IRCON International Limited IPO - Should you subscribe?

In June 2018, Ministry of Railway's PSU RITES Ltd launched its IPO. It was the first PSU IPO of Fiscal 2019. Even in the depressed market sentiments during that period and poor performance of PSU IPOs in the recent past viz. Hindustan Aeronautics Ltd and Bharat Dynamics Ltd, RITES Ltd IPO received a huge response from every category of investors (except employees quota). The subscription figures were quite fabulous, the issue was oversubscribed by more than 66 times. On the listing day also, it listed with a bang, the share listed with 21% premium to its issue price. Currently, the share is trading at 37% premium to its issue price. So, far the share has given outstanding return to its subscriber.

Now, in September 2018, yet another Ministry of Railway's PSU - IRCON International Ltd -is going to hit the primary market with its IPO. The issue is opening on September 17, 2018 and closing on September 19, 2018. The tentative dates of allotment and listing are September 25, 2018 and September 28, 2018 respectively. The issue price is Rs. 470 - Rs. 475 (Rs. 10 per share discount is offered to Retail Investors) and minimum lot size is for 30 shares.

The issue is 100% Offer For Sale. The President of India, acting through Ministry of Railways is the selling shareholder, offloading 99,05,157 Shares (10.53% of its pre-offer paid up equity shares capital) under this arrangement.  The employee reservation is kept at 5,00,000 shares. Out of balance shares, 35% shares are reserved for Retail Individual Investors.

Overview of the company: Incorporated in April 1976, IRCON International Ltd is an integrated Indian engineering and construction company, specializing in major infrastructure projects, including, railways, highways, bridges, flyovers, tunnels, aircraft maintenance hangars, runways, EHV sub-stations, electrical and mechanical works, commercial and residential properties, development of industrial areas, and other infrastructure activities. The company provides EPC services on a fixed-sum turnkey basis as well as on an item-rate basis for various infrastructure projects. It also executes on build, operate and transfer mode in various projects in order to meet the requirements of its bids.

The company is headquartered in Saket, New Delhi and it has an overseas office in Malaysia. Additionally, it has 26 project offices in India and abroad (including in Sri Lanka, Bangladesh, South Africa and Algeria) and five regional offices to support and manage its business operations. Its reputation for quality, commitment and consistency in terms of performance, as well as its local, regional and international presence, have allowed it to service the growing infrastructure needs throughout India.

Objects of the offer: As it is 100% Offer For Sale, the company will not receive any proceeds from the offer and all proceeds shall go to the selling shareholder. The objects of the offer are: (i) to carry out the disinvestments of upto 9905157 Equity shares, and (ii) to achieve the benefit of listing the equity shares on the stock exchanges.

Pricing of the issue: At the upper and lower price band (Rs.470 - Rs.475), the PE ranges between 11.16-11.27. Further, it is merely 1.19 times of its book value. For retail investors it may go further cheap as Rs. 10 discount is offered. The pricing of the share seems quite reasonable. 

Revenues & Profitability:

The company's consolidated total revenues for Fiscal Year 2016, Fiscal Year 2017 and Fiscal Year 2018 were Rs. 2,908.64 Crore, Rs.3,301.35 Crore and Rs.4,212.40 Crore, respectively. Its profit after tax (excluding OCI) for Fiscal Year 2016, Fiscal Year 2017 and Fiscal Year 2018 were Rs.393.11 Crore, Rs. 383.98 Crore and Rs. 411.58 Crore respectively. Though revenues and profits have been increasing, margin percentage are shrinking. The government's efforts to spend more in infrastructure can boost the growth of the company, however, the operations are highly impacted by the government policies, geopolitical environment, due elections etc.

Peer Comparison: There are no comparable listed companies in India engaged in the same line of business as the company, hence comparison with industry peers are not applicable.

Order Book: The company defines its Order Book as the value of projects awarded to it and for which it has entered into signed agreements or received letters of award or letters of intent or work orders, but for which the company has not commenced the work, and the value of the unexecuted portion of projects on which the company has commenced work.

In its industry, order book is considered to be one of the key indicators of future performance as it represents a significant portion of anticipated future revenue.

Its total order book was Rs.17,568.86 Crore, Rs.18,878.39 Crore and Rs.22,406.79 Crore as of March 31, 2016, 2017 and 2018, respectively, representing a year-on-year increase of 32.17%, 7.45% and 18.69% for Fiscal Year 2016, Fiscal Year 2017 and Fiscal Year 2018, respectively

As of March 31, 2018, the company is undertaking a total of 33 railway projects in two countries internationally and in 13 states in India, with an aggregate length of 1,664.74 km. Its Order Book for these ongoing projects amounted to Rs.19,425.77 Crore as of March 31, 2018, accounting for 86.70% of its total Order Book. Revenue from railway projects accounted for 77.12%, 68.26% and 68.95% of its total revenue from operation for Fiscal Year 2016, Fiscal Year 2017 and Fiscal Year 2018, respectively.

Dividend and Debt Equity Ratio: The company has been paying dividend consistently. It paid 204.46% dividend in Fiscal 2018, which comes to 4.31% of issue price. The company was debt free till March 2017, however, in March 2018, the debt equity ratio of 46:54.

The Competitive Strengths:

The company's construction business operates in diverse sectors covering many countries

Excellent execution track record through strong operating systems and controls

Strong financial performance and credit profile

Visible growth through robust order book and steady execution

Qualified and experienced employees and proven management team

Conclusion:

The share seems fundamentally strong. However, business and revenues are substantially dependent on construction and infrastructure projects undertaken or awarded by government authorities and other entities funded by government. Any change in government policy may adversely affect the business and results of operations. Majorly dependency on railway sector projects. There are 68 pending litigations against the company, and 17 litigation initiated by the company. There is intense competition from domestic and foreign engineering, construction and infrastructure companies. As it is Government company, scams can not be ruled out. NEUTRAL. 

Thank you for reading...Jai Hind

(Note: I write reviews based on my knowledge and understanding. The reader of this blog should do his/her own research before investing)