IPO Analysis : IRCON International IPO
IPO Rating - 50 (Invest with limited exposure)*
About the Issue
Another PSU, Ircon International, is set for the IPO which will open for subscription from September 17 to September 19, 2018. The issue consists purely of Offer for Sale (OFS) with 99,05,157 equity shares worth Rs 470.49 crore. The face value of the share is Rs 10 per share. The minimum lot size consists of 30 shares. The issue price per equity share is in range of Rs 470-475. Post allotment, the company will get listed on both BSE and NSE.
Purpose of the issue:
- To carry out disinvestment of up to 99,05,157 equity shares, including employee reservation portion, by the selling shareholder constituting 10.53% of the company’s pre-offer paid up equity share capital
- To achieve the benefits of listing the equity shares on the stock exchanges.
The promoter is the President of India acting through the Ministry of Railways which holds 99.71% stake before the offer. Post the offer, the promoter shall hold 89.18% stake in the company. The company will not receive any proceeds from the offer and all proceeds shall go to the selling shareholder.
Company Background
Ircon International is a Mini-Ratna public sector undertaking. It is an integrated engineering and construction company specialising 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. It is headquartered in Saket, New Delhi and has overseas office in Malaysia. It has 26 project offices in India and overseas, including Sri Lanka, Bangladesh, South Africa and Algeria. The company’s primary focus stays rooted in the railway sector.
The total order book of the company as on March 31, 2018 stood at Rs 22,406.79 crore. The company’s core business operations include construction and infrastructure development.
Construction –
Under the railway construction business, the company specialises in new railway lines, rehabilitation/conversion of existing lines, station buildings and facilities, bridges, tunnels, signalling and telecommunication, and railway electrification. As on March 31, 2018, it undertook 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. The order book for these ongoing projects amounted to Rs 19,425.77 crore as on March 31, 2018, accounting for 86.70% of its total order book.
Under the electrical business, it undertook eight electrification projects in India and abroad and the order book amounted to Rs 1208.39 crores as on March 31, 2018, accounting for 5.39% of the total order book.
Under the building and other business, it undertook three building and other projects in India and abroad. The order book amounted to Rs 494.61 crore as on March 31, 2018, accounting for 2.21% of the total order book.
Infrastructure Development business -
As on March 31, 2018, it had completed one road project of 115 km in India. It intends to complete two more BOT toll projects by the end of 2018 and start realising toll revenues. It has placed strategic focus on executing projects under the EPC, DBFOT and hybrid annuity modes.
Industry trends
Over the years 2019-2022, CRISIL Research expects the construction sector to increase 54% to Rs 22.2 trillion. Of this, about 93% would be contributed by infrastructure investments, while the rest would be from industrial sector. This growth in infrastructure investments is driven by government initiatives and budgetary support, especially in sectors such as roads, irrigation, urban infrastructure and railways. During 2015-18, railways accounted for 11% of the construction sector at Rs 1.6 trillion. Over the next four years, the construction opportunity in railways is expected to double to Rs 3.1 trillion, driven by investments by public as well as the private sector. The investments in railway sector will touch Rs 6.8 trillion during 2019-2022.
Financial Performance
Since past few years, muted growth is seen in revenues and net profits. However, steady growth is seen from FY16. Currently, the company’s order book is strong, which is almost 5.5 times the revenue of FY18. Thus, the revenue visibility over the next few years looks very strong. Also, the company has been paying consistent dividends over the years. It paid dividend at 919%, 186% and 204% in FY16, FY17 and FY18, respectively.
Valuation and peer comparison
By taking the upper price band of Rs 475 and EPS of Rs 42.13 as of FY18, the P/E works out to 11.27x. The RoNW for FY18 was 10.9%. There are no listed companies engaged in the same line of business, hence the company does not have peers to compare with.
Our View
The robust order book is one of the biggest strengths of Ircon International. Ircon's 87% of the order book comes from the Indian Railways' projects, thereby the company enjoys a monopolistic position in the market. The company expects the orders would get converted into revenue at a faster pace going forward. Also, to pursue an asset-light strategy, it is planning to monetise its Build-Operate-Transfer (BOT) road assets in Maharashtra, Rajasthan, Madhya Pradesh and Karnataka, having value of Rs 4,700 crore. Since past three years, the company's topline and profitability are improving gradually. However, considering that the elections are round the corner, any policy change is the biggest risk the company faces. Also, the rise in raw material costs can shrink its profitability. Looking at the valuations, although there are no listed peers for comparison, few of the risks have been already factored in. Thus, investors having a long term perspective can subscribe to the IPO with limited exposure.
*40 or lower – Avoid Investment, 41 to 45 – Risky, 46 to 50 – Invest with limited exposure, 51 to 55 – Investment recommended, 56 & above – Excellent Investment
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