WATCH VIDEO - VEL IPO Analysis by ASHOK KUMAR
IPO Fact Sheet & Financial Scan
Issue Details
Issue Price : Rs 165 – Rs 185
No of Shares (FV Rs.10) : 10.8 million
Issue Size : Rs 1,998 million at the upper band
Issue opens-closes : 27th – 29th January 2010
Listing : BSE and NSE |
Post Listing Details
Pre-Issue Promoter Holding : 43.81 per cent
Post Issue Promoter Holding : 38.41 per cent
Post Issue Equity Capital : Rs 900.16 million
Post Issue Equity Shares (nos) : Rs 90.01 million
Market Cap : Rs 14,852 million – Rs 16,652 million
EPS (Annualised Diluted) FY10 : Rs.5.5
P/E Ratio (Annualised) FY10 : 30 – 34.5 |
Business Model
Promoted by R. Vasudevan, Vascon Engineers Limited (VEL) has been engaged in the Engineering, Procurement and Construction (EPC) services space for over two decades. The Company has diversified into real estate development since a decade and undertakes activities across all aspects of real estate development The Company provides EPC services for its own projects as well as to third parties.
The real estate development business comprises the development of residential and office complexes, as well as shopping malls, multiplexes, hospitality properties, IT parks and other buildings, directly or indirectly, through its Subsidiaries or the Other Development Entities.
The Company has completed an aggregate of 181 EPC Contracts, with a total contract value of Rs. 8,890 million, out of which (73 per cent) 157 EPC Contracts amounting to Rs. 6,560 million were for third parties and the remaining 24 EPC Contracts were for projects developed by the company or the Other Development Entities. The company has completed a total 42 real estate projects with an aggregate saleable area of over 4.99 million square feet. Additionally VEL has sold land and land development rights aggregating 2.04 million square feet.
The current order book stands at an estimated total contract value of Rs. 4,0140 million with an order backlog of Rs. 3,2270 million. The company along with its other development entities is in the process of developing additional aggregate saleable area of over 55.36 million square feet.
The business model of the realty segment of the company appears to be similar to Godrej Properties which uses a joint development model which entails entering into agreement with the owner of the land to be developed for a pre determined revenue sharing.
The company’s portfolio of real estate development is primarily in Tier II and Tier III cities which, has its plus point in terms of potential, but in case of a downturn, these geographies are more severely affected and recovery is also slow as compared to metros.
The company is entering the capital markets to fund the construction of the forthcoming projects and repayment of loans. Below is the table showing the details of the proceeds to be utilized:
| Objects | Amt. to be funded through IPO Proceeds (Rs Million) | % of total Funds Raised | | Construction of EPC contracts and Real Estate development projects | 1,150 | 58% | | Repayment of debt | 396 | 20% | | General corporate purposes | NA | Balance |
Financial Scan & Analyst’s Notes :
Financial Snapshot
| PARTICULARS (Rs million) | H1 FY 2010 | FY 2009 | FY 2008 | FY 2007 | FY 2006 | | | | | | | | | Total Income | 3,620.39 | 5,247.57 | 6,205.34 | 3,992.46 | 1,430.60 | | Sales | 3,457.45 | 5,015.74 | 5,992.80 | 3,825.69 | 1,371.04 | | Other Operating Income | 89.43 | 179 | 175.81 | 122.47 | 13.5 | | Other Income | 73.51 | 52.83 | 36.73 | 44.3 | 46.06 | | | | | | | | | Total Expenditure | 3,253.56 | 4,931.45 | 5,193.68 | 3,313.05 | 1,205.78 | | | | | | | | | PBDIT | 405.93 | 398 | 1078.22 | 707.09 | 243.72 | | Operating Margin(%) | 11.21 | 7.6 | 17.38 | 17.71 | 17.03 | | | | | | | | | Net Profit After Tax as Re-stated | 232.31 | 306.41 | 599.36 | 343.94 | 121.53 | | Net Profit Margin(%) | 6.5 | 5.8 | 9.7 | 8.6 | 8.5 | | | | | | | | | | | | | | | | Balance Sheet | H1 FY 2010 | FY 2009 | FY 2008 | FY 2007 | FY 2006 | | | | | | | | | Total Debt | 2129.46 | 2505.96 | 3224.63 | 1273.9 | 1238.89 | | Networth | 4635.91 | 3901.1 | 3089.17 | 2351.72 | 509.45 | | Debt:Equity | 0.46 | 0.64 | 1.04 | 0.54 | 2.43 |
The company’s topline had dipped in FY 2009, owing to the economic downturn but it is worth noting here that this company has been able to reduce the debt on its balance sheet and has a comfortable debt-equity ratio.
Hence, the retirement of debt from IPO proceeds , will not significantly impact its profitability.
IPO Positives
Distinctive business model : The company has a distinctive business model where it enters into joint development partnerships with third parties and thereby reduces its needs for financing these projects. This in turn reduces its working capital requirements. It is able to generate revenues from two streams as it undertakes EPC work for its Real Estate projects. It also does not require large investments in the purchase of land as majority of its real estate development is undertaken for private parties, who own the land bank or sub-contracted from other developers.
While this limits its downside risk, it must also be noted that the return it will generate will also be shared in case of Joint Development activities.
Strong track record : With 24 years of experience in the EPC services business the company has constructed factories, hospitals, office and residential complexes, shopping malls, multiplexes, IT parks and other buildings. The company’s EPC clients include well-known Indian and MNC’s such as Cipla Ltd, Kirloskar Brothers, HDIL and Delhi International Airport.
Strengthening of the Balance Sheet on account of Equity Infusion: An important criteria by which EPC companies are rated for projects and Real Estate players, at the bourses, is the size and strength of its balance sheet. With equity infustion, this will benefit the company while bidding for its projects.
IPO Concerns
Concentration Risk : The Company’s projects are concentrated in the state of Maharashtra, and primarily in Pune which gives it a concentration risk apart from the concern that on account of its being an IT/ITeS hub, any sharp swings in the IT industry’s fortunes would impact its prospects too. However, Vascon now has real estate development projects spread across seven other Indian states, each at various stages of development.
Higher dependence on related parties: The distinctive business model of the company though beneficial in terms of capping costs, exposes the company to risk of dependence on related parties for the successful completion of its projects which are typically of long gestation nature, thus hindering clear visibility of its future contract revenues.
Tilted Order Backlog: The total order backlog for the company’s EPC business is of Rs. 32,270 million of which Rs.12,147 million (38%) is on account of third party related contracts and Rs.20,123 million (62%). While the former maybe completed on schedule and provide nearer term revenue visibility, estimating when the latter will hit the company’s P&L is less clear and estimates can go awry.
Concluding Notes & Pricing Review
At the upper end of the price band, the company is demanding a P/E of over 34 times its FY 2010 earnings. Following the market meltdown, players of a similar in size as also larger players with pan Indian presence, are available at more attractive valuations.
Based on the revenue and expenditure recognition accounting policies of the company, read in conjunction with its order backlog, it becomes evident that this company will peak in revenue and profitability terms in FY 2012. It is then that the real value unlocking in this stock will take place.
So, can flippers play this stock for a listing day pop ?
Unlikely.
Is it a sound company that merits the attention of long term investors ?
Yes.
theIPOguru’s Verdict :
INVESTOR TYPE
Risk Appetite | | Recommendation | FLIPPERS | | LOOK ELSEWHERE | INVESTORS | | CONSIDER INVESTING AT PRICE DIPS |
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