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Money Jun 29, 2012

VKS Projects: Crisil rating speaks enough!

By VS Fernando

The Navi Mumbai head-quartered VKS Projects Ltd (VPL) is making an initial public offer (IPO) of Rs 55 crore with a price band of Rs 55 to Rs 60 (10 paid-up). The issue quantum -between 91.7 lakh to 1 crore shares - amounts to 53 to 56% of the post-issue capital.

The IPO is being made through the book-building route wherein up to 50% of the issue should be allotted to qualified institutional buyers (QIBs) failing which the full subscription monies would be refunded. Not less than 35% is reserved for retail investors. The shares are proposed to be listed on the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE).

Offer at a glance

The objects of the public issue are: To procure Construction Equipment and Key Machinery worth Rs 23 cr; To set up Engineering Design Studio/Office and Training Centre in Chennai, Cochin, Delhi, Hyderabad and Ahmedabad at a cost of Rs 10 cr and meeting long-term working capital requirements Rs 15 crore. However, none of the proposed plans has been appraised by any external agency.

CRISIL has assigned a grade of "one on five" to the proposed IPO indicating that the fundamentals of the IPO are poor relative to the other listed equities in India. CRISIL has cited many negative factors for the dismal rating.

The company's revenue has grown at a CAGR of 106% between fiscal 2007 and 2011, from Rs 3.31 cr to Rs 60.25 cr, and profit after tax registered a CAGR of 150%, from Rs 8 lakh to Rs 3.16 cr. In the first nine months of fiscal 2012, revenue grew 62% to Rs 97.55 cr and net profit amounted to Rs 5.63 cr against the equity capital of Rs 8 cr.

Although VPL has in the past bagged orders from prestigious clients such as Reliance, Themax, Deepak Fertilizer, RCF and IG Petro, it has not been able to get repeat orders of large magnitude from these clients. Further, as of June 2011, VPL's order book backlog stood at Rs 97 cr which translated into 1.6 times of FY11 revenue which is very low as compared to other EPC players. Given the current unfavourable business climate faced by the EPC industry and the slowdown in the investment cycle, the low revenue visibility could have an adverse impact on growth in the near term.

Also, the company is yet to place orders aggregating to Rs 23 crore for the construction equipments and key machineries proposed to be purchased from the Issue proceeds. Any delay in their procurement or change in the assumptions or market conditions may delay the implementation schedule which could affect the cost, revenue and profitability.

Valuation
Infra Construction or EPC Contracting industry does not command a great discounting in these days. Whereas the composite market P/E is more than 14x today, many an EPC scrip has P/E in single digit. When well known peers yielding attractive dividend returns are available at a cheep discounting, why should one risk in a non-dividend paying company like VPL at a higher P/E? The promoters' average cost of holding is less than Rs.9 per share.

Source: India Aarthik Research

Manager's Track

VPL's IPO is lead-managed by Aryaman Financial which has a pathetic record to speak about. Though the investment banker has successfully managed as many as 65 IPOs since 1995, hardly a tenth is quoting above the offer price today. In fact more than 40 IPOs have vanished from the scene.

Among the most recent ones managed by Aryaman, Swajas Air failed to pass the muster and Midvalley Entertainment is currently languishing at 90% discount! The fixed-priced BCB Finance is struggling to hold above the offer price despite the market maker's best effort.

Table

Concerns

• Promoters new to investors and non-dividend paying company asking for a hefty share premium

• Yet to place orders for the entire construction equipment and key machinery aggregating to Rs 22.64 cr and yet to identify the office spaces estimated to cost Rs 10 cr

• Negative cash flows from operations for the past five years

• Low order book constraints revenue visibility and the company is unable to win large repeat orders

• Exposed to high concentration risk as orders from two new clients reportedly accounted for 97% of the order book.

• Shifting away from core competency - large portion of order book related to civil constructions

• Largely promoter-driven company and dependence on promoter-director is very high

• CEO does not have any experience in construction or engineering activity

• Co-promoter (main promoter's wife) is reportedly not actively involved in the business and lacks technical experience yet draws unjustifiable remuneration from the company

• Promoters' cost of holding is less than one-sixth of the IPO price

• Pathetic track record of the IPOs handled by the investment banker

Syndicated by India Aarthik Research (Feedback to fernando@iarlive.in)
*V S Fernando is a veteran IPO Analyst who has been tracking domestic Public Offerings since 1986.


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