RPP Infra Projects IPO Review

Investors can avoid the Initial Public Offer of RPP Infraprojects, a South-based construction contractor, given the high asking price relative to peers. The company does not have any distinguishing business model to command a premium to peers. In magnitude of order book and revenues, it lags well behind listed construction peers. Given its small-sized business, the execution risks in its efforts to scale up to a developer may be significantly higher. At the upper end of its price band of Rs 68-75, the offer is valued at 13 times the estimated FY-11 earnings. Peers such as Unity Infraprojects, Pratibha Industries and ARSS Infrastructure are available at valuations of 8 to 13 times trailing 12- month earnings. Other detracting factors include geographic concentration of the order book and stiff competition in other states.



Order book

RPP is a construction contractor; at end-June '10, its order book stood at Rs 612 crore, 4.2 times the revenues for FY-10. Civil construction makes up 53 per cent of the order book, followed by waste management (25 per cent), SEZs construction(14 per cent) and irrigation and power plant constructions making up the rest. A good number of projects come under urban development schemes of the government.

While order book is diversified with good growth prospects, it is geographically concentrated in Tamil Nadu (43 per cent) and Karnataka (25 per cent). Though RPP plans tapping other states, it may prove to be difficult, since most regions have local contractors which have established relationships with corporation and municipal bodies.

With a smaller average order size, RPP will require bid consortiums to scale up to large projects, until it develops the ability to qualify on its own merit.. It has not, hitherto, partnered any other company for project execution.

Issue objects

On offer are 65 lakh shares, of which 4 lakh are an offer for sale by the promoters. RPP plans to undertake road Build-Operate-Transfer (BOT) projects in consortium in the coming quarters. Rs 10 crore of issue proceeds will be invested in Special Purpose Vehicles for this purpose. The company has no previous experience in this space.

Securing BOT projects requires not only technical qualification but financial strength. The company may have a long road ahead to qualify on these aspects. Rs 11 crore will go towards acquisition of capital equipment and Rs 17 crore will fund working capital.

Revenues grew 49 per cent over the past three years to Rs 144 crore in FY-10 on a compounded basis and net profits grew 64 per cent in the same period to Rs 8.3 crore. Operating margins have held at 10 per cent for the past two years, a tad lower than listed peers. A 1.4 times debt equity is cut down to 0.6 times post-issue. However, fresh debt taken on to fund projects and working capital may push the debt up again.

The offer is open from November 18 to 22. The lead mangers to the issue are VC Corporate Services.

via BL