R.P.P. Infra Projects Limited (RPP) is tapping the capital markets with an IPO which has opened on Thursday the 18^th of November and closes on Monday the 22^nd of November. At the end of two days of subscription the issue is subscribed 0.76 times with zero subscription in the QIB category, 2.92 times in the HNI category and 1.07 times in the retail category.

Rpp is a construction company primarily engaged in the business of infrastructure development such as highways, roads and bridges. The company has diversified its civil works expertise into SEZ development, Water management projects, and Irrigation and power projects. It does business in the Southern India region covering states of Karnataka, Andhra Pradesh, Tamil Nadu and the union territory of Pondicherry, Andaman Nicobar Islands. The company has recently entered the Srilanka Market and is currently executing a project in the railway sector.

Currently the company has 30 projects on hand worth Rs 612.90 crs of which Rs 128.59 crs has been executed and as of 30^th June the balance works on hand is Rs 494.31 crs. The average ticket size of the companies orders are in the region of around Rs20.5 crs and has recently won a township project from NTPC of just about Rs 150 crs.

The largest completed project till date is the SEZ project at Tirunelveli known as Gangaikondan IT SEZ which was worth 32.90 crs.

Objects of the Issue

Financials
The revenue for the company for the year ended March 2009 was Rs 101.22 crs while it was Rs 146.89 crs for the year ended March 2010. In the first quarter ended June 2010 the revenue was Rs 36.86 crs. The net profit for the respective period was Rs 333.19 lakhs for March 2009, Rs 826.36 lakhs for March 2010 and Rs 218.10 lakhs for the quarter ended June 2010.

The EPS for the company based on the pre-IPO equity of 165 lakh shares or Rs 16.5 crs is Rs 2.02 for the year ended March 2009 and Rs 5 for the year ended March 2010. If one were to look at the current year first quarter ended June 2010, the EPs for the same is Rs 1.32 which if one were to annualise would be Rs 5.28

Comparison
The company has chosen to give its peers or comparables as ARSS Infra, CCCL, IVRCL Infra, J Kumar Infra, Pratibha Industries and Simplex Infra. If one were to look at their turnover the lowest in the group is J Kumar which had a turnover of Rs 770 crs for the year ended March 2010 and the highest is IVRCL Infra with a turnover of almost Rs 5500 crs. In comparison RPP is at a mere Rs 147 crs. The valuations or price earnings are even more expensive and as per information given in the RHP the company is more expensive than all except IVRCL Infra.

Clearly one fails to understand that when the company which is IPO bound, is comparing itself with a group where it clearly does not belong and even then justifies the valuation which look extremely expensive.

Risks

The Managing director of the company Mr P. Arul Sundaram has attracted disqualification under section 274(1)(g) of the companies act 1956 from being appointed/reappointed as Director on the Board of any other public Limited company for a period of five years ending 30^th November 2012. This disqualification is on account of SPAC Tapioca Products (India) Limited where the promoters hold 7.6% and 2.93% of the shareholding. This company has been categorised as a group company.

SEBI has introduced grading for companies going public with IPO’s. The grading system is well known and everyone is aware that the grade 1 to 5 means certain things. RPP has been awarded IPO grade 2 by Fitch which means below average fundamentals but the company to misguide investors has intentionally mentioned the same as Average Fundamentals. This error, intentional or otherwise appears on the front page of the RHP and also appears on page 38 of the RHP under IPO Grading.

The IPO grade press release has been carried on page 278 of the RHP which clearly mentions the word ‘BELOW AVERAGE FUNDAMENTALS’. The application form also carries the same grade as 2 with average fundamentals.

The Fitch report highlights that the grading is constrained by concerns relating to corporate governance and this is yet another example of the same.

Yet another risk involved with the company is its complete lack of knowledge and experience in dealing with BOT projects. Yet the company plans to raise Rs 10 crs for BOT projects.

Valuations
On a fully diluted post IPO equity capital of 2.26 cr shares the EPS based on March 2010 financials would be Rs 3.65 and for the quarter on an annualised basis would be Rs 3.86. Calculating the price earnings multiple for the same it would be between 18.59 to 20.51 times based on historical earnings and between 17.61 and 19.42 times based on first quarter annualised earnings. Looking at the size of the company and the virtually nil experience of the company/promoter in BOT and also that they have not even bid for such projects leaves a lot to be desired.

Conclusion
The issue is expensive and does not offer value to the investor. The lack of experience in BOT is a concern. The governance issue and in that light the gross misrepresentation that the issue has average fundamentals when it actually has below average fundamentals, makes one wary of the management and the company.  Avoid the issue.

SEBI Disclaimer: – I do not intend to subscribe to the above issue.