Verdict: Prospective, with a catch!

Update: 3rd Oct 2018, 6:40 pm - Issue called off due to poor response, of only 17% subscription on final day 

IPO Snapshot:

Dinesh Engineers is entering the primary market on Friday 28^th September 2018, with a fresh issue of upto 1 crore equity shares of Rs.10 each in the price band of Rs. 183 to Rs. 185 per share. Representing 25.32% of the post issue paid-up share capital, total issue size is Rs. 185 crore at the upper end of the price band. Issue closes on Wednesday 3^rd October and listing is likely on 11^th October.

Company Overview:

Dinesh Engineers, an Infrastructure Provider (IP)-licensee, provides passive communication infrastructure services to telecom operators and internet service providers (ISPs) by laying and maintaining duct and fiber optic cables (OFC), constructing basic transmission and telecom utilities, dark fiber leasing etc. In the past 5 years, company has laid its own optic fibre network of ~7,500 kms running across Rajasthan, Gujarat, Maharashtra, Goa, Karnataka, Andhra Pradesh and Telangana, which are leased out to telecos like Airtel, Reliance Jio, Vodafone Idea, BSNL and many ISPs. Besides, it has also executed vendor projects, on contact basis, for laying ~9,500 kms of fiber networks for telecom operators and broadband service providers. Lately, company has diversified into gas sector by laying gas pipelines for city gas distributor Mahanagar Gas in Mumbai. Given the industry it operates in, client concentration risk is high, as top 5 customers account for over 80% of the revenue.  

Financial Performance:

Thanks to improved data penetration of the telecom sector, company’s historic financial growth has been commendable, with revenues jumping 5x in the past 3 years, from Rs. 51 crore in FY15 to Rs. 302 crore in FY18, and net profit surging 8x during the same period, from Rs. 7 crore (FY15) to Rs. 62 crore (FY18). FY18 revenue mix stood as - 90% vendor projects, 9% IP leasing income and only 1% from gas pipeline. Company’s margins are also very healthy with 36% EBITDA margin in FY18, on EBITDA of Rs. 108 crore, while net profit margin came in at 20%, with net profit of Rs. 62 crore, translating into EPS of Rs. 21, on equity of Rs. 29.50 crore (post 117:1 bonus in Nov 2017). As of 31-3-18, company’s net worth stood at Rs. 108 crore (BVPS Rs. 37) while net debt is also low at Rs.26 crore (net debt equity ratio 0.24:1). FY18 return on net worth (RoNW) of 57% is up from 44% in FY16. Its working capital management has been good, with 3.3 months of outstanding debtors, despite such high growth. Order book position (1-4-18) of Rs. 420 crore (all from vendor contracts) is also assuring.    

Objects of Issue and Shareholding Pattern:

Company is setting up further OFC network of 5,740 km across Rajasthan, Maharashtra, Madhya Pradesh, Karnataka and Andhra Pradesh, with total capex of Rs. 196 crore. Of this, Rs. 156 crore will be funded from fresh issue proceeds of Rs. 185 crore raised via the IPO. Approximately Rs. 40 crore has already been deployed towards this capex from internal accruals. Balance issue proceeds will go towards general corporate purposes and issue expenses. Promoter holding, currently at 100%, will drop to 74.68% post IPO.

Valuation:

At Rs. 185, company’s market cap and EV will be Rs. 731 crore and Rs. 756 crore respectively, which discounts FY18 earnings by PE and EV/EBITDA multiples of 8.8x and 7x respectively. Below is the peer comparison with other listed companies engaged in OFC manufacturing and related telecom services:

 Note: Market cap is as of 25-9-18, Financials for FY18, valuation multiples based on FY18.

While size of Dinesh Engineers is smaller than listed peers stated above, its high growth rates are attractive. However, margins appear to be very much on the higher side - peers HFCL and Vindhya earn lower operating margin in their service vertical like EPC and turnkey contracts vis-à-vis product manufacturing. Dinesh is mainly engaged in services (without any cable manufacturing capability) but has the highest margins. Although its leasing business is unique, such high margins are quite high and need to be tracked closely going forward. Another point is sustainability of high RoNW (57% in FY18) given:

1. Fear of competitive forces bringing it down
2. Large presence of unorganized players
3. High financial muscle of biggies (listed above)
4. Limited entry barriers.

For one, expanded net worth of Rs.293 crore post IPO, from current Rs. 108 crore, will lower this return ratio. Choppy secondary market conditions coupled with small size of the issue may also limit participation by investors in the issue. Another high risk is the BRLM to the issue. Dinesh Engineers is Hem Securities’ maiden main board IPO, with prior experience only in the SME space, where liquidity issues persist. Thus, valuation multiples are not aggressive, but other factors surrounding the issue are not too encouraging.

Conclusion:

Given booming data usage in the country due to higher smart phone penetration coupled with significant capacity hike over the next 12 months, prospects for the company are bright. However, considering limited track record of the sole BRLM to the issue coupled with listing in ‘T’ segment, market operations cannot be ruled out. Hence, one may apply only is very limited proportion.

Grey Market Premium (GMP) of Dinesh Engineers: Grey Market Premium of Dinesh Engineers is an unofficial figure, against guidelines of SEBI. We strongly recommend investors against following the grey market premium. To know more about grey market premium and how it operates, read our article on ‘Grey Market Premium for IPOs’ in Pathshala column.

Disclosure: No interest.