A2Z Maintenance & Engineering Services

A2Z Maintenance & Engineering Services (A2Z), promoted by Amit Mittal, was incorporated in FY 2003 as a facility management service (FMS) provider, supporting the infrastructure and integrating business and people. From FY 2006 onwards, the company went into the EPC business within the power transmission and distribution sector with focus on the distribution segment. Apart from the EPC/engineering services business, the company is significantly focused / involved in (i) generating power from renewable energy sources; (ii) providing municipal solid waste (MSW) management services; and (iii) developing information technology solutions for power utilities.



In order to streamline the business, the company demerged its FMS business into a separate wholly owned subsidiary of A2Z, A2Z Infraservices. Later on, to get the necessary pre-qualifications for the EPC business from state/Central utilities, the company adopted the inorganic route and acquired various firms in the same/similar line of business. It acquired Sri Eswara Sai Constructions, a private limited company engaged in the installation of transmission lines, which was subsequently merged with the company with effect from January 1, 2008. In Q1 FY 2011, the company has acquired three partnership firms: Surendar Chowdhury & Brothers engaged in the business of construction of electrical sub-stations and railway electrification work, Mohd. Rashid Contractors engaged in the business of telecommunications cable laying, civil works and other EPC services, and En-Tech Engineers and Contractors engaged in the business of telecommunications cable laying, civil works and other EPC services so as to strengthen its capabilities in the EPC business. With all these acquisitions, the company became prequalified in Power Grid's T&D line orders and rural electrification orders. Total order book position as on July 2010 stood at around Rs 1292 crore.

In August 2010, the company acquired 1% profit sharing in Star Transformers, a partnership firm in the business of manufacturing and fabrication of transformers. The company intends to increase its interest in Star Transformers by up to 51% after it is converted into a company. In October 2010, it acquired the entire equity share capital of IL&FS Property Management & Services, a company in the FMS business.

The engineering services/EPC business (EPC business) of the company accounts for about 91.63% and 87.52% of the consolidated income for FY 2010 and four months ended July 2010. The management has not provided further segmental break-up within the EPC business as to how much is coming from transmission and how much from distribution. Neither the order book break-up is shared. However, the EPC business of the company has been historically focused on the power distribution sector, where its services include installation of distribution line infrastructure with capacities of up to 33 KV, construction of substations of up to 33 KV, and participation in system strengthening projects and rural electrification projects.

Capability of the power transmission segment, where it has undertaken select projects, includes construction of extra high voltage (EHV) substations of up to 400 KV and EHV transmission lines of up to 765 KV. The company is executing projects in the power transmission and distribution sector in India for various state power utilities and central public sector utilities such as PGCIL, NTPC and NHPC.

In power generation, the company is currently executing EPC projects for an aggregate capacity of 60 MW. Moreover, it has recently been awarded an EPC project in the road segment.

The power generation business, which the company has recently entered, will focus on renewable energy projects based on fuels such as biomass, refuse derived fuel (RDF) generated from its own MSW projects, bagasse, mustard stems, rice husk, juliflora and other agricultural and forest waste. Currently the company is constructing four power plants of 15 MW each comprising three 15 MW bagasse-based cogeneration projects in sugar mills located in Punjab on a BOOT basis and a 15-MW biomass-based power plant at Kanpur in Uttar Pradesh, where it intends to primarily use, among others, RDF generated from its MSW business as a source of fuel. These four power plants, with an aggregate generation capacity of 60 MW, are to be commissioned in March 2011.

In addition, the company is also setting up five 15-MW biomass-based power plants based on crop residue as fuel in Rajasthan. These five projects are to be commissioned in October 2011. Further it is also setting up rice husk based biomass power plants in Punjab with an aggregate installed capacity of 100 MW. This 100 MW Punjab biomass projects is to use the rice husk generated from the rice milling operations to be undertaken by the company and the power plants are to be commissioned in December 2011.

The Municipal Solid Waste (MSW) business of the company involves collection, transportation, processing, disposal and treatment of municipal solid waste. In the last three years (2008-2010) it has been awarded contracts for (a) setting up IRRFs on a BOOT basis with an aggregate MSW capacity of 3800 tonnes per day (tpd) in six cities; (b) the collection and transportation (C&T) of MSW of an aggregate capacity of 910 tpd in two cities; and (c) the processing and disposal (P&D) of MSW of an aggregate capacity of 855 tpd in 12 cities in India. Currently, the C&T activities in the cities of Kanpur (in 34 out of 110 wards), Indore, Biharsharif, Patna (in one out of four circles), Aligarh, Varanasi, Moradabad and Meerut, and the P&D activities in the city of Kanpur are operational.

The facility management services (FMS) business with which the company started its journey offers engineering maintenance (mechanical, plumbing, electrical, HVAC, DG set), energy saving solutions, janitorial services, parking management, property lease management, telecommunications tower maintenance and security services to public and private sector clients.

The company differentiates itself by leveraging its engineering skills and assisting clients in adopting preventive maintenance and energy saving solutions. Moreover, it has established itself as a multi-location, multi-service FMS provider in the Indian market. It also provides specialized services to the Indian Railways under the Clean Train Station (CTS) scheme, the Intensive Rake Cleaning (IRC) scheme and the On-Board Housekeeping Services (OBHS) scheme in 11 out of 16 railway zones. As of September 30, 2010, the company is providing services in 27 states in India and the NCT of Delhi and Haryana and had, as of such date, 14,670 employees in this business.

In power IT solutions the company is executing projects as a systems integrator by developing solutions for aggregate technical and commercial (AT&C) loss reduction in India. It also intends to provide advanced metering solutions to power utilities.

Proceeds from the fresh issue will be used for 1) investment in three 15-MW bagasse-based cogeneration power projects in Punjab and five biomass-based power plants of 15 MW each in Rajasthan of Rs 188.03 crore; 2) investment in equities of subsidiaries of Rs 169.67 crore; 3) repayment of a loan granted by L&T Infrastructure Finance of Rs 41.67 crore; 4) working capital requirements of Rs 125 crore and general corporate purposes.

Strengths

The 11th five-year plan and the 12th five-year plan provide emphasis on the power sector. Both revised APDRP (Accelerated Power Development and Reform Programme) and RGGVY (Rajiv Gandhi Grameen Vidyutikaran Yojana) schemes have specified allocations towards power T&D and rural electrifications scheme. Further along with state/Central utilities, private players will also play a major role in T&D segment in the 12th five-year plan. So the industry scenario is encouraging.

The company has presence in the entire value chain of the municipal solid waste management business, i.e., right from collection & transportation to sorting & recycling, Composting, land filling and waste energy. While the C&T business gets paid on per tone of waste collected and transported, the company gets grant for P&D. Moreover, the company is able to get additional value from the waste as it produces compost organic and compostable materials which is co-marketed with fertilizers by fertilizer companies, makes interlocking tiles and bricks from construction debris which is sold to construction companies, uses inert remnants for sanitary land fills, sets up a 15-MW waste to energy plant in Kanpur, which is expected to be operational in FY 2011. Thus the integrated waste management solution on BOOT basis provides cash flow stability.

Similarly, the company which got the nod to set up two Integrated Resource Recovery Facility (IRRF) at five location totaling ten in Punjab will get paddy supplied by Punjab Grains and will also get milling charges as prescribed by the Central government. Apart from milling charges the company is allowed to capture value from the rice husk, rice bran and other residues, which are allowed to be retained by the company which is captured through sales of power (through PPA) generated from attached biomass plant, which uses rice husk from mill and bought-out paddy straw and other fuels.

The FMS business has marquee clients such as Aircel, Apollo Munich, BSLI, Delhi Metro Rail Corp, First Source Solutions and Indian Railways.

The company is eligible to certain tax benefits such as a deduction under Section 80-IA of the Income Tax Act, 1961, for its Renewable Energy Generation projects completed before March 31, 2011 and claim a deduction under Sections 80-IA and 80 JJA of the Income Tax Act for its MSW projects. Its MSW business also receives subsidies from the urban local bodies. The new renewable power generation business of the company will enjoy policy incentives such as preferential feed in tariffs, renewable energy certificates, and renewable purchase obligations (RPOs) made available for a renewable power project by the government of India.

Weaknesses

The company lacks a track record in many new fields it has ventured into.

Auditors in their report have emphasized that there is an inadequate internal control system with regards to sale of goods and services. The company does not formally monitor and analyze its costs incurred on projects as against the total estimated project costs on a periodical basis.

The turnover for the year ended March 2010 stood at about Rs 1219 crore on a consolidated basis and nearly 90% was from the EPC business. But the order book for this segment as on July 2010 is just around Rs 1292 crore, which does not give enough visibility for growth.

The EPC contracts strike rate of the company, that is the ratio between bids placed and contract won/awarded, has come down in FY2010. The company, which was awarded about 42 of the 57 bids, has been successful only in 24 projects out of 146 bid in FY2010.

While the company has experience in distribution projects and has built a track record, the same can't be said for power generation projects and road projects, where it is a new entrant. Moreover currently all its power generation contracts in its order book are largely of captive orders from SPVs. Though the company intends to expand to include service to third parties, its competitiveness in bagging third party contracts is yet to be tested. Since the company has no prior experience in development, operation and maintenance of power plants, MSW processing and disposing and rice milling, the execution risk is high.

At consolidated level, there is continuous net cash out flow at the operating level. For FY 2010, cash outflow stood at Rs 65.14 crore, while for four months ending July 2010, the cash outflow was Rs 101.80 crore. Since the company's majority of business is with government, semi government, and municipal organizations, debtors more than six months old remain a continuous worry for the company. Thus cash flow will continue to remain a problem in future as well.

Reportedly, Central Vigilance Commission (CVC) has forwarded a complaint to the Chief Vigilance Officer (CVO) of the Ministry of Youth Affairs and Sports for a fact-finding report on allegation Amit Mittal, the promoter of the company, paid money to a certain government official in India in connection with the FMS contract that was awarded to the company for the Commonwealth Games held earlier this year in Delhi. The company states this is a media report and it has not received any notice from any regulatory authority in connection with the matter referred to in such news reports. It adds that the contract worth Rs 19.30 crore was won on competitive bidding process only. If any proceeding is initiated it will damage the reputation and business prospects of the company.

The company is using circulating fluidized bed combustion (CFBC) boilers for its bagasse-based power projects in Punjab and biomass-based power project in Kanpur. Though CFBC boilers are better for burning low calorific value fuels, the orders for CFBC boilers are sourced from Chinese and their reliability and suitability for Indian biomass/ bagasse based power plants is to be seen. The company has also ordered boilers using reciprocating grate technology from another Chinese player for its 2-MW power project in Rajasthan and UP. This involves technology risk.

Valuation

Consolidated revenue of the company for the year ended March 2010 surged 70% to Rs 1219.29 crore on the back of increase in the size of EPC business as well as FMS business. During FY 2010, the revenue was benefited on account greater contribution from short duration projects. The increase in size of FMS was largely on account of addition of new clients as well as inclusion of revenue generated by CNCS, in which it acquired majority equity interest in October 2009. The net profit was higher by 66% to Rs 97.87 crore. The EPS on post-issue equity of Rs 74.18-73.16 based on offer price of Rs 400-410/ share works out to Rs 13.2-13.3 for FY2010.

At the offer price band of Rs 400-410/ share, the PE works out to 30.3-30.8 times, which is very high compared to much larger and established players in T&D EPC such as KEC International and Kalpataru Power Transmission, which are available at a PE of 12.1 and 14.8 times of their FY 2010 consolidated EPS.

via Capital Market