VKS Projects Limited (VKS) is tapping the capital markets with its IPO for Rs 55 crs. The price band is Rss 55-60 and the company would be issuing 100 lac shares at the lower end and 91.66 lacs at the upper end of the price band. The issue opened on Friday the 29th of June and closes today Wednesday the 4th of July.
The issue at the end of the penultimate day was subscribed 0.66 times, with the QIB portion oversubscribed at 1.15 times. The HNI portion was subscribed 0.33 times and retail portion a mere 0.10 times. It is surprising that the QIB portion was subscribed on the opening day and the company has been struggling in receiving subscription thereafter. The daily levels were 0.50 on day one, 0.50 on day two and 0.66 on day three.
| Price Band | Rs 55 – Rs 60 |
| Issue Size in Rupees | Rs 5500 lacs |
| Issue Size in Shares | 1,00,00,000 Equity Shares at Rs 55 to 91,66,667 Equity Shares at Rs 100 |
| QIB’s | 50,00,000 Equity Shares at Rs 55 to 45,83,333 Equity Shares at Rs 60 |
| Non Institutional Investors | 15,00,000 Equity Shares at Rs 55 to 13,75,000 Equity Shares at Rs 60 |
| Retail Investors | 35,00,000 Equity Shares at Rs 55 to 32,08,333 Equity Shares at Rs 60 |
| Book Running Lead Manager | Aryaman Financial Services Limited |
| Syndicate Member | KGR Securities Pvt Ltd |
| Isssue Opening Date | Friday 29th June |
| Isssue closing date | Wednesday 4th July |
| IPO Grade | CISIL grade 1/5 indicating poor fundamentals |
| Paid -up Capital Pre IPO | 80,00,000 Equity Shares |
| Paid -up Capital Post IPO | 1,80,00,000 Equity Shares at Rs 55 to 1,71,66,667 Equity Shares at Rs 60 |
| Market Cap post listing | Rs 9900 lacs at lower band to Rs 10300 lacs at higher band |
| Bid Lot | 100 shares |
| Bidding Amount | 3300 shares at Rs 60 or Rs 1,98,000 |
Objects of the issue
The objects of the issue are as follows:-
| To meet long term working capital requirements | Rs 1500.00 lacs |
| To finance procurement of construction Equipment and key machineries | Rs 2264.18 lacs |
| Setting up of studio/office and training centres in 5 cities | Rs 1000.00 lacs |
| General Corporate purposes | |
| To meet issue expenses |
Business
VKS is a certified Engineering, Procurement and Construction Company (EPC). The company is engaged in various verticals like Turnkey piping, Civil Land development, Industrial/Commercial Infra Projects, Structural fabrication and erection of equipment’s, fire fighting projects and commissioning of chemical refinery. The company despite its small size in terms of revenue has developed experience and capability of executing projects in various streams and industries. The company has experience of more than 10 years in the field and has grown at a CAGR of over 106% over the last five years. The EBITDA in the same period has grown over 125%. The restated profit after tax has grown over 150%.
Financials
The company’s sales have grown from Rs 3023 lacs in year ended March 2010, to Rs 6025 lacs in March 2011. The same has further risen to Rs 9755 lacs in the nine month period ended December has increased from Rs 200.44 lacs to Rs 315.97 lacs and Rs 562.58 lacs in the nine month period ended December 2011.
| Nine months | |||
| Dec-11 | Mar-11 | Mar-10 | |
| Income | Rupees in lakhs | ||
| Sales | 745.70 | 898.13 | 2136.04 |
| Contract Revenue | 9004.63 | 5070.29 | 887.30 |
| Other Income | 4.81 | 57.01 | 0.41 |
| Total Income | 9755.14 | 6025.43 | 3023.75 |
| Expenditure | |||
| Cost of Goods Purchased | 655.90 | 858.23 | 1524.00 |
| Labour and Staff Cost | 7792.13 | 4044.78 | 869.07 |
| Other Direct Expenditure | 62.16 | 160.87 | 219.97 |
| Adminstrative Expenditure | 61.82 | 224.21 | 28.10 |
| Interest & Finance Charges | 214.30 | 160.73 | 50.42 |
| Depriciation | 100.81 | 104.40 | 6.53 |
| IPO related Expenses | 21.47 | 0.00 | 0.00 |
| Total Expenditure | 8908.59 | 5553.22 | 2698.09 |
| Profit Before Tax | 846.55 | 472.21 | 325.66 |
| Provision for Taxation | 283.93 | 156.23 | 125.22 |
| Current Tax | 290.00 | 110.00 | 125.00 |
| Previous years’ Tax | 0.00 | 7.92 | 0.00 |
| Fronge Benefit Tax | 0.00 | 0.00 | 0.00 |
| Deferred Tax | -6.04 | 38.31 | 0.22 |
| Net Profit after Tax | 562.62 | 315.98 | 200.44 |
| EPS | 7.03 | 3.95 | 2.51 |
| PE at lower | 7.82 | ||
| PE at upper | 8.53 | ||
| EPS and PE for nine months of period ending December 2011 is not annualised. | |||
| Annualised basis the figures would be | 9.38 | ||
| Fully diluted and annualised EPS | 4.17 | 4.37 | |
| PE AT LOWER | 13.20 | ||
| PE AT UPPER | 13.73 | ||
The pre-Ipo equity of the company is 80 lac shares.Post the IPO depending on the price fixed the capital would increase by 1 cr shares to 91.66 lac shares. The present EPS based on nine months annualised earnings on pre-IPO capital would be Rs 9.38
Track Record of Merchant Bankers
The merchant banker for the above issue is Aryaman Financial Services Limioted. This merchant banker has handled two other issues prior to this issue. The first issue was Midvalley Entertainment Limited and the second was an issue on the SME segment BCB Finance Limited. A third issue was brought out last year in September 2011 of Swojas Air Charters Limited which was withdrawn because the issue received inadequate response.
The first issue Midvalley Entertainment was issued at a price of Rs 70 per share in January 2011. The issue made a high of Rs 153.40 in July 2011 and then began its descent. The share has fallen to its current price in single digits of Rs 6.73 as of Tuesday the 3rd of July. The company was unique in itself having not paid income tax for the last nine years before it went public. Looking at the price performance of the share, its track record and the performance of the company post the listing it appears that the whole process was to just raise money and do the disappearing act. Revenues of a film exhibition company are virtually not there.
The second company was BCB Finance which is a SMEM listing. The shares were issued at Rs 25 and the share is trading at similar levels. One must remember that there is compulsory market making on the SME platform for three years, and hence the chances of the price dropping sharply are remote.
Looking at the dismal track record of the merchant banker one does get wary of the issue without doubt.
Comparisons
The company has compared itself with eight different companies including people like Larsen & Toubro, AshokaBuildcon, Petron Engineering, Technofab Engineering etc. The list is not quite comparable as L&T has sales revenues which exceed Rs 64,000 crs while revenue of VKS in just under Rs 100 crs. Small companies in size based on turnover are Petron Engineering and Technofab which have turnovers below Rs 400 crs and are comparable with VKS.
Valuations
The valuations of VKS leave a lot to be desired. Based on fully discounted post IPO equity capital and annualised earnings based on nine month performance of nine months ended December 2011, the EPS of the company is Rs 4.17 at the lower end and Rs 4.37 at the higher band. The PE based on this earning is 13.20 at the lower end and 13.73 at the upper end. The asking price or PE is over 3.5 times what companies like Petron or Technofab are quoting at. With so much of choice available in the whole market why should one invest at such expensive valuations is indeed surprising.
Concerns
The present small size of the company is a concern. Secondly the order book of the company is small and it does not have order visibility for the next 12 months as yet. The order book as per the RHP is under Rs 100 crs as of December 2011. The order completion schedule shows that there would be hardly any orders to be executed after September 2012. Thirdly the track record of the merchant banker handling the issue leaves a lot to be desired.
Conclusion
The issue is extremely overpriced leaving no scope for any appreciation in the short term. With multiple choices available in the market, it makes better sense to invest money in listed entities.
SEBI Disclaimer: – I do not intend to subscribe to the above issue
