Kaushalya Infrastructure: Avoid

Investors can avoid the initial public offer of Kaushalya Infrastructure Development Corporation (Kaushalya) for now. Given the small size of business and the absence of any unique positioning, the valuation at the current offer price does not appear attractive.

In the offer band of Rs 50-60, the IPO is priced at 14.5-17 times its FY-07 earnings on the pre-offer equity base.

The IPO would expand the equity base by 76 per cent and holds the risk of earnings dilution in the medium term.

Further, Kaushalya’s plans to foray into real-estate and build-operate-transfer (BOT projects) may prove to be risky, given the small base and tremendous competition in these segments.

Attractive pricing may be crucial for small players that enter the market now, unless they have a niche in any promising segment in the industry.

This is especially because there are other opportunities in the listed space at present, with superior track record and better visibility for earnings growth.
Background and offer

Kaushalya is an infrastructure company, primarily into the construction of roads and bridges and a focus in Eastern India.

It plans to foray into building commercial and residential complexes through a tie-up with the West Bengal Government.

The company will raise Rs 42-51 crore through this offer, the proceeds of which would be utilised for purchase of construction equipment, investment in BOT projects and for acquisition of land/development rights for real-estate projects.
Pricing

Kaushalya’s sales grew at a compounded annual rate of 45 per cent over the last three years. However, its FY-07 sales of Rs 55 crore is smaller than peers such as PBA Infrastructure or Tantia Constructions, which are traded at discounted/similar valuations.

Though the order-book, as of July 2007 at Rs 76 crore, provides revenue visibility, it is only about 1.38 times the FY-07 revenue as against a industry average of three-five times last year’s revenues.
New forays

The company’s agreement with the West Bengal Housing Board to execute housing projects and allied infrastructure works can be expected to provide some upside to the company’s earnings over the long term.

The company is also likely to get a reasonable stream of business as it appears to enjoy a good reputation with the public works department and similar local authorities.

Further, the infrastructure development in East India lags behind the rest of the country providing much scope for players in that region.

We are however cautious about the company’s other tie-ups for foraying into real estate.

A good number of these tie-ups are with its own group companies that have been recently incorporated and with, perhaps, limited experience in the realty space.

Further, close to 70 per cent of the existing land reserves/rights are in Zaheerabad in Andhra Pradesh, a region that is completely out of the company’s existing domain and plans. Sale of the same could, however, bring in one-time income.

Entry into the BOT segment may also not be too easy, given that it requires financial and technical qualification or securing tie-ups with bigger players.

The IPO is open from November 20-23. SREI Capital Markets is the book running lead manager.