Prakash Constrowell IPO Review by MLR Sec (Avoid)

Issue Period: 19th Sep - 21st Sep
Price Band: INR 130-138
Issue Size: INR 60 Cr
Mcap: INR 163-173 Cr
Grading: CARE IPO Grade 2
BRLM: Intensive Fiscal Services ltd
Promoter: Prakash & Aruna Laddha
Listing: BSE & NSE

Prakash Constrowell is engaged in the business of civil construction, infrastructure construction, industrial constructions and real estate development. PCL undertakes projects for various government/ semi -government bodies and private sector clients. It is headquartered at Maharashtra and has its operations across the state of Maharashtra. PCL is registered as class 1]A contractor with the public works department, the government of Maharashtra, wherein it can bid for range of contracts without restriction on the contract value. PCL is promoted by Mr Prakash Laddha and has over 30 years of experience in the construction business.

PCL is involved in the following segments of construction:

• Infrastructure development which includes the construction and maintenance of roads / highways, bridges, industrial parks, workshops, hospitals, educational institutions;
• Civil construction which includes the construction of the government staff quarters, hostel buildings and auditoriums;
• Residential and commercial real estate development

Objects of the Issue

• To meet working capital requirement - Rs 35 Cr
• Investment in Construction Equipment - Rs 9.3 Cr
• Investment in Subsidiaries - Rs 2.3 Cr

• PCL's order book as of June 30th, 2011 is at Rs 151 Cr which is 1.2 times its FY11 revenue of 127 Cr. Out of which, 51% is of Infrastructure construction (Rs 78 Cr), 43% of Civil Construction (Rs 69 Cr) and the rest is of Real Estate (Rs 4 Cr).
• The company's topline grew at a CAGR of 49% in the last four years to Rs 127 Cr in FY11 due to the execution of more orders, while bottomline grew at a CAGR of 22% to Rs 11 Cr during the same period. Company's EBITDA margins are quite volatile with an EBITDA margin of 14% and a PAT margin of 8.3% in FY11.
• PCL is comfortably leveraged with a debt equity ratio of 0.2:1. It delivered an RoE of 33% in FY11 which fell from 36% in the previous period.
• The company's market cap is Rs 173 Cr on an upper price band of Rs 138 and a market cap to sales ratio of 1.4. PCL is asking for valuations of 15.4-16.3 times FY11 EPS on a price band of Rs 130-138 on a post issue basis. P/BV is almost 2 times it FY11 book value 73 post issue. Valuations are quite expensive when compared to its peers like Vascon Engineers which is trading at a market cap to sales ratio of 0.5, P/E of 9 and a P/BV of 0.6.

Concerns

• Geographical Concentration: The company's major chunk of orders are concentrated in Maharashtra. This exposes the company to geographical concentration risk. In case of change in the state government policies or slowdown in tendering, the company's revenue and profitability might get impacted.
• Client Concentration: PCL is highly dependent on the state government/ semi-government entities. Its top fourcustomers accounted for approximately 65% of its total revenues in FY11. Loss of any of its large customer can adversely impact its business. The contract awarded by the government authorities are tender based in which
  PCL has to compete with the other companies.
• Relatively small scale of operations: The company is relatively small compared to other construction players. Small size not only restricts its ability to bid for the large size contracts but also makes it highly vulnerable to the uncertainties associated with the execution of projects.

PCL is asking for valuations of 15.4-16.3 times FY11 EPS on a price band of Rs 130-138. P/BV is almost 2 times it FY11 book value of Rs 73 post issue.