Deepak Builders
IPO Size: Rs. 260 cr
- Fresh Issue worth Rs. 217 cr for (i) debt repayment Rs. 30 cr (of Rs. 152 cr net debt) and (ii) working capital Rs. 112 cr
- Offer for sale (OFS) worth Rs. 43 cr by the promoters (100% holding to drop to 72.5%)
Price band: Rs. 192-203 per share
M cap: Rs. 946 cr, implying 27.5% dilution
IPO Date: Mon 21st Oct to Wed 23rd Oct 2024, Listing Mon 28th Oct 2024
Grey Market Premium (GMP): We are strongly against ‘grey market premium’ as it is an unofficial figure, against SEBI guidelines.
Engineering and Construction Company
Deepak Builders & Engineers India is a Ludhiana, Punjab based construction company, undertaking government projects in North India (Punjab, Haryana, Delhi, Chandigarh, Rajasthan, Uttarakhand). Company has an outstanding order book of Rs. 1,380 cr, representing 2.7x book to bill ratio, with 66% order book comprising railways station work and 25% industrial building.
Margins Double immediately before IPO
Revenue rose 18% YoY in FY24 to Rs. 511 cr, but EBITDA margin nearly doubled to 23% in FY24, from 12% in FY23 (12% in FY22 and 11% in FY21). Larger peers Ircon, Ahluwalia, PSP and ITD reported EBITDA margins of 11-16% in FY24. This stupendous margin expansion just prior to the IPO is attributed to change in product mix towards railway work, but this is not convincing enough and makes one apprehensive. Since company’s scale of operations is small, sustainability of profit remains to be seen.
FY24 PAT rose to Rs. 60 cr, from Rs. 21 cr YoY, leading to a net margin of 12% and an EPS of Rs. 17. Q1FY25 revenue stood at Rs. 105 cr, with Rs. 14 cr PAT and 14% net margin. Due to a high fixed asset turn of 8-9x, RoE is as much as 52%, but will drop to around 21% post IPO.
Other Risks
- Undisclosed Income: Company has declared Rs. 15.7 cr undisclosed income in a search operation conducted by the income tax department. This is not a very dated matter and currently remains pending in the High Court of Punjab and Haryana. This is a serious matter with regards to corporate governance.
- Poor Working Capital Management: Working capital cycle is stretched at nearly 7 months, and has degraded from 3.5 months in FY23. Outstanding inventory is unusually high at over 6 months, against 1-2 months for peers.
- Low Credit Rating: Company’s borrowings of Rs. 153 cr are at very high cost, with average rate of interest (excluding bank charges) of 16-17%, during FY22 to FY24. Its fund-based credit rating is BBB-, the lowest investment grade, and till FY22, it had B+ rating with ‘issuer not co-operating’ tag, from not 1 but 2 rating agencies (Crisil and Care). Such a poor track record is alarming, to say the least.
- Only Government Projects: Company does not have a single private sector project work, and caters entirely to government entities.
Weak Fundamentals
Margin spurt just prior to IPO, poor working capital management, small size of operations and regional presence do not build confidence in this micro-cap stock.
PE multiple of 11.7x on FY25E EPS of about Rs. 17.30 is aggressive for the weak fundamentals. Investor need to be mindful to not become gullible to such companies, seen in ample in the bull markets.
19th Oct 2024 at 01:53 pm