eClerx, BGR Energy, Transformers, Brigade Enterprises, Jyothy Lab

eClerx Services 270 to 315 95 to 100


BGR Energy 425 to 480 380 to 400


Transformers & Rectifiers 425 to 465 180 to 200


Brigade Enterprises 351 to 390 110 to 120


Jyothy Lab. 690 230 to 240


Burnpur Cement Ltd. 12 2 to 3


Edelweiss 825 780 to 800


Renaissance Jewellery 150 20 to 25


Kolte Patil 145 75 to 80


Kaushalya Infra 60 13 to 14


SVPCL 42 - 3 to -4

Grey Market - Burnpur, BGR Energy, eClerx, Edelweiss, Jyothy Labs

Jyothy Lab. 620 to 690 220 to 225


Burnpur Cement Ltd. 12 8 to 9


eClerx Services 270 to 315 80 to 90


BGR Energy 425 to 480 240 to 250


Edelweiss 725 to 825 750 to 775

Renaissance Jewellery 125 to 150 20 to 25


Kolte Patil 125 to 145 75 to 80


Kaushalya Infra 50 to 60 12 to 15


SVPCL 42 - 3 to -5

KAUSHALYA INFRASTRUCTURE Subscription Details

Qualified Institutional Buyers (QIBs) - 2.8427 times

Non Institutional Investors - 17.2745 times

Retail Individual Investors (RIIs) - 10.1539 times

OVERALL - 7.20 times

Yes Bank, Empee Distilleries, Mundra Port, Edelweiss Capital, Axis Bank, Hero Honda, Renaissance Jewellery, Kolte Patil, Kaushalya, Jyothy, Ranbaxy

Yes Bank, Empee Distilleries, Mundra Port, Edelweiss Capital, Axis Bank, Hero Honda, Renaissance Jewellery, Kolte Patil, Kaushalya, Jyothy, Ranbaxy

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.

Kaushalya Infrastructure Development Corporation

Kaushalya Infrastructure Development Corporation (Kidco) is a Kolkata-based small construction company promoted by the Mehras. The company specialises in the construction and maintenance of roads and highways and bridges, erection of transmission lines, electrification projects as well as commercial and residential complexes. It also operates a hotel in Jhargram, West Bengal.

Originally incorporated in 1992 as RMS Exim, Kidco got into construction in 2001 and executed around 32 projects in its last six years of active presence in the construction sector. The company is strongly focused on the eastern part of the country with most of its construction happening in West Bengal. The company subsequently extended its operations to other eastern states such as Jharkhand, Sikkim and then to Chhattisgarh. It undertakes contracts both as a primary contractor as well as a sub-contractor providing services to various government, semi government organisations, and public sector undertakings. Its clients includes AMR Construction., Punj Lloyd., Engineering Projects (India), Power and Energy Department of the government of Sikkim, Tantia Construction, Balasore Alloys, Allied Infrastructure and Projects, Purulia Zilla Parishad, PMGSY, and National Projects Construction Corporation.

For its realty foray Kidco acquired land either directly or through its subsidiaries and proposes to buy more land and development rights. These are in various stages of identification and acquisition. For the projects undertaken by its subsidiaries or joint ventures (JVs), the company will undertake development of land parcel including construction activity.

On 23 March 2006, Kidco entered into a memorandum of understanding (MOU) with West Bengal Housing Board (WBHB) to develop housing and related infrastructure in Bengal. For this, the company has incorporated a JV with WBHB, Bengal KDC Housing Development. The subsidiary had bid for an expression of interest for development of residential complexes in Himachal Vihar, Siliguri, issued by the Siliguri Jalpaiguri Development Authority, on 11 October 2006. The area of the project is four acres to be given on a 30-year lease (renewable) to the successful bidder. The project involves construction of residential complex. The estimated cost of the project would be Rs 20 crore. After completion, the successful bidder will sell/ lease/ give on rent the project to various parties. The project, to be completed in three years, is to be executed on build-operate-transfer basis.

To further consolidate its position in infrastructure development, the housing and real-estate sector, Kidco has entered into/executed a JV agreement /MoU with various government and private bodies like the West Bengal Small Industries Development Corporation, Santech Communication and Rose Land and SSNNLL Corporation, an IIIinois (US)-based company.

Kidco is tapping the capital markets to fund its plan of1) purchasing construction and infrastructure equipment for execution of projects amounting to Rs 5.01 crore; 2) acquisition of land and land development rights and realty development amounting to Rs 17.50 crore; 3) Investment in BOT/ build-own-operate-transfer (BOOT) projects and JV amounting to Rs 12 crore; and 4) meeting long-term working capital requirement of Rs 12.04 crore and corporate expenses.

Strengths

Unexecuted part of the order book stood at Rs 76.01 crore end June 2007. Though order backlog seems small compared with the other listed peers, the completion of all the orders by June 20’08 gives strong revenue visibility.

Presently owns 28.39 acres of freehold land close to Hyderabad at Hothi Village, Zaheerabad, Medak District, Andhra Pradesh. This is close to the industrial belt. Subsidiaries have acquired 4.004 acres of land at Rajarhat, West Bengal, which is fast emerging as IT hub of Kolkata. Entered into either an agreement for purchase or MoU for further 8.016 acres of land at Rajarhat, West Bengal.

Weakness

Continues to claim benefits under Section 80IA of the Income-Tax Act, 1961 in spite of the recent clarification stating these benefits are applicable only to infrastructure developers. If the litigation seeking clarity brought by the construction industry against the income-tax department fails, adjustment will have to be made to liabilities over the years against general reserve, affecting net worth apart from hitting the margin factored in current orders.

About 61% of the unexecuted part of the order book accounted by two packages/orders from Sipat Super Thermal Power Project. Hence, any delay in completing the project will adversely affect performance in the coming quarters.

Has little experience in real estate development

Is yet to undertake large-ticket orders (in excess of Rs 50 crore). Moreover, the execution track record in road space largely comprises rural and district roads. Capability to scale up either on own and or in consortium is yet to be seen in highly competitive National Housing Authority of India (NHAI) or state road-sector projects.

Valuation

On adjusted net profit in the year ending March 2007 (FY 2007), the EPS works out Rs 2 on post-issue equity capital. At the price brand of Rs 50 –Rs 60, P/E works out to 25 times on the lower band and 30 times on the upper band. In comparison peers such as MSK Projects and Roman Tarmat are available at a P/E of 19.8 and 16.7 times.

Kaushalya Infrastructure IPO Analysis

Kaushalya Infrastructure Development Corporation is entering the capital market on 20th November, 2007 with a public issue of 85 lakh equity shares of Rs.10 each in the band of Rs.50 to Rs.60 per share.

The company is a small contracting company executing work for leading construction companies like Punj Lloyds, Engineering Projects, Tantia Construction etc. for the last 6 years. The volume of work executed by the company is quite low compared to its net worth. For FY 07, inspite of a net worth of Rs.14.71 crores, total income of the company was at Rs.55 crores on which PAT was just Rs.3.82 crores. This has resulted in an EPS of Rs.3.45. The company has been executing more of petty jobs where payment cycle is also of longer duration. Due to this, whatever margin enjoyed by the company is more on account of blocking working capital. The company has less than 4 cycles of its net worth, every year.

To improve its bottomline, the company thought of venturing into various activities of real estate development, investment in BOT/BOOT Project and for working capital. The proposed issue would be able to mobilize between Rs.42 crores and Rs.51 crores, at the lower and upper band. Rs.6 crore has been mobilized via pre-IPO placement.

However, such a small amount of Rs.50 crores is allocated on too many heads, thus having a very small allocation on each of them. The company is planning to develop about 12 acres of land at Rajarhat in Kolkatta and also at other places for which Rs.17.50 crores has been allocated. In Rajarhat, big developers like DLF and Unitech are developing integrated township and hence the projects of the company would always have lower realization of its properties. Even Rs.12 crore earmarked for BOT/BOOT projects are very small sum, which may not enable the company to take stake in 2 projects also.

Return on net worth of the company is very low at about 18% for FY 07. The post issue equity of Rs.19.60 crores would also be huge and shall pose difficulty for the company to service. Additional fund from IPO of about Rs.50 crore would improve the performance marginally.

Still it would remain a very small player with no significant presence in any of the segment and hence would also remain languishing at the levels of issue price. Hence, investment is not advised even at the lower band.

SP Tulsian