Avoid Kaushalya Infrastructure IPO: SPA Sec

November 21, 2007

SPA Securities has come out with report on Kaushalya Infrastructure Development Corporation IPO. It has recommended ignoring the issue.

Kaushalya Infrastructure Development Corporation has opened for subscription with an IPO of 85 lakh equity shares of Rs 10 each at a price band between Rs 50 and Rs 60. The issue will close on November 23.

SPA Securities report on Kaushalya Infrastructure IPO

Investment Highlights

KIDCO has shown a CAGR of 45% in the topline; 67% in OPM & 62% in the bottomline in the last three years.
Investment Rationale: KIDCO is engaged in well-diversified construction activities including civil and commercial projects and infrastructure development and Real-Estate Projects. It has executed various infrastructure development projects and commercial and residential complexes. Registered as a class IA contractor. Order book at Rs 76.01 crore of the total contracts under-execution value of Rs 144.84 crore executable in next 18-24 months. Focus on under developed areas of Eastern India, viz., West Bengal, Chattisgarh, Jharkhand & Sikkim, which provides immense potential for growth. Company for its construction and development of quality housing in West Bengal has entered into a Joint Venture with West Bengal Housing Board (WBHB) and formed Bengal KDC Housing Development Ltd.
Concerns are: Low margin road business comprises almost 75% of the order book. Low networth therefore cannot bid for big contracts. Sales/Networth ratio of less than 4x against the industry average of 10x. Low debtors turnover ratio of 2. Allocation of issue proceeds to too many heads. Small allocation of Rs 12 crore for BOT/BOOT projects.
For the quarter June 2007, the company recorded a topline of Rs 16.20 crore, operating profit of Rs 2.13 crore and posted a PAT of Rs 1.09 crore translating to EPS of Rs 4.32 (annualized) & RoNW of 19.20%
Order book as on 30 June’07 is of Rs 76 crore. The order book break is: Road Projects 75%, Infrastructure projects 21% & Other Projects 4%.

Valuation: The stock is currently available at a P/E of 25x to 30x on the lower & upper price bands respectively of its post issue FY07 EPS of Rs 1.98. The stock is expensive among its peer group which is trading at much lower P/E multiple range of 8x to 16x. On EV/EBIDTA, the company is valued at 20-23x which too is very expensive vis-à-vis its peers which is trading in range of 11-21x EV/EBIDTA. Company posted OPM of 11.27% & NPM of 7.14% in FY07, which is mediocre performance in the industry. On the basis of its high exposure to low margin business of Road Projects (75% of the order book) we are of the view that margins will not increase much going forward. Real Estate projects will start contributing only after 18-24 months from here, as construction on its acquired land has not started till the filing of the public issue. Hence, we recommend ignore the issue.

Source: moneycontrol.com