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VKS Projects: A Weak Foundation

| 6/28/2012 9:00 PM Thursday

The Navi Mumbai-based Engineering Procurement and Construction (EPC) contractor, VKS Projects is tapping the primary market in highly volatile conditions. The company plans to raise Rs 55 crore through this issue. This is a 100 percent book built issue, with the shares offered within a price band of Rs 55-60 each. The issue opened on 29th June, 2012 and will close on 4th July, 2012.

VKS Projects, originally named ‘Chaitanya Contractors & Engineers’, is an EPC contractor engaged in the business of undertaking mechanical and infrastructure construction-based EPC contracts. It caters to various industries including oil and gas, textiles, petrochemicals, pharmaceuticals, food and beverages, power, steel, ports, etc. Founded by two promoters in 1998, the majority of the shares (99 per cent) are held by its promoters.

The company proposes to use the proceeds of this IPO to meet its long-term working capital requirements (Rs 15 crore), to finance some equipments and machines (Rs 22.64 crore) as well as to set up an engineering design studio and office training centres in various cities (Rs 10 crore). The rest will be deployed for general corporate and issue-related expenses.

The infrastructure sector is currently in a negative growth phase as many companies have been deferring their capex plans. Besides, in the results for the quarter ended March 2012, the depreciation expenses of India Inc. declined by five per cent. The outlook for the sector remains flat at the moment. However, one should also look at the company- specific issues while deciding whether or not to invest.

This company has shown a very high growth in the last five years. For the 9MFY12, its revenues surged by 61 per cent to Rs 97 crore over the full year revenues reported in FY11. For each of the past four to five years, it has doubled its revenues. The net profit has also shown multifold growth during this period. VKS currently has an order book of Rs 98 crore, which provides some revenue visibility, though only for the current fiscal.

However, despite showing nearly two-fold growth every year, the company has shown negative cash flows. This is due to the surge in receivables. As per its 9MFY12 financial numbers, a total of Rs 65 crore are tied up in receivables, which is 67 per cent of the total revenues for the period. In fact, the average receivables in the last five years are at 47 per cent, which also makes us circumspect about the stock.

VKS has a very high client concentration in terms of revenues. The top five clients contribute three-fourth of the total revenues, which we believe is a risk as the order books of the top capital goods companies have tumbled as per their March 2012 quarter numbers. Besides, if one looks at the IIP data, then the growth of the capital goods companies has remained negative in the second half of the last fiscal. As industrial growth declines, a direct impact would be felt on companies like VKS, and thus, we remain skeptical about its order book and the sustenance of its exponential growth.

With regard to valuations, on the post diluted equity, the company is priced at the PE of 14x of its annualised estimated FY12 EPS (on the higher price band). This is very steep as compared to that of industry peers like Unity Infra at 3.5x and Pratibha Industries at around 5.5x.

Hence, considering factors like a weak order book position that gives lower revenue visibility, the steep valuations and the large proportion of receivables, we recommend that investors avoid this IPO.

Issue InformationRating : 40
Issue Opens On 29-Jun-12
Issue Closes On 04-Jul-12
Total Issue Size
(No of Shares Cr)
0.91
Price Band (Rs) 55-60
Issue Route Book Building
Promoters V.K. Sukumaran
Saritha Sukumaran
Post Issue Equity
Shares (Cr)
1.71
Lead Managers Aryaman Financial Services
Listing BSE, NSE
Retail Portion 0.32
QIB Portion 0.45
Non-Institutional Portion 0.13
*Based on upper price band

Shareholding PatternPre Issue (%)Post Issue (%)
Promoter 100 46.6
Other Investors 0 34.7
Public0 18.7
Total 100 100

Financial Perfomance (Rs/Cr)
Particulars9MFY12FY11
Income 97.55 60.25
Interest Charges 2.14 1.6
NPBT 8.46 4.72
Tax 2.84 1.57
PAT 5.62 3.15

 

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