RPP Infra Projects. IPO Note November 18, 2010 SECTOR: INFRASTRUCTURE. Expensively Priced

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1 IPO Note November 18, 2010 RPP Infra Projects SECTOR: INFRASTRUCTURE Expensively Priced Issue Snapshot Issue Open: 18-November-10 Issue Close: 22-November-10 Price Band (Rs.) Issue Size Rs 442mn - Rs 487mn Market Cap Rs mn - Rs 1695mn Issue Size: 6,500,000 shares Employee Reservation Portion 400,000 shares QIB: 3,050,000 shares Non-Institutional: 915,000 shares Retail: 2,135,000 shares RPP Infra Projects is a construction company primarily engaged in the business of infrastructure development such as Highways, Roads and Bridges. The company has diversified its civil works expertise into SEZ Development, Water Management Projects, Irrigation and Power Projects. The company has operations in the South Indian region - covering states of Karnataka, Andhra Pradesh, Tamil Nadu and the Union Territory of Pondicherry, Andaman Nicobar Islands. The firm entered the Sri Lanka market recently and is currently executing a project in the Railway Sector. Issue: The issue comprises a fresh issue of 6,100,000 shares and an offer for sale of 400,000 shares by promoters. 400,000 shares are reserved for the employees. Net Issue to public is 6,100,000 shares. Face Value (Rs./share): 10 Book Value as of FY10 (Rs.) Capital Structure: Pre Issue Equity (Rs. Mn.) 165 Post Issue Equity (Rs. Mn.) 226 Investment Rationale Presence in diverse segments RPP Infra has civil construction expertise in diverse segments of the construction and infrastructure industry such as Roads, Bridges, Highways, SEZ Development, Irrigation, Water Supply Management and Power Projects. Shareholding Pattern Pre Issue (%) Post issue (%) Promoter 100.0% 71.2% MF/FII & others 0.0% 17.6% Public 0.0% 11.2% Total 100.0% 100.0% Total Shares 16,500,000 22,600,000 Objects of the Issue Sr. No. Particulars Rs Mn. 1 Funding margin requirement for working capital Investment in capital equipment Investments in SPVs for BOT projects General Corporate Purposes [.] 5 Issue expenses [.] Total [.] Comfortable Order Book The value of Order book stands at INR 6129mn as on June 30, 2010 which is equivalent to 4.24x FY10 Contract Revenue. Investment in construction equipment to sustain future growth Company has invested INR mn in last three years on equipment purchase. Ownership ensures continuous availability of critical equipment resulting in several advantages like lower cost and rapid mobilization. Valuation & Recommendation On the post issue FY10 earnings per share, the shares are offered at a P/E of 18.6x and 20.3x on upper and lower band respectively which is high compared to its peers. Company s ability to win BOT/BOOT projects and execution capabilities has not yet established. The offer is expensively priced. Website: Sumit Duseja sumit.duseja@spagroupindia.com

2 Investment Rationale Presence in diverse segments RPP Infra has civil construction expertise in diverse segments of the construction and infrastructure industry such as Roads, Bridges, Highways, SEZ Development, Irrigation, Water Supply Management and Power Projects. Sector wise break up of Turnover: Source: Company In the FY10, Income from operations (excluding non-operating income) was INR 1,445.45mn (44.40% higher YoY) and Profit after Tax of INR 82.64mn (100.48% higher YoY). Comfortable Order Book The value of Order book stands at INR 6129mn as on June 30, 2010 which is equivalent to 4.24x FY10 Contract Revenue. As of June 30, 2010 total order book is 5.94% of Power Projects, 24.35% of Water Management Projects, 47.57% of Building Projects, 16.32% of SEZ Development and 5.82% of Irrigation Projects. Following is the sector wise breakup of order book: Source: Company trucks, tractors, trailers, jeeps, etc. Ownership ensures continuous availability of critical equipment resulting in several advantages like lower cost and rapid mobilization. Track record of timely completion of Projects Company has a track record of timely execution of the projects which minimizes cost overruns and eliminates any possibilities of penalties and liquidated damages. Company has executed projects with average contract value of INR 110mn for clients which include NTPC, Neyveli Lignite, Chennai Corp., IVRCL, L&T, BHEL, Siemens, Chennai Petro and Lanco Infra. Company Background RPP Infra Projects is a construction company primarily engaged in the business of infrastructure development such as Highways, Roads and Bridges. The company has diversified its civil works expertise into SEZ Development, Water Management Projects, Irrigation and Power Projects. The company has operations in the South Indian region - covering states of Karnataka, Andhra Pradesh, Tamil Nadu and the Union Territory of Pondicherry, Andaman Nicobar Islands. The firm entered the Sri Lanka market recently and is currently executing a project in the Railway Sector. Companies businesses encompass the following sectors in the civil engineering and construction space: Construction Sector: Execution of civil construction projects from designing and execution to providing integrated one stop solutions in allied services across the value chain; Irrigation Sector: Irrigation and water supply projects including dams, tunnels, lift irrigation projects and sewerage schemes; SEZ Sector: Industrial construction projects such as development of Special Economic Zones and related work; Water Management Sector: Water and waste water projects such as water treatment plants, water transmission and distribution systems, elevated reservoirs and ground level service reservoirs, sewage treatment plants, and common effluent treatment plants Transportation sector: Transportation engineering projects, including roads, bridges, flyovers and subways; Power Sector: Construction of civil structural for thermal/hydel power projects. Investment in construction equipment to sustain future growth Company has invested INR mn in last three years on equipment purchase. It owns the latest construction equipment comprising of crushers, hydraulic cranes, excavators, loaders, dozers, paver finishers, jack hammers, air compressors & transportation equipments such as Key Concern Company intends to bid for BOT/BOOT projects for which it has no prior experience. Therefore, its ability to win and execute the same in the highly competitive sector has to be seen. 2

3 Industry Overview Construction Industry: India s construction industry employs a work force of nearly 32 million with market size worth about Rs. 2,480,000mn is the second largest contributor to the GDP after the agricultural sector. The construction equipment market is valued at Rs.1,050,000mn. (Source: CIDC Website) The contribution of construction to the GDP at factor cost in was Rs 1,965,550mn, registering an increase of 10.7% from the previous year. The share of construction in GDP has increased from 6.1% in to 6.9% in The increase in the share of construction sector in GDP has primarily been on the account of increased government spending on physical infrastructure in the last few years, with programmes such as National Highway Development Programme (NHDP) and PMGSY/Bharat Nirman Programme receiving a major fillip of late. The 11th Five Year Plan envisages an infrastructure investment of Rs. 20,561 billion (at FY 2007 prices), equaling US$ 514 billion, to be shared between the Centre, states and private sector in the ratio of 37.2%, 32.6% and 30.1%. Set forth below is the estimated level of investment in the infrastructure sector over XI plan: Promoter Background Mr. P. Arul Sundaram, 44 years, is the Chairman and Managing Director of the Company. He has over twenty two (22) years of experience in civil works in the fields of transportation/ power/ commercial buildings and irrigation projects. He has been responsible for strategic direction and development of the Company and is in overall control of operations. Ms. A. Nithya, 37 years, is the Whole Time Director, Finance of the Company. She has been on the Board since February 19, 1999 and is responsible for the finance, accounting and treasury functions of the Company. Valuation & Recommendation On the post issue FY10 earnings per share, the shares are offered at a P/E of 18.6x and 20.3x on upper and lower band respectively which is high compared to its peers. Company s ability to win BOT/BOOT projects and execution capabilities has not yet established. The offer is expensively priced. 3

4 Financials Balance Sheet (Rs.Mn) As on 31st March Income Statement (Rs.Mn) As on 31st March FY08 FY09 FY10 FY08 FY09 FY10 Share Capital Income from Operations Reserves & Surplus Operating Expenditure Net Worth Other Income Borrowed Funds EBIDTA Current Liabilities EBIDTAM% 8% 12% 12% Total Liabilities Depreciation Profit before Interest & Tax Net Block Financial Charges Investment Profit Before Tax Def. Tax Assets (1.6) (1.2) (2.6) Tax Current Assets Profit after tax Total Assets PATM% 3% 4% 6% Prior Period/Adjustment (7.9) 0 Net Profit Cash Flow Statement (Rs.Mn) As on 31st March Ratios As on 31st March FY08 FY09 FY10 FY08 FY09 FY10 Debt to Equity (x) Cash Flow from Operating Activities (18.90) ROCE (%) Cash Flow from Investing Activities (42.87) (16.63) (123.27) Cash EPS (Rs.) Cash Flow from Financing Activities (71.28) BV/Share (Rs.) P/BV at 75 (x) Net Cash Flow RoNW (%) Opening Cash EPS (Rs.) Closing cash P/E at 75 (x) *Pre Issue Figures Peers Comparison Company CMP (Rs) M-Cap (Rs Mn) M-Cap/Sales (x) Sales (Rs Mn) EPS (Rs.) P/E (x) BVPS (Rs) P/BV (x) RPP RPP ARSS Infra CCCL IVRCL infra J.Kumar Infra Pratibha Industries Simplex Infra *EPS and BVPS are calculated using post issue shares 4

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