IPO Size: Rs.66 cr  

• Entirely fresh issue, to fund Rs. 45 cr working capital

Price band: Rs. 33-35 per share

• Allocation: 60% retail, 30% HNIs, 10% QIBs

M cap: Rs. 194 cr, implying 34% dilution

IPO Date: Mon 20^th March to Thu 23^rd March 2023, Listing Mon 3^rd April 2023

Grey Market Premium (GMP): We are strongly against ‘grey market premium’ as it is an unofficial figure, against SEBI guidelines.

Road EPC Company in Karnataka

Davangere headquartered engineering procurement and construction (EPC) company, building roads, bridges, irrigation projects, smart city projects. FY22 revenue stood at Rs. 186 cr, of which, 9% came from sale of ready-mix concrete (RMC).

No Revenue Growth despite Large Order Book

EPC revenue (excluding RMC, scrap sales, toll receipts) has declined from Rs. 200 cr in FY21 to Rs. 169 cr in FY22 and further to Rs. 75 cr in H1FY23. This is despite a larger order book position of Rs 1,290 cr, as of 31.12.22, i.e. 6x of annual revenue.

Company’s order book position has always been high (Rs. 1,012 cr as of 31.3.20, Rs. 1,079 cr as of 31.3.21 and Rs. 881 cr as of 31.3.22) yet revenue growth is missing, indicating poor execution skills.

Unsatisfactory H1FY23 Performance

Company started toll collection at 2 road projects in H1FY23, revenue for which was Rs. 7.43 cr but expenses Rs. 7.54 cr, resulting in operating loss.

Also, Construction expenses and raw material cost stood at Rs. 87 cr in H1FY23, while EPC revenue was lower at Rs. 75 cr, again leading to operating loss.

Seems H1FY23 net profit of Rs. 10 cr, against Rs. 12 cr in FY22, is mostly due to scrap sales, which stood at Rs. 12 cr in H1FY23, against Rs. 4 lakh each in FY21 as well as FY22. While EPS H1FY23 rose to Rs. 2.75 from Rs. 3.3 in FY22, H1FY23 business fundamentals look weak, which is concerning factor, immediately prior to IPO.

Other Risks

1. Pending GST Litigation: Rs. 42.6 cr GST amount recoverable from customers (government in this case) is pending under litigation for long. As company has already recognized this as revenue, a negative judgement will have an adverse impact, while positive one may not lead to incremental upside. Since Rs. 43 cr is a material amount (~4x FY22 PAT of Rs. 12 cr), the downside risk is high.
2. Ventured into iron ore mining in Bellary, which can be risky, given large capital requirement and management bandwidth.

Undemanding Valuation

Based on H1FY23 annualised earnings, PE multiple works out to 6.4x, with Enterprise Value (EV) of Rs. 225 cr. This is lower than most listed peers trading at 8-9x, and justifiably so, as company is a regional player (present only in Karnataka), with a stagnant topline and recent rise in gross debt (from Rs. 39 cr, as of 30.9.22, to Rs. 50 cr as of 31.12.22).

While promoter holding will reduce to 66% post IPO, from 100% now, poor fundamentals makes the risk reward unfavourable, even at these undemanding valuation levels.