Prakash Constrowell IPO - Is it subscription worthy?

Prakash Constrowell (PCL), which is into the business of infrastructure and civil construction, is tapping the primary market to raise Rs 60 crore with its new issue, within a price band of Rs 130-138. The company will issue 43.50 lakh fresh equity shares on the higher price band and 46.20 lakh equity shares on the lower price band. This will take the post issue equity to 1.257 crore and 1.284 crore equity shares respectively. The funds raised will be utilised for meeting the working capital requirements, purchase of construction equipments, investment in subsidiaries and general corporate purposes.

Understanding The Business

PCL’s construction and contracting business is divided into three areas, viz. infrastructure development, civil construction and building construction. Infrastructure development includes the construction and maintenance of roads, bridges and industrial parks. Civil construction includes hospitals, educational institutions, government staff quarters, hostel buildings and auditoriums. Building construction includes residential and commercial real estate construction. The company earns its revenues primarily from the government.

Presently, PCL has an order book of Rs 150.80 crore, which is divided as 51.90 per cent in infrastructure, 45.50 per cent in civil construction and 2.70 per cent in buildings. The noticeable factor is that around 40 per cent of the order book will be completed till Q2 FY12, and 67 per cent will be completed in FY12 as a whole. We would like to mention that, while many listed construction companies have a normal order book of two to three times of their FY11 sales, this company scores poorly on this front with mere 1.2x.

With the smaller balance sheet size, intense competition and the operational area restricted to the Maharashtra region, it is quite difficult to consider higher growth going forward.

Objectives of the Issue

The objectives of the issue look structured merely to facilitate the IPO and listing the company on the bourses. These are:

• Meeting the working capital requirement of Rs 35 crore
• Investment in construction equipments worth Rs 9.3 crore
• Investment in four subsidiary companies for Rs 2.35 crore
• The rest for general corporate purposes.

Here, we would like to mention that in estimating the working capital requirements for the future years, the company expects to increase its debtor days in FY12 to 66, from 43 days in FY11. In case of credit, the days will fall very sharply to 45 days from 105 days. This poorly-placed calculation only represents its pitiable working capital management.

Further, the company will invest Rs 2.34 crore to acquire full stake in four subsidiary companies. The consideration of this will go to the existing directors and relatives being shareholders. With the subsidiary companies hardly contributing to consolidated results, the fairness of this transaction is difficult to ascertain.

Another point drawing attention is a related party transaction, wherein the company has taken a commercial property of 18000 square feet on lease from its subsidiary Atal Buildcon, for further sub-letting. The worst part is that PCL has paid an advance of Rs 10.5 crore as security deposit towards the same and expects to get possession of the property by 30th September, 2011. We fail to understand the compulsions behind the company blocking valuable resources.

Financials and Valuations

On the financial front, the company posted a consolidated topline of Rs 129.05 crore and bottomline of Rs 10.58 crore for FY11, as against Rs 115.90 crore and Rs 8.05 crore in FY10 respectively. Surprisingly, while the major players have witnessed a fall in margins, PCL has improved its EBITDA margins to 14.30 per cent, from 11.10 per cent in FY10. However, we feel that the margins are not sustainable in the current scenario of cut-throat competition and rising interest rate regime.

On the valuation front too, the issue seems to be expensive, with the lower price band discounting the FY11 earnings by 15.78x. Even larger and established players like Unity Infra and Sadbhav Engineering are available at 4x and 7x respectively. Further, even if the company manages to post a bottomline of Rs 12 crore, considering the order book of Rs 150.80 crore being completed in FY12, the P/E stands at 13.83x. This is still above the larger peers, and hence we, at DSIJ, recommend that investors avoid the issue.

Share Holding Pattern

Issue Information