Evaluating SRM Contractors Ltd IPO opportunity; Should you invest?

Take a closer look at the exclusive details of SRM Contractors Ltd’s IPO inside

About the Issue:  

SRM Contractors Ltd is launching its initial public offering for equity shares valued at Rs 10 each. The IPO price range is set between Rs 200 and Rs 210 per equity share, resulting in a total issue size of Rs 130.20 crore at the upper price band.

The IPO is scheduled to commence on March 26, 2024, and will conclude on March 28, 2024. The market lot size for the IPO is 70 shares, with the option to apply for multiples of this lot. Individual retail investors have the opportunity to apply for a maximum of 13 lots, equivalent to 910 shares or a total investment of Rs 1,91,000 assuming the upper price band.   

Objects of the Issue  

Considering that the offer is exclusively a fresh issue, it is crucial to note that the company will directly profit from the offer proceeds. The company plans to allocate the net proceeds raised from the fresh issue for the following purposes:

1. Funding capital expenditure requirements for the purchase of equipment/machinery

2. Full or part repayment and/or prepayment of certain outstanding secured borrowings availed by the company

3. Funding the working capital requirements of the company

4. Investment in project specific joint venture projects

5. General corporate purposes

Promoter holding  

Sanjay Mehta, Ashley Mehta, and Puneet Pal Singh are the promoters of the company. The promoters and promoter group currently hold a pre-issue shareholding stake of 99.92 per cent in the company.   

Company profile  

The company is primarily involved in engineering, construction, and development activities, focusing on construction of roads (including bridges), tunnels, slope stabilization works, and various other civil construction projects in the Union Territories of Jammu & Kashmir and Ladakh. The company has expanded its operations to include the execution of additional infrastructure projects such as standalone bridges, larger slope stabilization works in order to capitalize on emerging opportunities in these areas.

As an Engineering, Procurement, and Construction (EPC) contractor, the company’s services encompass a comprehensive scope. It includes detailed engineering of the project, procurement of construction materials, plant and machinery, construction and execution of the project, and operation and maintenance in strict adherence to contractual provisions.

The company's prominent clients consist of significant entities such as the National Highways & Infrastructure Development Corporation Ltd, Ministry of Road Transport & Highways, Government of India, Konkan Railway Corporation Ltd (KRCL), Government of Jammu and Kashmir Economic Reconstruction Agency (ERA, Jammu), Border Road Organisation (BRO), Public Works (R&B) Department, among others.

As of January 31, 2024, the company's order book comprises twenty-one infrastructure construction projects. This includes eleven road projects (including bridges), five tunnel projects, four slope stabilization projects, and one miscellaneous civil construction activity. As of January 31, 2024, the total value of contracts in the order book amounted to Rs 1,199 crore.

Financials 

The company has successfully demonstrated consistent growth in both its revenue and net profit over the past few years. In FY22, both revenue and net profit witnessed robust year-on-year growth, with a 64 per cent surge in revenue and 112 per cent rise in net profit compared to FY21.

While the growth pace experienced a slight decline in the financial year 2023, the figures for the December quarter remained equally impressive. It suggests the potential for robust growth for the financial year 2024 if the current pace is sustained. The company boasts a return on equity (RoE) and return on capital employed (RoCE) of 35 per cent and 34 per cent, respectively, for the fiscal year 2023.

Valuation and outlook  

The issue is priced with a P/BV ratio of 4.17 times, calculated using its Net Asset Value (NAV) of Rs 50.31 as of December 31, 2023. When we calculate the PE ratio for the company by considering the annualized FY24 earnings relative to the fully diluted paid-up equity capital, the resulting PE ratio stands at 13. SRM Contractors Ltd exhibited superior performance in comparison to its listed peers, taking into account both valuation and returns simultaneously.

The company stands poised to capitalize on burgeoning opportunities in road infrastructure development, propelled by government initiatives like the National Infrastructure Pipeline (NIP) and PM Gati Shakti National Master Plan. The company's in-house integrated model, coupled with a proven track record of efficiently executing projects in the challenging terrain of the Union Territory of Jammu and Kashmir, along with a robust pipeline of projects, serves as its key strengths. Hence, we advise investors to contemplate subscribing to the offering with a long-term perspective.