IPO Analysis : Dinesh Engineers
IPO Rating - 51 (Investment Recommended)*
About the Issue
The IPO of Dinesh Engineers is opening for subscription from September 28 to October 3, 2018. The company is offering 100 lakh equity shares with face value of Rs 10 each. The issue size is Rs 185 crore and the issue price band is between Rs 183-185 per share. The minimum lot size is 80 shares. Post allotment, the company will get listed on both BSE and NSE.
Purpose of the Issue
The objects of the issue are –
- Expansion of business by setting up of further OFC network under IP-1 licence;
- To fund expenditures towards general corporate purposes; and
- To meet public issue expenses.
Company Background
Dinesh Engineers is a passive communication infrastructure provider company and has worked on laying fibre for many telecom companies since 2006. It has been licensed by the Department of Telecommunications (DoT) and has an infrastructure provider (IP)-I licence. Its core business of leasing the fibre and duct on IRU basis to telecom operators is a unique business model which forms a major portion of the revenue. Its expertise lies in the field of providing support services to telecom vendors, which includes project management for laying of the duct and optic fibre cables, construction of basic transmission and telecom utilities, dark fibre leasing, optical fibre network construction, maintenance of duct and optic fibre and optical fibre project turnkey services to various telecom network operators and broadband service operators across India. The network infrastructure solutions are being used by Airtel, BSNL, Reliance Jio, Vodafone, Idea, Tata Communications, etc.
Since the receipt of the IP-I licence, the company has created optic fibre network of around 7,500 kms which runs across the state of Rajasthan, Gujarat, Maharashtra, Goa, Karnataka, Andhra Pradesh and Telangana. Since the year 2011, it has laid fibre network of around 9,500 kms for the telecom operators under the vendor projects across the states of Maharashtra, Gujarat, Uttar Pradesh, Bihar, Karnataka, Andhra Pradesh, Chhattisgarh, Goa and Rajasthan. As of April 1, 2018, company’s order book was Rs 420 crore, which is 1.4 times the revenue of FY18.
Recently, the company has also diversified into executing gas pipeline projects. It has undertaken laying gas pipelines in Maharashtra (Mumbai) through sub-contractors assigned by Mahanagar Gas.
Business model and its operations
Project Execution for Telecom Operators – As per the requirement, telecom companies notify the area where they require the fibre network. Once the project is notified, it is assigned to the company, and with ROW permissions, the company initiates the project. The fibre is laid in the allowable ROW limits from the centre of the road and available land width. The activity is done simultaneously on multiple routes across the areas. After testing the network along with ROW documents are handed over to the telecom operator.
Laying fibre under IP-I License (IP-I) – Under this segment, the company maintains the assets such as dark fibres, right of way and duct space to grant on lease/rent/sale on IRU basis to the licencees of telecom services providers and other vendors. It identifies strategic routes where the operators do not have their presence and the network is built which is leased by duct lease or fibre lease. For the projects executed under the IP-1 License, the right to use the network is given to the vendors on irrefutable basis for a specific period of time as agreed between the company and the vendors, and the ultimate ownership of the network is with the company.
Operations & Maintenance - It undertakes the operations & maintenance activity for the telecom operators and of the leased fibre maintained under IP-1 License. The operation and maintenance activities involves deploying manpower and tools required for maintenance such as splicing machine, rodometre, OTDR machine, etc. to monitor the route of the operator and preventing the underground optic fibre therein from getting damaged due to activities like road repairs, digging and expansion works by various authorities.
Factors to drive company’s business
The Government of India (GoI) launched the ‘Digital India’ initiative in July 2015 with three broad targets: providing digital infrastructure as a core utility to every citizen, governance and services on demand as well as digital empowerment of citizens. One of the projects under the ‘Digital India’ initiative was ‘Bharat Net’, launched to deploy high-speed optical fibre cables to connect 2.58 lakh Gram Panchayats across the country by 2018. Also, on the rising penetration of 4G, 5G and Fibre-To-The-Home (FTTH), company’s business is expected to rise.
Financial Performance
The growth in revenue and PAT has been robust and consistent over the last few years. The PAT margin has also gradually improved on YoY basis over the years. The debt of the company has been at moderate levels, and for FY18, the debt-equity ratio stood at 0.34x. For FY16 and FY17, it paid dividend of Rs 120 and Rs 160 per equity share, respectively.
Valuation and peer comparison
None of the listed companies in India are engaged in the business similar to Dinesh Engineers and hence cannot be compared with peers. On the valuation front, by taking the upper price band of Rs 185 with EPS of Rs 20.95 of FY18, the company’s P/E works out to 8.83x. Looking at the P/E, the offer price seems to be fair and rather attractive. In FY18, it delivered RoNW of 57.2%.
Our view
The company’s growth has been robust and margins have been improving consistently. Also, the valuation is cheap and the company is available at an attractive price. The business model is unique, its strong customer relations is leading to repeat business and all the top telecom players are its customers. The company’s network of optic fibre is wide and the market is expected to grow going forward. Also, the company’s diversification into the gas pipeline projects will generate additional revenue in the upcoming years. Considering these factors, investors can subscribe to the IPO having perspective to hold over the medium term.
*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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