VKS Projects IPO Analysis

Relatively Small business seeking high price VKS Projects is engaged in the business of undertaking EPC/turnkey/item-rate contract for mechanical, piping and heavy equipment erections for various industrial and infrastructure projects. Of late the company is also forayed into land development for industrial/infra projects. The company originally promoted by V K Sukumaran and K Unnikrshnan was incorporated in Feb 17, 1998 as a private company in the name of Chaitanya Contractors & Engineers. Subsequent to transfer of shares held by Unnikrishan and family to Saritha Sukumaran, the wife of V K Sukumaran in 2005, the name of the company changed to VKS Projects in August 31, 2007. Latter in Nov 3, 2010 the company has turned into limited liability company. The company currently has design capabilities in piping projects such as CS/SS/Alloy Steel Turnkey Piping, Structural Fabrication, Erection and commissioning of Equipments and Fire Fighting Projects for various industries. Moreover the company also offers turnkey/ item rate service for Civil Land Development for Industrial / Commercial Infra Projects. The industries catered by the company includes Chemicals, Oil and Gas (on-shore and offshore), Refinery, Petrochemicals, Dyestuff, Pharma & Bulk Drugs, Metallurgy, Power, glass, port, textiles, air conditioning and refrigeration etc., The company's expertise lies in Fabrication & Erection of Key Industry Equipments / Plants including Reaction Vessels, Auto Claves, Vacuum Tray Driers, Storage Tanks, Chilling Plants, Hydrogenerators, Fire Fighting Units, Heat Exchangers/Condensers, Rotary Vacuum Tray Driers, Centrifuges, WHR boilers, Crystallizers, Scrubbers, Distillation Units, and Flakers etc. Unexecuted order book of the company as end of December 31, 2012 stood at Rs 98.25 crore, translating into 1.6 times of its FY11 revenue. The company is tapping the capital market with its initial public offer (IPO) to raise Rs 55 crore to meet long term working capital requirement to the tune of Rs 15 crore, finance procurement of construction equipment / machineries of Rs 22.64 crore, finance setting up of engineering design studio / office and training centre in Chennai, Cochin, Delhi, Hyderabad and Ahmedabad of Rs 10 crore and balance for general corporate purposes and meet issue expenses. Strength Principal promoters have over two decades of EPC experience. The company has executed over 40 projects across various states of the country in last 13 years of its existence with strong execution track record. In the process, the company has built strong project management capabilities and prequalification either alone or jointly with others. The ticket size of the company has increased from about Rs 2-3 crore to about Rs 40-50 crore in the past few years. This is as result of its pursuit to build capabilities, obtained necessary pre-qualifications and tapping new area of opportunities in mechanical and infrastructure construction space. The company intends to create design capabilities in sectors such as the Building Construction, Transportation and Water management so as to tap Turnkey and Item Rate solutions opportunities in these sectors apart from its current design capabilities in mechanical, piping and heavy equipment. This strategy though increases execution risk as well as profitability concern, resulted in better order inflow and top line expansion. Moreover significant part of the contracts of the company involves 3rd party contractors particularly those relating to labour contracts, fabrication works etc the company's growth going forward largely depend on its ability to be competitive and win fresh contracts. For instance in FY11, approximately 66.07% of its Project Executions was carried out by Third Party Sub Contracting. Weakness Current unexecuted order book is executable by December 2012. Thus the medium term growth of the company largely depends on its ability to bag fresh orders. And given current shrinking pie on the back of slowdown in industrial / infrastructure investment, the competition will be hot and the ability of the company to win fresh orders without compromising margin has to be seen. On single large projects i.e. PACL contract accounts for about 46% of the total unexecuted order book and the large 3 orders accounts for about 70.2% of the orders book. Given higher concentration of orders book to 3 clients increases the execution risk as any client side delay might impact the order book burnout leading to strain on revenue and cash flow. The share of land development contracts to total unexecuted order book stands at about 60%, The land development contracts are of less complexity and there by low margin, the greater contribution from these segment going forward will result in pressure on profitability. The EPC industry is typically a working capital intensive industry involving retention money and mile stone payments etc. The company had negative operating cash flow in last five fiscal and 9mFY12 on account of higher working capital requirement. Thus any delay in payments from client will further escalate the liquidity of the company. Has outstanding unsecured loan of Rs 2.4622 crore as end of December 31, 2011 and of which about Rs 1.4829 crore is repayable on demand and that might lead to financial crunch for the company and it might force to borrow at uneconomical terms. Moreover the contingent liability toward outstanding bank guarantee amounting Rs 1.90 crore as end of Dec 31, 2011 and in the event of that materializing the financial condition may adversely affected. The company in FY2011 has purchased assets of VKS Infra Projects, a promoter group company at a value of about Rs 11 crore. It was also buying project consumables from another group company. The company in the past has not followed AS 15 regarding employee benefits prescribed by ICAI. There is no provision for punitive action from any authorities, but the company started complying with the provision of AS15 starting fiscal ended March 31, 2011 and made a provision of Rs 0.84 lakh based on actuarial valuation, which is only estimated and not actual. Valuation The sales for FY11 jumped by 97% to Rs 59.68 crore, but as margins contracted by 120 basis points to 11.4%, the growth at operating profit level was restricted to 78%. The net profit was eventually higher by 58% to Rs 3.16 crore. But the sales for the 9MFY12 stood at Rs 97.50 crore and with operating margin being 11.9% the operating profit stood at Rs 11.57 crore and the net profit was Rs 5.63 crore. The 9mFY11 sales and profits were higher than FY11 sales and profits. Good show in both FY11 and 9MFY12 is largely on account of handful of large land development contract including that of PACL, which are under execution currently. The offer price of Rs 55-60, the post issue equity works out to Rs 18 crore on lower price band and Rs 17.17 crore on upper price band. The EPS for FY11 on post issue equity works out to Rs 1.8 and the PE works out to 30.6 and 33.3. Considering the 9MFY12 annualized EPS of Rs 4.2-4.4, the PE works out to 13.1-13.6 times. In comparison, Petron Engineering, the more established and larger player quotes at a PE of 4.6 times of its FY12 EPS. Similarly that of Sunil Hitech Engineers quotes at a PE of 3.3 times of its FY12 EPS. The giant of EPC players in the country BHEL is quoting at a PE of 7.7 times of its FY12 EPS. Considering low order book visibility the asking rate appear steep.