Capacit’e Infraprojects (CIP) IPO opens for subscription today and JainMatrix Investments has come up with its research note on the public offer. Capacit’e Infraprojects IPO rating by the Bangalore-based research firm is positive and it has listed several reasons behind the favourable response. Among other factors, the firm has mentioned a strong grey market premium of INR110 per share. Readers can find the full report at the end of the article, here are some quick points from the research report.
Positives for Capacit’e Infraprojects IPO
- The rise and rise of CIP is due to the success of promoter brothers, Rohit Katyal and Rahul Katyal. With rich work experience from Pratibha Industries, they set up CIP together. They also handle different portfolios – Rahul as MD handles Sales and Operations and Rohit is CFO.
- CIP has a good reputation of doing quality work in a timely fashion, which is delivered by using its proprietary tools and technologies which bring down the construction cycle time.
- CIP has an exclusive focus on construction of buildings in major cities. The geographical spread of their projects has been limited to major cities in India, with a focus on Mumbai, NCR and Bengaluru.
- CIP has a marquee client base and a large order book at 3.9 times revenues in May 2017.
- They have secured repeat orders from some of their clients, like the Lodha Group, The Wadhwa Group, Godrej Properties, Transcon Developers, Ahuja Constructions and Puravankara Projects. In fact clients have taken them to new geographies outside Mumbai, and helped in their growth.
- CIP has a strong track record of growth and profitability. They have reduced debt over 2 years.
- The asking P/E at 24 times is moderate. CIP has low debt and a sustainable business model.
- The IPO is a fresh issue of shares. Hence the promoters aren’t cashing out which is a positive.
The unofficial/ grey market premium for this IPO is Rs.110/share. This is a positive.
Risks and Negatives for Capacit’e Infraprojects IPO
- CIP has risen to today’s strengths in less than 5 years of operations. This sounds incredible, in such a high competition business. However we have found that that the promoters had many years of work experience in a related business (Pratibha Industries) before starting CIP.
- A revenue growth of 30-50% may be required to sustain high RoE for CIP. The high RoE of CIP is explained by high revenue growth of the firm. Margins are in average range and cannot rise sharply for a construction contractor. On time delivery is a given. To continue this high performance, CIP will need to continue growing at a fast clip, in the chosen high growth cities.
- Client concentration – projects awarded by their top 5 clients represented 38.7%, and their top 10 clients contributed 59.7% of their Order Book, as of May 2017. This is a risk. However conversely we can say that if relationships stay strong, these solid customers can power future growth.
- Typical Industry risks include 1) manpower shortage issues. 2) Liability claims or claims for damages or termination of contracts with clients for failure to meet project milestones or defective work issues. 3) fluctuating prices of steel, sand and ready-mix concrete. 4) Clients operate in a highly regulated environment, and existing and new laws, regulations and govt. policies can affect the sector. 5) Construction involves physical hazards and risks. 6) A competitive market, CIP must bid for and continue to win construction projects.
Capacit’e Infraprojects IPO Rating and overall opinion: BUY
- Construction sector is massive in India and likely to witness a revival from increased demand from real estate and infrastructure projects, govt. initiatives and funding and private sector investments.
- In this massive sector with numerous players and high competition, CIP stands out as an innovative, aggressive building contractor which brings in technologies and processes that helps it deliver with high quality and on time delivery. It has an excellent client base among Property firms.
- CIP has a professional management team, a reputed PE backing and clear growth strategies which are likely to take the company to new heights in the near future.
- Given this client base and assuming the relationships stay strong, CIP can look at revenues rising at over 30% annually for 3-4 years which will give it a good size, market share and high return ratios.
- The major risks are loss of any top 5 client, and project disruptions due to labour or other issues.
- The valuations at the IPO price are average, however we are positive due to strong growth potential.
This IPO offering is rated BUY, and investors can invest with a 2 year perspective.
Read JainMatrix Investments’ full report on Capacit’e Infraprojects IPO rating here