IRCON International Ltd.

Transcription

1 September 12, 2018 IPO - te IRCON International Ltd. Recommendation: SUBSCRIBE Infrastructure IRCON International Ltd ( Headquarter in Saket, New Delhi and overseas office in Malaysia) is a mini-ratna catergory-1 company, operating since 1976 and specialized in major infrastructure projects including railways, highways, bridges, flyovers, tunnels, aircrafts maintenance hangers, runways, EHV sub-stations, electrical and mechanical works, commercial and residential properties, development of industrial areas etc. Currently IROCN has 26 project offices in India, Sri Lanka, Bangladesh, South Africa, Algeria and 5 regional offices to manage and support the business. As on 31 March, 2018 the order book stands at INR 224, Million and 1179 full-time employees. Although the largest shareholder is Ministry of Railways, company wants to operate as a separate legal entity from the Government of India. IRCON have ranked as 248 positions in the list of the top 250 international contracts by Engineering News Record of the United States. Issue Snapshot Issue Open: Issue Close: 17/Sep/18 19/Sep/18 Price Band INR Issue Size Market Cap Particulars Fresh Issue no. share in mn INR 4705 mn INR mn mn OFS Issue no. share in mn 9.91 QIBs n-institutional Retail Eligible Employee Capital Structure Pre Issue Equity Post Issue Equity NIL 47% Of Net Issue 14% Of Net Issue 33% Of Net Issue 5% Of Net Issue INR 941 mn INR 941 mn Bid Lot 30 Minimum Bid 470 INR Minimum Bid 475 INR Shareholding Pattern (%) Pre Issue (%) Post issue (%) Promoters 99.72% 89.18% Public 0.28% 10.82% Particulars Face value INR 10 P/BV 31-Mar EV/EBITDA 31-Mar Objects of the issue Fresh Issue To carry out the disinvestment of upto 9,905,157 Equity Shares, including Employee Reservation Portion, by the Selling Shareholder constituting 10.53% of our Company s pre-offer paid up Equity Share capital of the Company. To achieve the benefits of listing the Equity Shares on the Stock Exchanges. Investment Rationale Diversified business across many countries: As of March 31, 2018, Company has completed more than 127 projects in more than 24 countries across globe, and 380 projects in various states in India. Company diversified into various infrastructure sectors including railways, highways, bridges, flyovers, tunnels, aircrafts maintenance hangers, runways, EHV sub-stations, electrical and mechanical works, commercial and residential properties, development of industrial areas etc. Excellent execution track record through strong operating systems and controls: Robust contract management system, efficient planning and project management & innovation in designs and advance technology are the key reason for excellent execution of the projects. Visible growth through robust order book and steady execution: Order Book as of March 31, 2018 was INR 224, million which translates into approximately 6x of total operating revenue in Fiscal Year 2018 and 93% of the total order is domestic. Company has secured INR 61, million of new contracts in Fiscal Year Growth in the Order Book position is a result of the track record of successful execution of the projects, which has led to the ability to successfully bid and win new projects. Company is very much particular about the bidding value (above INR 5000 millions) and project margin (not less than 8 to 10%). Qualified and experienced employees and proven management team Key Management Personnel have an average of 27 years of experience and have been associated with for an average of nine years. Sunil Kumar Chaudhary, Chairman and Management Director, is a civil engineer who has more than 34 years of experience in overseeing the implementation/execution and monitoring of projects in various segments of the operations. M.K. Singh, Director Finance, has over 25 years of experience in various capacities in Indian Railways. Deepak Sabhlok, Director - Projects has experienced in various fields of infrastructure, such as railway construction, contract management, track maintenance and ancillary works. Strong financial performance and credit profile Company's credit rating for long and short term borrowing has been maintained at AAA/A+ since 2011 (CARE rating agency). Company has a strong credit profile that includes non-fund based standby bank limits of INR 31,200 million out of which INR 16, million has been utilized. Outlook and Valuation With the strong order book, highly experienced management team, proven track record of various domestic and foreign project executions, project bidding criteria, own cash investment in core business, will help IRCON to grow at a robust pace. At present, IRCON has enough cash to meet working capital needs and a passes-through amount reflects a healthy balance sheet. At the upper price band level at INR475, IRCON is available at 10.9x FY18 P/E. We recommend SUBSCRIBE to the issue with a long-term perspective. Girija Ray girija.ray@spasec.in Ph / Ext

2 Investment Rationale Diversified business across many countries As of March 31, 2018, Company has completed more than 127 projects in more than 24 countries across globe, and 380 projects in various states in India. Company diversified into various infrastructure sectors including railways, highways, bridges, flyovers, tunnels, aircrafts maintenance hangers, runways, EHV sub-stations, electrical and mechanical works, commercial and residential properties, development of industrial areas etc. many other areas such as construction of commercial and residential complexes, power transmission lines, industrial lighting, bridge/ fly overs, 60 tunnels, commercial, residential and retail properties, electrical and mechanical work, signaling/telecom, coach factory, station building, multi-function complex, and aviation. Excellent execution track record through strong operating systems and controls Robust contract management system, efficient planning and project management & innovation in designs and advance technology are the key reason for excellent execution of the projects. Company has recently been given the opportunity to bid for coal connectivity projects in Chhattisgarh, Odisha and Jharkhand, and executing the Majuba Rail project in South Africa. From FY15 to FY18, company has completed a total of seven railways projects with an aggregate value of INR 28, million, and is currently undertaking 33 railways projects and five highways projects with an aggregate value of INR 366, million. Visible growth through robust order book and steady execution Order Book as of March 31, 2018 was INR 224, million which translates into approximately 6x of total operating revenue in Fiscal Year 2018 and 93% of the total order is domestic. Company has secured INR 61, million of new contracts in Fiscal Year Growth in the Order Book position is a result of the track record of successful execution of the projects, which has led to the ability to successfully bid and win new projects. Company is very much particular about the bidding value (above INR 5000 millions) and project margin (not less than 8 to 10%). Qualified and experienced employees and proven management team Key Management Personnel have an average of 27 years of experience and have been associated with for an average of nine years. Sunil Kumar Chaudhary, Chairman and Management Director, is a civil engineer who has more than 34 years of experience in overseeing the implementation/execution and monitoring of projects in various segments of operations. M.K. Singh, Director Finance, has over 25 years of experience in various capacities in Indian Railways. Deepak Sabhlok, Director - Projects has experienced in various fields of infrastructure, such as railway construction, contract management, track maintenance and ancillary works. Strong financial performance and credit profile Company's credit rating for long and short term borrowing has been maintained at AAA/A+ since 2011 (CARE rating agency). Company has a strong credit profile that includes non-fund based standby bank limits of INR 31,200 million out of which INR 16, million has been utilized. INDUSTRY OVERVIEW: Construction sector to increase: The construction sector to increase by 54% to INR 22.2 trillion between FY19-22 and about 93% of this is contributed by infrastructure investments while the rest is from industrials. This infrastructure development is driven by government initiative and budgetary support for these developments. Government Initiatives as: New Metro Rail Policy unveiled in August 2017 which makes PPP a must for obtaining central government assistance to boost private participation in Metro Rail. Awarding national highway projects only after 80-90% of the required land is in possession of the government from FY17 to reduce the uncertainty in the projects. Launching of schemes to help developers improve cash flow and repay debt, such as rescheduling premiums in road projects and permitting developers to offload stake in the buildoperate-transfer projects initiated in FY16. Increased thrust on financing projects through external funding and private participation in Railway infrastructure from FY16. Financial restructuring of state electricity boards through UDAY, providing room for investments in distribution network. Bharatmala project(under inter-ministerial consultation as of August 2017) which envisages construction of 24,800 km of Roads Investment of ~ INR 350 billion in urban infrastructure in seven states over FY under the Atal Mission for rejuvenation and Urban Transformation(AMRUT). Convergence of irrigation schemes under the Pradhan Mantri Krishi Sinchayee Yojana (PMKSY) with a spending target of INR 500 billion for the period FY

3 Development of 50 economic corridors as well as 35 multimodal logistics parks and 10 intermodal stations, to boost transportation related investments under multi-modal logistics and transport policy in Railways construction to rise to 14% over the next 4 years: Railways accounted for 11% of the construction during FY Over the next 4 years, the opportunity is expected to double to INR 3.1 trillion driven by investments by public as well as private sector especially in Network decongestion, expansion and Safety which account for over half of the total investments in railways during this period. Investments in key segments such as new lines, gauge conversion, doubling, track renewals, and electrification will account for INR 2.3 trillion (73%) of the construction opportunity during fiscals with doubling accounting for the highest share at 31% during this period. The investments in railway sector to increase by about 77% to INR 6.8 trillion in fiscals assurance of funds from LIC being utilized in addition to Gross Budgetary Support (GBS). The pace of completion of doubling projects is likely to increase to 1,500 km by FY22 from 882 km in fiscal Spending on Doubling to increase significantly: Investment in Railways: During FY19, budgetary allocation for railways at INR 1465 billions: Sources: Budget Documents. Split of investment ( Railway Segments) FY15-18 FY19-22P Rolling Stock 22% 20% Safety 12% 14% Network Expansion 18% 19% Network Decongestion 17% 20% Others ( includes DFC, HSR etc) 31% 27% Sources: Indian Railways Network Decongestion includes: investment in Gauge Conversion, Doubling, and Electrification. It is estimated that an outlay of INR 1.4 trillion (21% of actual capex) for network decongestion between FY19 and FY22 - about 102% jump in allocation compared to the previous 4 years. Doubling projects are seeing sharper focus on commissioning due to new sanctions, emphasis on project prioritization, an te: Indian Railways budget estimate for FY19 is INR 174 billion. Ministry of Railways' electrification capex is estimated to surge to INR 41 billion in fiscal 2018: The government's plan till FY is to touch electrification pace of 10,500 km every year. The push has been supported by a significant rise in allocations - with the latest Union Budget revising the targeted spend for fiscal 2018 to INR 50 billion and proposing an even higher outlay for fiscal It is expected that the completion of electrification to average at 4,750 km during FY19-22, taking the total kms electrified to about 19,000 kms. Even the two dedicated freight corridors on which work is currently underway will both be electrified lines. Over fiscals , and estimate an average run rate of INR 78 billion per year over fiscal

4 Electrification to drive EPC contracts while rolling stock presents opportunities in manufacturing for private players. INR 26 billion potential in manufacturing facilities for rolling stock, more projects proposed under JV. With the focus on network expansion and rising rate of electrification, there is expected to be a commensurate increase in locomotive demand. To balance this demand, the government has envisaged two locomotive plants, both in Bihar, which have been awarded already through the PPP route. While Alstom has commenced production of its first locomotive from October, 2017, GE had imported its prototype from US. The railways have also planned to set up a factory for manufacture of EMU/MEMU coaches under JV route. The selection of the JV partner for the project is currently under process. Conversion from metre gauge to broad gauge is undertaken to ensure seamless movement of traffic on Indian Railways network. Broad gauge is used for regular trains, while metre gauge and narrow gauge are used for smaller and unconventional engines and coaches and it is expected expects gauge conversion of about 2,900 rkm over FY19-FY22, indicating that about ~98% of the network will be on broad gauge by FY22. Steady completion of average km expected in gauge conversion over FY19 - FY22. Huge backlog of projects: New lines are sanctioned for providing connectivity to regions not adequately connected to the railway network. Priority has been accorded to clearing the huge backlog of projects, most of which are more than 10 years old and routes which offer better return. New line projects typically take 2-3 years to commission after land acquisition. Indian Railways will be able to take up additional new line projects if State JVs/ PPPs come up in a big way or where industrial hubs need to be connected. The investments on track renewals to increase from estimated INR 238 billion over FY15-18E to INR 475 billion over FY19-22, aided by higher availability of funds for safety through newly introduced Safety fund "Rashtriya Rail Suraksha Kosh" during FY18 budget. On an average, about 4,500 km of track should be renewed annually. However, due to financial constraints, the achievement on this score has declined over the past six years. This has resulted in a backlog of 5,300 km as of FY16, leading to high maintenance and speed restrictions. Thus, the backlog has hindered efforts to increase train speeds, bloated up maintenance effort and costs, and led to safety failures. Construction opportunity in Railways is expected to double to INR 3.1 trillion over FY19-22, driven by huge investments especially in Network decongestion, expansion and Safety which account for about 53% of the total investments in railways during this period. Of this, ~73% (INR 2.3 trillion) of total IR construction spend is expected to be in new lines; gauge conversion; doubling; track renewals; and electrification. Construction opportunity in major segments of IR Source: Industry, Ministry of Railways, Spend on DFC gathers traction, PPP Stretch in DFC, a key monitorable. The Eastern Dedicated Freight Corridor (DFC) covers a route length of 1856 Km whereas the western DFC covers a route length of 1504 km. The total project cost for these two DFCs is estimated at INR 815 billion. As on FY17, the total investment in DFCs stood at INR 317 billion of which INR 159 billion is towards land acquisition. Over fiscals , investments to the tune of INR 682 billion (INR 184 billion is already spent) are anticipated in DFCs. As per DFCCIL, 92% of civil contracts have been awarded (EDFC and WDFC), while it is 82% each for electrical and signaling-and-telecom contracts. In terms of Physical progress, according to a PIB circular about 29% of the project is completed physically as on July INR 101 billion opportunity on eastern DFC alone The Dankuni - Sonnagar stretch on the eastern DFC has been identified for awarding to private players. The construction cost is estimated to be around 70-80% of the cost of the project. Development of high speed rail (HSR) corridors in India: During fiscals , Indian Railways' have targeted an investment of INR 650 billion for the development of high speed rail (HSR) corridors in India. The feasibility study of the first HSR between Mumbai-Ahmadabad estimated at INR 976 billion has concluded. Despite such a high cost, the project will materialize due to availability of cheaper funds from Japan International Cooperation Agency (JICA). JICA has agreed to fund 81% of the project cost at an interest rate of 0.1% per annum for 50 years, with a 15 year moratorium period. During fiscals , the budget has allocated INR 24.5 billion towards the new special purpose vehicle (SPV) for HSR - the National High Speed Rail Corporation (NHSRC). 4

5 Station redevelopment: A ~INR 70 billion window, IR maintains ~8,500 stations developed over the years. Of these, large stations face various issues- congestion due to incoming/outgoing passengers and visiting relatives who throng platforms and overhead bridges and waiting areas. To address this, Indian Railways has now decided to redevelop 400 stations under the PPP model by simplifying processes for faster redevelopment. These stations offer an investment opportunity of INR 70 billion till fiscal Road infrastructure investments to continue: Total investments in Road infrastructure grew at a CAGR of 12% during FY13 to FY18 driven by investments in National Highways and Rural Roads. And expected to have an investment of INR ~3.7 trillion, up 2.5 times for FY In fiscal 2017, total projects awarded by NHAI amounted to 4,337 km. And it is expected that the momentum in the highways sector to accelerate in fiscal 2018 and NHAI awarding to cross 5,000 km driven by: Completion of the remaining length of the National Highway Development Program (NHDP) program, New projects such as Bharat Mala, Up-gradation of state highways to national highway. Sources: MoRTH Sources: NHAI State Roads account for a major share in Road Infrastructure investments. State roads comprise of ~20% of the country's total road network and handle ~40% of road Traffic. Currently, 12-15% of the total investments in state road projects is channeled through the public private partnership (PPP) route. This proportion is expected to remain largely range bound over fiscals , however with a slight upward bias as few states start exploring different PPP models like HAM to improve private investments. Propelled by higher budgetary allocations by state governments, investment in state roads is expected to grow steadily at a compounded annual growth rate (CAGR) of ~9% between fiscals Investments had grown at a higher 15% CAGR during the preceding four years, mainly due to the low base effect. Rural roads fall under the jurisdiction Pradhan Mantri Gram Sadak Yojana (PMGSY), introduced in It is expected that the investment in PMGSY to increase by 1.6 times from fiscals 2019 to 2022, as the central government aims to achieve targets three years ahead of schedule. To speed up implementation, the Centre increased allocation to the PMGSY by 12% to INR 190 billion in fiscal Investment in Rural Road to rise: Sources: Budget Document EPC & HAM model to support pick up in awarding of National Highway projects in FY18: NHAI awarded projects of ~4,350 km in fiscal 2016, a rise of 40% on-year. However, awarding in fiscal 2017 fell to 4,337 km. And it is expected that the awarding to increase moderately and reach 5,280 km in fiscal 2018 owing to uptake in acceptance for the HAM model from developers as well as financers, thus resulting in easier financial closure. BOT projects typically start with a lag of about 8-12 months after being awarded, as players take more time to achieve financial closure. On the other hand, EPC projects start within 2-4 months. Sources: Budget Documents Sri Lanka and Bangladesh to offer opportunity in Railways as well. In case of Sri Lanka and Bangladesh, long term plans by respective railways reveals investment to the tune of LKR 289 billion and Tk 2.34 trillion respectively. For Sri Lankan Railway, only improvement of existing railway network and construction of new railway lines offer significant amount of construction potential. In case of Bangladesh, Rehabilitation and construction of tracks, bridges, electrification etc. and Buildings & Workshops provide construction potential. 5

6 Company Overview: Corporate Structure Core Operation: Construction & Infrastructure Development Business Railway projects as of March 31, 2018: Total of 33 railway projects in two countries internationally and in 13 states in India, with an aggregate length of 1, km, ongoing projects amounted to INR 194, million accounting for 86.70% of total Order Book. Highways and roads as of March 31, 2018: 5 roads projects, in the aggregate for India and abroad, amounted to INR 12, million accounting for 5.70% of total Order Book. Electrical business as of March 31, 2018: 8 electrification projects, in India and abroad. Order Book for these projects amounted to INR 12, million accounting for 5.39% of total Order Book. Building and other business as of March 31, 2018: 3 building and other projects, in India and abroad. And the Order Book for these projects amounted to INR 4, million accounting for 2.21% of total Order Book. Performance from Construction Business: Current Order Book Details INR in % of Number of millions Order Book Projects Railway Project % 33 Highways and roads % 5 Electrical business % 8 Building and other business % 3 Total Order Book % 49 Revenue - INR in millions FY16 FY17 FY18 Railway Projects % of Total Revenue 77.1% 68.3% 69.0% Highways and roads % of Total Revenue 9.8% 19.7% 21.8% Electrical business % of Total Revenue 8.2% 8.5% 2.3% Building and other business % of Total Revenue 2.9% 2.6% 1.4% Total Construction Revenue

7 Infrastructure Development Business: Company develops and maintains railways and roads on a BOT basis. As of March 31, 2018, company has one completed road project of 115 km in India, which is on a toll basis where profit is realized largely by toll collection during the concession period, and expected to complete two more BOT (toll) projects in Fiscal Year Company has one project under implementation on a hybrid annuity basis where a fixed amount of the project will be paid after the project starts commercial operations. Company is currently placed strategic focus on executing projects under the EPC, DBFOT and hybrid annuity modes, as there has been an increase in high value projects being bid using these modes of project execution. Outlook & Valuation With the strong order book, highly experienced management team, proven track record of various domestic and foreign project executions, project bidding criteria, own cash investment in core business, will help IRCON to grow at a robust pace. At present, IRCON has enough cash to meet working capital needs and a passes-through amount reflects a healthy balance sheet. At the upper price band level at INR475, IRCON is available at 10.9x FY18 P/E. We recommend SUBSCRIBE to the issue with a long-term perspective. Risk Factors The business and revenues are substantially dependent on construction and infrastructure projects undertaken or awarded by government authorities and other entities funded by the government. Any change in government policies, the restructuring of existing projects or delay in payments to us, may adversely affect the business and results of operations. The portfolio will be increasingly concentrated in large-scale and long-term projects, specifically, projects in the railway sector. Such concentration in the portfolio if not properly managed could lead to material adverse effect on the business, prospects, financial condition and results of operations. Some of the employees are on deputation from Ministry of Railway and may not get permanently absorbed in the Company. Projects sub-contracted or undertaken through a joint venture may be delayed on account of the performance of the joint venture partner, principal or sub-contractor, resulting in delayed payments or non -enforcement of performance guarantee issued by the company, could lead to material adverse effect on the business, prospects, financial condition and results of operations. 7

8 Financials Income Statement Y/E (INR mn) FY15 FY16 FY17 FY18 Net Sales Net Sales Growth -23.7% -16.2% 23.1% 31.3% Cost of Goods Sold Employee Cost Other Optg. Exps Total Optg. Exps EBITDA(excl OI) EBITDA Growth -30.6% -58.4% 23.9% 37.2% EBIDTA Margins 21.4% 10.6% 10.7% 11.2% Dep./Amortization EBIT EBIT Margins 20.6% 9.4% 9.8% 10.7% Interest Expense Other Income EBT before Excep Item's Exceptional Items Share in Profit/(Loss) of Joint Ventures EBT after Excep Item's Tax Expenses PAT 5,630 3,931 3,840 4,116 PAT Growth -24.6% -30.2% -2.3% 7.2% PAT Margins 18.9% 15.8% 12.5% 10.2% Balance Sheet Y/E (INR mn) FY15 FY16 FY17 FY18 Source of Funds Share Capital Reserves and Surplus Total Networth Minority Interest Total Debt Deferred Tax Liability (1636) (1682) (1268) (1604) Other Long-Term Liability Current Liabilities Total Liability Application of Funds Net Block CWIP Investments Current Assets Others Total Assets Key Ratios Y/E FY15 FY16 FY17 FY18 Per Share Data (INR) Adj.EPS CEPS BVPS Return Ratios(%) RoACE 25.2% 17.8% 14.0% 8.9% RoANW 17.4% 11.1% 10.3% 10.9% Liquidity Ratios Net Debt/Equity (1.0) (1.3) (1.2) (0.4) Interest Coverage Ratio Current Ratio Efficiency Ratios Asset Turnover Ratio Inventory Days Debtor Days Creditor Days Valuation Ratios P/E(x) P/BV(x) P/CEPS(x) EV/Net Sales(x) EV/EBIDTA(x) Cash Flow Y/E FY15 FY16 FY17 FY18 EBT Less: Other Income/Exceptionals (2574) (4159) (2340) (1849) Add:Depreciation Add: Interest paid Direct Tax Paid (2716) (2185) (1715) (1468) Change in Working Capital (246) Cash Flow from operations (a) Change in Fixed Assets (187) (253) (159) (114) Change in Investments (629) (2533) (3225) (545) Other (33150) Cash Flow from Investing (b) (33808) Change in Equity (49) Debt Raised/(Repaid) (1931) Dividend paid (1900) (2192) (2217) (2316) Interest Paid (287) (433) (587) (646) Others (2447) Cash Flow from Financing (c ) (3547) (2448) (1876) Net Change in Cash (a+b+c) (626) Opening Cash Closing Cash

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