Prakash Constrowell

Prakash Constrowell is entering the capital market on 19^th September 2011 to raise Rs. 60 crore via a fresh issue of 43-46 lakh equity shares of Rs.10 each, in the price band of Rs. 130 to Rs. 138 per share. The issue, comprising about 35% of the company's post issue paid-up capital at the upper price band, closes on 21^st September.

Mumbai-based Intensive Fiscal Services is the book running lead manager (BRLM) to the issue. This is the same merchant banker which brought Inventure Growth and Securities to the primary market few weeks back which speaks volumes of the quality of issues handled by the intermediary. Also, current issue is only the third IPO being undertaken by the BRLM which also points towards the inadequate experience.

Nashik-headquartered Prakash Constrowell is engaged in 3 segments of infrastructure development, civil construction business, and residential and commercial real estate construction. Having completed a number of BOT projects awarded by government and semi-government bodies under the public-private partnership (PPP) model, the company's order book was Rs 151 crore, as of June 30, 2011.

The objects of the issue look structured to merely facilitate IPO and listing of the company on the bourses:

1. Meeting working capital requirement of Rs. 35 crore
2. Investment in construction equipments worth Rs. 9.3 crore
3. Investment in 4 subsidiary companies for Rs. 2.35 crore, the consideration of which go to company's directors and their relatives being shareholders of these subsidiary companies. Thus the fairness of this transaction is difficult to ascertain.

What is also surprising to see is that in estimating the working capital requirements for the future years, the company will have to increase its debtor days i.e. extend higher credit period to its clients from 43 days in FY11 to 66 days FY12 onwards, while credit days obtained by company from its own creditors will fall very sharply from 105 days in FY11 to 45 days in FY12 and FY13, which only represents very poor working capital management on behalf of the company and management!

Another point drawing attention is that a related party transaction, wherein the company has taken a commercial property admeasuring 18,000 sq ft on lease at a monthly rental of Rs. 1.8 lakh from its subsidiary Atal Buildcon Pvt. Ltd. for the purpose of sub-letting it. The company has advanced a huge amount of Rs. 10.5 crore as security deposit towards the same and 'expects' to get possession of the property by 30^th September 2011. One fails to understand the compulsion behind the company to block valuable resources in such transactions in form of security deposit. Moreover, annual rental of Rs. 21.6 lakh is very significant and exceptionally high for this tiny sized construction company.

For FY11, company's income from operations on a consolidated basis was Rs 127 crore in FY11 while its PAT was Rs 10.65 crore, resulting in 8.4% net profit margins and EPS of Rs. 12.95 on equity of Rs. 8.22 crore. Company's net worth, as of 31^st March 2011, was Rs. 32 crore, while it is seeking a market cap of Rs. 173 crore on listing at a price of Rs. 138 per share.

This is very aggressive valuation, translating into a PE multiple of 10-10.7 times based on lower and upper price band, respectively. While larger, more established players, having stronger geographic presence are ruling in PE multiples of 4 to 6 times, there seems no justification for a PE beyond 3 for this tiny company, having limited geographic presence restricted only to Maharashtra. Fair value is seen not above Rs. 30 per share for the company's stock.

We are not enthused by this weak and expensive issue. Better to avoid such small investment ideas and focus on the listed quality stocks!