Grey Market - Bafna, Niraj Cement, Anus Labs

Gokul Refoils 195 10 to 12

Anus Laboratories 210 32 to 35

Niraj Cement 175 to 190 12 to 15

Bafna Pharmaceutical 40 10 to 12

Niraj Cement Structurals

Niraj Cement Structurals (NCSL) is a small-sizes construction company focusing on the road segment. It also makes pre-cast paver blocks. Sales of paver-blocks account less than 0.5% of total sales.

The construction contracts business model involves acting as main contractor, contracts through joint venture (JV) and subcontractor. Currently, the order portfolio is spread across Orissa, Madhya Pradesh and Rajasthan.

The proceeds of the issue will be used to fund acquisition of capital equipment worth Rs 20.95 crore and working capital requirement amounting Rs 18.17 crore.

Strengths

The current order book is about Rs 660.29 crore. Out of this, its share of work totals Rs 477.48 crore, which translates to 5 times its FY 2008 revenue. The projects are to be executed over nine to 24 months.

Despite focusing only on the road sector, the operating profit margin was a strong 17.7% in the year ending March 2008 (FY 2008). OPM were 16.7% in FY 2007 and 16.3% in FY 2006. This is way above the normal 8-10% of margin available for players focused on road projects.

Weaknesses

As the focus is solely on road development, lacks diversification in other areas of construction.

In the past, defaulted on payment of interest and repayment of loan to various banks / financial institutions.

Sundry debtors stood at 103.45 crore in FY 2008. This represents about 111.4% of its sales for FY 2008. To fund this, secured and unsecured loans of Rs 18.92 crore and Rs 19.98 crore were raised by March 2007 and Rs 30.86 crore and Rs 58.49 crore by March 2008. The high debts are attributed to delay in receipts from government and also from principal contractors. As a result, interest cost has been racing ahead from 3% of sales in FY 2006 to about 5.5% of sales in FY 2008.

Valuation

Sales grew by 16% in FY 2008. Net profit, however, stood higher by only 2%, limited by higher interest cost and tax incidence. EPS on post-IPO equity stands at Rs 6.3. On the asking price of Rs 175-Rs 190, the PE ratio works out to about 27.8 times FY 2008 earning at the lower price band and 30.2 times at the upper price band. In contrast, peer players such as C & C Construction, Roman Tarmat, PBA Infrastructure, Valecha Engineering trade at 9 to 12 times their trailing 12-month (TTM) EPS.

Niraj Cement Structurals IPO Analysis

Investors can avoid the Initial Public Offering of road building contractor, Niraj Cement Structurals. The asking price of Rs 175-190 appears stiff, given the small scale and limited scope of the company’s business, fluctuation in profit growth and high risks specific to the company.

At the offer band, the price-earnings multiple works out to 19-21 times its FY-2008 earnings on the pre-IPO equity base.

The asking price also discounts its estimated FY-2009 per share earnings (post equity expansion) by at least 18 times. Peers of similar size trade at a considerable discount.
On the company and offer

Niraj is a road construction company with most of the projects in the form of sub-contracts from principal contractors. While the company also manufactures cement structurals, this business forms a negligible portion of the total revenue.

The company plans to raise about Rs 60 crore through this IPO and seeks to list the stock at the Bombay Stock Exchange. This would expand the current equity capital by 45 per cent.

The offer proceeds are to be utilised towards purchase of capital equipment and for meeting working-capital requirements.
High volume on the cards

Niraj currently boasts of a massive order-book of Rs 660 crore, amounting to seven times its 2007-08 revenue of Rs 92 crore. This is likely to provide impetus to the revenue growth witnessed by the company.

However, the limited time-frame available for completion of the projects poses a challenge to its execution capabilities. Most of the orders need to be completed within a 12-20 month period. Agreed that the company’s plan (through the IPO proceeds) to increase capacities of its Ready Mix Concrete (RMC) batching plant would hasten the input availability, at least in the projects sites where they are installed. Transporting the RMC units between project sites may pose logistics problems.

In addition, the RMC batching plant planned would have a capacity of 1,44,000 cu. m. of RMC per year as against 20,000 cu.m consumed by it in FY-2008. This essentially implies that despite high orders in hand, the company may have excess capacities after captive consumption.

The sale or lease of the same may not be easy given that the market size for RMC remains limited in India, apart from transportation costs involved. The capital expenditure to be incurred hence holds risk of high costs.
Burdened by interest and taxes

The company’s profit margins have remained in line with other road builders such as C&C Constructions and Roman Tarmat. However, net profits have witnessed a decline since 2005-2006.

Despite surge in revenues, mounting interest costs and taxes have dented the bottomline.

The mounting borrowing cost is reflected in the shrinking interest coverage ratio. While profits (before interest and taxes) covered the borrowing costs by fives times in 2006, the same ratio shrunk to 2.8 in the latest fiscal.

The company has further disclosed its default in payment of interest and repayment of loans to some of its lenders. Taxes have also seen an increase; this apart, the company has stated that it has been claiming deduction under Section 80-IA of the Income Tax Act, a benefit that is no longer available for contractors such as Niraj.

The offer document states that the company has not made any provisions for the additional tax burden either for the current year or for retrospective years from 2000. The provisioning and higher tax burden in future would hurt net profits.

Further, Niraj’s sub-contract status has heightened its risks of non-payment from the principal contractor. Sundry debtors of Rs 103 crore, is higher than full year revenues for 2007-08, indicating legacy receivables and delay in collection.

This could lead to increased crunch in cash flows for the company. The offer is open from May 26-30.