bulls and further the raw material viz. cement, steel would be provided to Unity by India Bulls. This would result in increased margins for UIPL. Unity Infra Projects has bagged real estate projects on BOT basis in Joint Venture with BSEL Infra in Nagpur & Pune where the land cost has to be paid during the lease period. Such business models for real estate projects on contract basis insulates UIPL from blocking its money in land bank.

Risks & Concerns:

· The projects of the company are heavily concentrated in & around Mumbai with Mumbai contributing about 21% of the current order book.

· Increasing interest rates are detrimental as debt comprises a significant portion of BOT projects.

· Entire construction industry is expected to experience pressure on margins with increasing raw material cost & wages.

Valuations:

With an EPS CAGR growth of 37% estimated over FY06-FY09E, on the back of a 54% CAGR growth in net sales and a ROE & ROCE levels of 34.3% & 35.8% on FY09. We feel, at the current price of Rs 498, the stock trades at an EV/EBITDA of 5.1x FY09E and the current valuations look attractive. UIPL is a compelling BUY and we initiate a coverage on the stock with a BUY reccommendation. We arrive at a target price of Rs 609 for the stock based on SOTP approach. At our target price the stock will be valued at 6x EV/EBITDA for FY09E.