Update (1st Oct, 7:15pm): Due to poor response from institutional investors, issue closing extented from Fri 1st Oct to Wed 7th Oct, with price band lowered to 116-120 from 117-120. 

Verdict: Micro cap in a promising sector

IPO Snapshot:

Likhitha Infrastructure has entered the primary market on Tuesday 29^th September 2020, to raise Rs. 61 crore via a fresh issue of up to 51 lakh equity shares of Rs. 10 each, in the price band of Rs. 117-120 per share. The issue represents 26% of the post-issue share capital and will close on Thursday 1^st October, with listing likely on 12^th October. Since company’s market cap will be less than Rs. 250 crore, listing will be in the ‘T’ category with 5% circuit limits.

Company Background:

Hyderabad based Likhitha Infrastructure provides oil and gas pipeline infrastructure services, such as laying pipeline networks, constructing associated facilities and operations and maintenance (O&M) to city gas distribution companies. Clients include both public and private sector players such as BPCL, HPCL, IOCL, GAIL, IGL, ONGC. Company’s order book of Rs. 663 crore (31-7-20), comprising 28 pipeline infra projects and 3 O&M, is healthy, representing 4 times FY20 sales.  

Objects of Issue and Shareholding:

Fresh issue proceeds of Rs. 61 crore will fund working capital needs of Rs. 47 crore. Post IPO, promoter holding will decline to about 74% from current 99.96%.

Secular Industry Growth:

Petroleum and Natural Gas Regulatory Board (PNGRB) had initially notified 30 geographical areas for laying city gas distribution (CGD) network, which has increased to 228, covering 70% of Indian population and 53% of area. This presents large opportunity to the company, not just in laying pipeline infrastructure, but later for O&M services too. Share of O&M services, which yield better margin vis-à-vis pipeline projects, has risen from 7% of FY18 revenue to 21% of FY20 revenue of Rs. 160 crore. However, barriers to entry are not too high in the business.

Financials:

FY20 revenue grew 16% YoY to Rs. 160 crore, but EBITDA growth was barely 4% YoY to Rs.31 crore, translating into 19% EBITDA margin. While company provides contracting services, they are labour-intensive in nature and hence fixed asset are very low at Rs. 10 crore. Thus annual depreciation charge is just Rs. 3 crore and so is the interest burden of barely Rs. 1.4 crore, as leverage is also minimal, with gross debt of Rs. 2.3 crore, against net worth of Rs. 70 crore (BVPS Rs.48, as of 31-3-20). This leads to healthy PBT margin of 16%. On PAT of Rs. 20 crore, net margin for FY20 was strong at 12% and EPS stood at Rs. 13.6, on current equity of Rs. 14.63 crore, post bonus issues of 3.5:1 in Feb 2018 and 2.25:1 in Dec 2019. Company holds cash and equivalents of Rs. 20 crore, indicating surplus cash per share of Rs. 13.

While company has not shared Q1FY21 financial performance in the RHP, it has estimated 15% impact on H1FY21 revenue due to covid. Since Q2 is generally a soft quarter for contracting business due to monsoon, H1FY21E financial performance is likely to be quite subdued. Thus, return on equity (RoE) which stood at 33% for FY20 will nearly halve about 17% for FY21 on account of (i) equity dilution and (ii) lower profitability due to covid. 

Red Flags:

• Promoter drew remuneration of Rs. 3.6 crore in FY20, representing 13% of PBT and Rs. 7.2 crore in FY18 and FY19 each, representing 30% of PBT, which is quite dis-porportionate.
• Since it will be a micro-cap stock post listing, it may be susceptible to price volatility.

Valuation:

At Rs. 120, company’s market cap will be Rs. 237 crore, with enterprise value (EV) of Rs. 220 crore, which leads to an EV/EBITDA multiple of 7x and PE multiple of 9x, based on FY20 earnings. On FY21E, PE multiple stands at 11x.

While there are no listed peers, valuation can be broadly benchmarked to contracting companies such as PNC Infra and J Kumar, who are trading at historic FY20 PE multiples of 7x and 4x respectively. Since Lihkitha’s net margins are in double digit vis-à-vis single digit for contracting companies, along with cash surplus balance sheet, Likhitha’s premium valuation multiples are in-line, despite its much small scale of operations. Thus, issue pricing is not aggressive, although FY21 may be a little challenging.

Conclusion:

While financials are strong with healthy margins coupled with nil leverage, micro cap status and infrastructure theme not being in focus on the secondary markets currently go against the issue. Hence, only those with high risk appetite may allocate a small portion to the IPO.

Grey Market Premium (GMP) of Likhitha Infra: Grey Market Premium of Likhitha Infra 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’ in Pathshala column.

Disclosure: No Interest.