PrakashConstrowell Limited is tapping the capital markets with its IPO which opens on Monday the 19th of September and closes on Wednesday the 21st of September. The company plans to raise Rs 60 crs in a price band of Rs 130-138.
| Price Band | Rs 130 – Rs 138 |
| Issue Size in Rupees | Rs 6000 lacs |
| Issue Size in Shares | 46,15,385 Equity Shares at Rs 130 to 43,47,826 Equity Shares at Rs 138 |
| QIB’s | 23,07,692 Equity Shares at Rs 130 to 21,73,913 Equity Shares at Rs 138 |
| Non Institutional Investors | 6,92,308 Equity Shares at Rs 130 to 6,52,174 Equity Shares at Rs 138 |
| Retail Investors | 16,15,385 Equity Shares at Rs 130 to 15,21,739 Equity Shares at Rs 138 |
| Book Running Lead Manager | Intensive Fiscal Services Pvt Ltd |
| Isssue Opening Date | Monday 19th September |
| Isssue closing date | Wednesday 21st September |
| IPO Grade | CARE grade 2/5 indicating below average fundamentals |
| Paid -up Capital Pre IPO | 82,20,000 Equity Shares |
| Paid -up Capital Post IPO | 1,28,35,385 Equity Shares at Rs 130 to 1,25,67,826 Equity Shares at Rs 138 |
| Market Cap post listing | Rs 16686 lacs at lower band to Rs 17344 lacs at higher band |
| Bid Lot | 50 shares |
| Bidding Amount for Retail | 1400 shares at Rs 138 or Rs 1,93,200 per application |
This is yet another IPO following the model of no road show. It’s a low key issue which would be subscribed with the help of “friendly” intermediaries. There would be virtually zero or minimal subscription from QIB’s, would be subscribed entirely by HNI’s and retail investors and overall oversubscribed. The justification for the price, the business fundamentals are non-existent and therefore unjustifiable. There is every possibility that like the previous issue from this merchant banker, even though there was no road show for the IPO there would be a listing ceremony when the issue is listed.
Business
The company is a construction company predominantly engaged in the business of infrastructure development and civil construction. The company is a fast growing company that provides integrated engineering, procurement and construction services. The company believes in providing high quality and innovative projects on a timely basis. It undertakes projects for various Government/semi-government bodies and other private sector clients. The company is headquartered in Nasik Maharashtra, and has operations across the state of Maharashtra.
The company is registered as a Class 1A contractor with the Public Works Department, Government of Maharashtra. This allows the company to bid for a range of contracts without restriction on any cost parameters. As of 30th June 2011, the company has an order book of Rs 15,080.67 lacs which means that it needs new orders in the third quarter for the coming year. Typically orders take between 15-21 months for completion and the order flow for next year is required if the company has to have adequate work in progress to keep things going for it.
Objects of Issue
The objects of the issue are as follows: –
| Rs in lacs | |
| Working Capital Requirement | 3500.00 |
| Investment in Construction Equipment | 930.00 |
| Investment in Subsidiaries | 234.52 |
| General Corporate Purposes | |
| Public Issue Expenses | |
| TOTAL | 6000.00 |
Financials
The total revenue of the company has increased from Rs 6562.22 lacs in the year ended March 2009 to Rs 11590.20 lacs in March 2010 and to Rs 12905.57 lacs in March 2011. The net profit on a consolidated basis after restatement has increased from Rs 323.38 lacs in March 2009 to Rs 745.84 lacs in March 2010 and to Rs 1064.59 lacs in March 2011.
| year 2009 | year 2010 | year 2011 | |
| Income | Rupees in Lakhs | ||
| Income from Operations | 6423.17 | 11340.58 | 12691.45 |
| Other Income | 139.05 | 249.63 | 214.13 |
| Total Income | 6562.22 | 11590.21 | 12905.58 |
| Expenditure | 6279.82 | 10711.50 | 11511.46 |
| Profit before Tax and Extraordinary item | 282.40 | 878.71 | 1394.12 |
| Add/(Less) Extraordinary items/Prior period | 0.00 | 0.00 | -26.51 |
| Add/(Less) Transfer from revaluation reserve | 179.71 | 179.71 | 134.78 |
| Profit before Tax and after Extraordinary item | 462.11 | 1058.42 | 1502.39 |
| Current Tax | 43.94 | 248.72 | 412.73 |
| Earlier Years | 8.35 | 25.32 | 36.42 |
| Deferred Tax Liability | 41.11 | -20.89 | -4.83 |
| Profit After Tax | 368.71 | 805.27 | 1058.07 |
| Less minority interest | 28.50 | 34.99 | 60.92 |
| Profit After Tax and minority interest | 340.21 | 770.28 | 997.15 |
| Adjustments net of tax impact | 16.83 | 24.44 | -67.45 |
| Net profit as restated | 323.38 | 745.84 | 1064.60 |
| NET MARGINS | 4.93 | 6.44 | 8.25 |
The company which is of a small size considering the nature of its business has been making too many adjustments to its financials. It has over the last four years added back a sum of Rs 180 lacs for the three years of 2008.2009 and 2010 as transfer of revaluation reserve. The business is small and its margins seem to high compared to its peers. The way the profits have increased in this manner, than the margins look much better than they actually are. The net margins have improved from 4.93% to 6.44% and to 8.25% in the year ended March 2011.
Comparisons
The company has chosen to compare itself with the following companies namely: – RPP Infra Projects Limited, Man Infraconstruction Limited and Vascon Engineers Limited. The comparison seems unfair in many ways. Vascon Engineers is not only into construction of infrastructure, it is also into buildings, hotels etc. Secondly it also owns hotels and its last reported turnover on a consolidated basis was Rs 1016 crs and its market cap as on Friday the 16th of September was Rs 399 crs, which is 0.39 times their sale. Man infraconstruction is primarily into the business of building construction and had a topline of Rs 625 crs for the year ended March 2011 and a market cap of Rs 670 crs or 1.07 times its turnover. RPP Infra reported a topline of Rs 208 crs for the year ended March 2011 and Rs 68 crs for the first quarter ended June 2011. The order book on hand is Rs 2150 crs to be completed in 30 months.
Valuations
The valuationsbased on fully diluted equity of 128.35 lakh shares and earnings based on March 2011 numbers,the EPS of the company is Rs 8.29 at the lower end of the price band and Rs 8.47 at the upper end. The price earnings multiple at this EPS is 15.67 at the lower end of the price band of Rs 130 and 16.29 at the upper end of the price band of Rs 138.Very clearly the comparison which the company has done with other companies seems unfair and the valuations being asked for by PrakashConstrowell are simply expensive and unjustified. It may be of interest to note that companies like AshokaBuildwell with a revenue of Rs 1302 crs for March 2011 is available at a price earnings multiple of 6.58. Similarly Ramky Infra with revenues of Rs 3146.96 crs is available at a PE of a mere 5.86 times. This company has a market cap of Rs 1300 crs which translates into 0.41 times turnover against a ridiculous 1.34 times being asked for by PrakashConstrowell.
Conclusion
Margins have risen very sharply and have been helped to some extent by change in accounting practices. Business size and type of business activity do not give one the required comfort. Valuations are expensive to the point of being obscenely expensive. There is no way one could ask anyone to invest in such an issue with such steep valuations. I suggest in extremely volatile market conditions where even the Government of India did not want to launch the FPO of ONGC; it makes sense to stay away from this small size and expensive issue.
I do not recommend subscribing to the issue because of its poor fundamentals and expensive valuations.
SEBI Declaimer: – I do not intend to subscribe to the above issue.
