By Vivek AnanthAmong the many initial public offerings (IPO) that are coming up in July 2021, there is GR Infraprojects (GR Infra), an integrated engineering, procurement and construction (EPC) road developer. The company’s IPO opened on Wednesday and was fully subscribed at the end of the first day, receiving bids for 2.3 times the available quota of 81.23 lakh shares. On the second day, investors had bid for 5.75 times the available shares on offer. The IPO closes on Friday July 9, 2021.
The IPO is entirely an offer for sale, with no money coming into the company. The promoters and a private equity fund run by financial services company Motilal Oswal are selling shares through the IPO. The PE fund is exiting the company through this share sale. The total value of the share sale is up to Rs 963.3 crore out of which the company already raised Rs 283.3 crore through an anchor placement on Tuesday.
At the upper end of its price band of Rs 828-837 the company is valued at 8.5 times its FY21 earnings post issue, while listed peers likeKNR Constructions and PNC Infratech are currently trading at a TTM PE of 16.9 and 15.5 times, respectively. With the company leaving enough money on the table, does the IPO make sense for investors who are looking at road infrastructure play?
Sound financials bode well
GR Infra grew from a small regional player to pan-India road EPC player. Although the company gets a majority of its revenues from the roads construction space (97%), it has recently entered the railways space by winning a contract worth around Rs 5,800 crore for construction of the Delhi-Alwar rail rapid transit system project.
The company currently has an order book of around Rs 19,000 crore, which is 2.6 times its FY21 revenues, while peers like KNR Construction and PNC Infratech have order books worth 4.2 times and 3.4 times their FY21 revenues. These companies are trading at twice the valuation that GR Infra is asking for in the IPO.
Over the past three years, the company’s consolidated profits and revenues have grown at a CAGR or 21.9% and 15.3%, respectively. The company’s good performance over the years is due to it completing many of its projects ahead of time, which meant that it earned early completion bonuses.
The majority of the company’s revenues comes from EPC projects, which made up nearly 68% of total consolidated revenues as of FY21. The company operates both build, operate and transfer (BOT) road projects and hybrid annuity model (HAM) projects. The former is when the road developer puts in the entire funds and owns the tolled road, while the latter is a mix of BOT and EPC.
The company has one operational BOT project that's been running since 2015. Over the past few years, the company added 14 new HAM projects to its portfolio. This gets clubbed into EPC in the graphic below.
Out of the 14 HAM projects, five are operational, four under construction and remaining five were recently awarded to the company. The company needs a total of Rs 2,500 crore for investment into these HAM projects, out of which it has already invested around Rs 1,300 crore. The balance will be invested over the next three years, for which it plans to use internal accruals.
There are also plans to sell a part of full stake in the HAM projects to investors to raise funds to invest in future projects. But there are many companies that are looking to do this, and the intense competition means the company’s road assets and the traffic should be worth it.
The funding requirement and financial closure norms are less onerous in a HAM project, and hence developers prefer such projects. BOT is a pure public-private partnership model for road development and has led to many delays due to land acquisition in the past. Now, projects are undertaken only when the land acquisition is completed. This way the HAM model is more beneficial for road developers.
Steady return and debt ratios
Being an integrated road developer, the company’s return ratios are above its peers. This is what investors have shown in the first two days bidding for the IPO makes it an attractive prospect for the future.
Even if we look at its debt ratios, they are at comfortable levels. Even though the debt ratios rose slightly in FY21, they are still at a very comfortable level.
The optimism among investors would be that GR Infra will be able to repeat this performance over the next few years. CRISIL Research expects nearly Rs 17 lakh crore to be spent by states and the Centre over FY 21-25 to build roads, highways and expressways. This will create a decent order pipeline for most road developers.
But this space sees intense competition as the contracts usually go to the lowest bidder. That means that the developer needs to run a tight ship and control costs to deliver decent returns to investors. As GR Infra expands into other regions (currently operates in 14 states) and other businesses like railways, the management’s bandwidth will be tested.
The grey market premium for the stock is already near Rs 410 over the upper end of its price band of Rs 828-837. This indicates there is strong demand for the company’s shares among investors and there might just be a decent listing premium. Investors looking at a cheap road EPC play might find GR Infra an interesting proposition.