IRCON International IPO opens: Should you subscribe?
Public sector enterprise IRCON International has opened its initial public offering for subscription on September 17 with a price band of Rs 470-475 per share.
The public issue, which will close on September 19, comprises an offer for sale of 99,05,157 equity shares by the government of India which intends to raise around Rs 470 crore through this IPO. Retail investors and eligible employees will get shares at a discount of Rs 10 per share on the final offer price.
This would be the 9th company coming out with public issue in current financial year 2018-19 while it would be the second company from the government coming out with IPO under divestment programme.
IRCON International, a 99.7 percent government-owned company (under the Ministry of Railways), is an integrated Indian engineering and construction company, specialising in major infrastructure projects, including, railways, highways, development of industrial areas and other infrastructure activities.
With strong order book (Rs 22,406.8 crore as of March 2018), excellent execution track record, healthy financials, virtually debt-free operations, enough cash to meet working capital needs and reasonable valuations, all brokerage houses said one can subscribe the issue for listing gains as well as with long-term perspective.
There are no comparable listed companies in India that engage in the same line of business as the company. At the higher price band of Rs 475 per share, IRCON’s share is valued at a P/E multiple of 10.9x (to its restated FY18 EPS of Rs 43.8), which shows the issue is attractively priced at current levels, brokerages said.
Here are views from brokerage houses:
IRCON’s revenues grew at 29.4 percent CAGR to Rs 4,001.2 crore in FY16-18. The order book was at a robust Rs 22,407 crore, which implies an order book to bill ratio of 5.6x on FY18 numbers, indicating revenue growth getting better ahead.
Adjusting for subsidiary investments worth around Rs 700 crore, the issue is available at 9.2x FY18 EPS on higher band, which is attractive valuation vis-à-vis its peer companies.
Hence, we have a Subscribe recommendation on the issue at the offer price only for listing gains.
We believe, the company being majorly under railways, IRCON has managed to perform well over the years with good economies of scale, healthy order book position which implies an order book to bill ratio of 5x on FY18 numbers.
On valuation parse, post-IPO, IRCON is expecting a market cap Rs 4,467 crore at higher price band, valued at 1.24x the book value and the stock is available at PE 11.28x FY18 EPS, which appears to be low on valuations, but with no direct peer comparison and being a government entity with stable business outlook, valuations doesn’t stand attractive.
Hence, Subscribe for long term considering risk appetite of the investor.
Centrum Wealth Research
We believe the issue is attractive. IRCON’s order book provides revenue visibility. Over FY15-17, its growth was muted, with the same picking up in FY18 (revenue up 31 percent and PAT up 24 percent).
Historically debt-free, in FY18 IRCON has acquired debt of Rs 3,203 crore from the Indian Railway Finance Corporation at interest rate of 8.77 percent (repayable in 5 equal instalments commencing from 15 Apr’19) to pay upfront lease premium to Rail Land Development Authority (RLDA) for the acquisition of a project site.
Given the government’s focus on infrastructure spends (initiatives like Metro, Bharatmala, Economic corridors), healthy order book and attractive valuations, we suggest that investors can Subscribe to the issue.
With the strong order book, highly experienced management team, proven track record of various domestic and foreign project executions, project bidding criteria, own cash investment in core business, will help IRCON to grow at a robust pace.
At present, IRCON has enough cash to meet working capital needs and a passes-through amount reflects a healthy balance sheet. We recommend Subscribe to the issue with a long-term perspective.
Based on FY19 and FY20 earnings, the forward P/E comes out to 9.9x and 8.4x, respectively. Thus issue seems to be attractively priced considering its strategic importance in the Indian Railway, future growth outlook, limited competition, virtually debt free operations and healthy financial performance.
Thus considering the above observation we assign a Subscribe rating to the issue.
With excellent execution track record through strong operating systems and controls and strong financial performance and credit profile, the company is expected to see good growth record, going forward.
Also, the company enjoys the strong order book. However, 86.70 percent of its order book is from the Railway sector projects. Any change in the sector causing decline in the number of project available may adversely affect its revenues and profitability.
We have assigned 3 star out of 5 to the issue, which means Fair issue.