By Geetanjali Kedia

Dilip Buildcon is entering the primary market on Monday 1st August 2016, to raise Rs. 430 crore via fresh issue of equity shares of Rs. 10 each and an offer for sale (OFS) of upto 1.02 crore equity shares, both in the price band of Rs. 214 to Rs. 219 per share. Despite the RHP dated as recent as 21st July, mentioning consideration of retail discount, no discount for retail investors has been announced on 25th July, along with the price band, which does not reflect well on the company (bumper subscription to recent IPOs probably make the company and its 4 BRLMs rather over confident). The issue size aggregates to Rs. 654 crore at the upper end of the price band, of which, OFS portion is Rs. 224 crore. Both promoters and PE investor Banyan Tree are participating in the OFS. Representing 21.83% of the post issue paid up equity share capital at the upper end, issue closes on Wednesday 3rd August, 2016.

Dilip Buildcon, a road EPC player with nearly 2/3^rd business coming from Madhya Pradesh, has a fleet size of 7,345 construction equipments. Having diversified into irrigation and urban development, company’s current order book (31-3-16) stands at Rs. 10,779 crore, of which, 85% is roads, comprising of 50 third party road EPC projects and 6 own BOT projects, among others.

While FY16 consolidated total income rose 57% YoY to Rs. 4,349 crore, leading to EBITDA growth of 48% to Rs. 1,029 crore, higher construction cost softened EBITDA margin to 23.7% in FY16 from 25.1% YoY. This growth in topline and operating profits has been funded by high-cost debt, which nearly doubled from Rs. 2,045 crore as of 31-3-14, to Rs. 3,825 crore, as of 31-3-16. This lead to finance cost more than doubling in 2 years, from Rs. 200 crore in FY14 to Rs. 514 crore in FY16. Clearly, declining interest rates during the latter half of this period has not benefitted the company, in fact reverse has happened with interest costs ballooning.

High interest burden resulted in de-growth in company’s PBT, from Rs. 242 crore in FY14 to Rs. 231 crore in FY16, despite total income jumping 84% during this period to Rs. 4,349 crore in FY16, from Rs. 2,402 crore in FY14, again a poor sign. Given the mounting debt burden and nature of business, company’s PAT has remained very volatile – Rs. 241 crore in FY13 declined to Rs. 186 crore in FY14, which further slipped to Rs. 88 crore in FY15, which finally increased to Rs. 197 crore in FY16. Its net margins have thus slipped to less than 5% currently (4.6% in FY16, 3.2% in FY15), from 12.6% in FY13 and 7.8% in FY14. FY16 diluted EPS stands at Rs. 16.79.

As of 31-3-16, its consolidated total debt is enormous at Rs. 3,825 crore (including current maturities of LT debt). Excluding cash and equivalents of Rs. 116 crore, consolidated net debt is Rs. 3,709 crore, which, on net worth of Rs. 1,001 crore, leads to DER of 3.7:1, which is excessively steep. DER, which was close to 2.5-2.75 until FY14, has shot up drastically in the past 2 years, which is not a healthy sign. On a peer comparison too, company’s debt is humungous (refer peer comparison table below). Post IPO, DER ratio of 2.4:1 is also considered to be high, as debt repayment of Rs. 202 crore and working capital funding of Rs. 200 crore is planned from issue proceeds.

In addition to debt, company’s working capital position is also very precarious. Inventory of Rs. 1,580 crore, as of 31-3-16, represents 4.4 months of sales, which is exceptionally high. Even debtors of Rs. 1,262 crore, representing 3.5 months of sales, is on the higher side. Moreover, of this, Rs. 367 crore worth of debtors or ~29% of total outstanding, are due for over 6 months, which has not also been provided for. Slow collections from debtors is always a nightmare for any business, more so for the construction industry, in which the company operates. Thus, company’s working capital position is also not comforting.

Promoters are currently holding 90.25% stake, which will reduce to 75.63% post IPO. 9.75% stake is held by PE firm Banyam Tree (since Feb 2012), whose holding will shrink to 2.53%, post OFS. At the upper end of the price band, company is seeking market cap of Rs. 2,995 crore and EV of Rs. 6,700 crore, which translates into EV/EBITDA and PE multiple of 6.5x and 15.2x for FY16 respectively. In relation to peers, this is quite high, given the huge debt and high working capital days.

Major road EPC companies stack up in the following financial metrics, with respect to their FY16 consolidated financial performance: (numbers highlighted in red indicate negative feature while green stands for positive)

*post IPO.

Despite favourable industry dynamics and fat order book position, negatives of the company like low net margin and huge debt are not compensated for, with a lower valuation vis-à-vis peers. Also, being a primary market offering, atleast 15-20% has to be left on the table for prospective investors. For rich valuations like this, IPO of Dilip Buildcon, one can rather go for fundamentally stronger companies, with lower leverage and higher net margin like J Kumar Infra, from the above table or MBL Infra for high revenue visibility and low PE multiple.

Low single digit net margins, leveraged balance sheet and excess funds being locked in working capital in the intensely competitive road construction industry, along with rich valuations make the issue unattractively. On fundamentals, one can, thus, give it a miss.

Disclosure: No Interest.