Vascon Engineers Ltd. is entering in the capital markets with an initial public offering, IPO of 10,800,000 Equity Shares of Rs.10 each, at the price band of Rs 165-185 per share. Bids can be made for a minimum of 35 equity shares and in multiples of 35 equity shares thereafter. Promoters' shareholding will be reduced to 38.41% post issue.
Valuation and recommendation:
At a lower price band of Rs. 165, as per our estimates the Company would provide an ROE of 11% and 14%, for FY10E and FY11E, which is in-line with an average of its peers set of Brigade Enterprise, Mahindra Lifespace Developers and Gayatri Projects. Moreover, at a lower price band of Rs. 165, the Company proposes an EV/EBITDA for FY11E of 11.1x, which offers an upside against its peers set average of 12x for FY11E. Moreover, our DCF based valuation (Cost of Capital 14.3% and Terminal Growth rate 5%), suggests a fair value of Rs. 189. Thus, we recommend investors to Subscriber to the issue at the lower price band.
Issue closes on 29th January 2010
Vascon Engineers Limited (VEL) is an engineering, procurement and
construction (EPC) services and real estate development company
based in Pune. VEL and its other development entities collectively have
equity interest in five hospitality properties and also own and operate a
shopping mall and an office complex. It started as an EPC services
company in 1986, and has diversified into real estate development in the
past few years. VEL intends to raise upto Rs. 2 bn from the issue and
would utilise the proceeds from the IPO of 10.8 million shares for the
construction of its EPC contracts and real estate development,
repayment of debt, to fund its general corporate expenditures and to
achieve the benefits of listing on the stock exchanges.
We see the VEL’s issue as a good investment opportunity as:
• It enjoys a strong EPC order book of Rs. 32.27 bn and an order
book-to-sales ratio of 6.4x, which provide an impressive revenue
visibility for the next three-four years.
• VEL has a diverse client base and ~33% of its total order book is
towards industrial, hospital, educational and airport segments,
offering business stability.
• It has a vast experience of 24 years in the EPC business and boast
of strong execution capabilities and technical expertise. Besides, it
has a good reputation in the Pune market with a track record of
timely delivery to its clients.
• The Company follows the joint development model, which reduces
the working capital requirement as the contribution towards land
cost is only in the form of deposits with the land owners. The risk of
a fall in property prices is shared with the land owner. In this
business model, VEL acts as a real estate contactor as well as
developer thereby earning a larger share of the revenues.
IPO
Issue details
Vascon Engineers is entering in the capital markets with an initial public offering, IPO of 10,800,000 Equity Shares of Rs.10
each, at the price band of Rs 165-185 per share. Bids can be made for a minimum of 35 equity shares and in multiples of 35
equity shares thereafter. Promoters' shareholding will be reduced to 38.41% post issue.
Issue objectives
• Construction of EPC contracts and real estate development projects: The Company intends to deploy Rs. 900 mn towards Zenith and Rs. 250 mn towards Nucleus Belgaum, two of its EPC contracts and real estate development projects.
• Repayment of Debt: Rs. 396.28 mn from the Net Proceeds of the Issue would be used towards repayment of the loan taken from Housing Development Finance Corporation Limited.
• General Corporate Purposes: It would include payment towards strategic initiatives and acquisitions, brand building exercises, strengthening of its marketing capabilities and, towards repayment/prepayment penalty on loans as maybe applicable.
• Achieve the benefits of listing on the Stock Exchanges
Promoters
The individual promoters of the Company are R. Vasudevan, Lalitha Vasudevan, Thangam Moorthy; and Geeta Lulla. The corporate promoters of the Company are Vatsalya Enterprises Private Limited, Premratan Exports Private Limited and Golden Temple Pharma Private Limited. The Company’s operations are headed by Mr R Vasudevan, who has over 32 years
of experience in the construction industry and has been VEL’s director since January 1, 1986. He holds 9.28 million shares in the Company.
Investment Rationale
Strong revenue visibility
VEL has strong order backlog of Rs. 32.27 bn comprising of 47 EPC Contracts for third parties with an order backlog of Rs. 12.15 bn and 23 EPC projects developed by the Company with an order backlog of Rs. 20.12 bn. With a current order book-to-sales ratio of 6.4x, the Company offers a strong revenue visibility for next three-four years. Moreover, as a result of
significant infrastructure and other development opportunities in India and the commitment to these sectors by the Indian central and state governments, we expect VEL to maintain large order book in the future supported by its execution capabilities, track record and technical experience.
Excellent track record and execution capabilities VEL has a significant experience of 24 years in the EPC services, having constructed a diverse range of projects, like factories, hospitals, hotels, office and residential complexes, shopping malls, multiplexes, IT parks and other buildings. As of December 31, 2009, it had completed an aggregate of 181 EPC Contracts, with a total contract value of Rs. 8.89 bn, having a clientele of well-known Indian and multinational companies such as Cipla Limited, Emcure Pharmaceuticals Limited,Zensar Technologies Limited, Kirloskar Brothers Limited, Symbiosis, and Okasa Pharma Private Limited. In addition, as of
December 31, 2009, it and its other development entities had completed an aggregate of 42 real estate developmentprojects, with an aggregate Saleable Area of over 4.99 million square feet.
Benefiting from its presence in real estate development VEL has its operations of EPC business and real estate development in a number of states and union territories in India.
Having started as an EPC services company, it has since diversified into the real estate business leveraging the synergies between the two businesses. Although VEL’s revenue contribution from real estate business declined to 5.53% in FY09 from
43.5% in FY08, leading to decline in EBITDA margins, we expect the current revival in real estate sector to help VEL to improve its margins in the years to come.
Diversified client base, with focus on institutional clients VEL has been able to perform relatively well as compared to other players due to its customer profile. Around 33% of the
total third party order book comes from institutional clients like hospitals and educational institutions, and airports where the impact of the downturn is minimal. VEL’s diversified client base offers better business stability as compared to its other EPC contractor peers.
Effective Development Structure
VEL generally acquires development rights to significant portions of land without having to invest large amounts of money to purchase it by entering into joint development agreements and/or joint ventures with land owners to acquire development rights to their land in exchange for a pre-determined portion of revenues or profits generated from the projects. In case of the
other development entities, they have management control over their projects and can control important business decisions relating to it by owning a majority interest in or control such entities. The company also provides all EPC services to its real estate development projects. As a result of it all, it is able to closely monitor the management and operations of its projects,
apply a uniform management philosophy, optimize revenues and minimize operational costs and risks.
Risks and concerns
High concentration of operations in Maharashtra
The Company’s real estate development business is primarily concentrated in Maharashtra, especially in-and-around Pune, exposing it to a high level of geographic and price risk. As of December 31, 2009, VEL’s 73.5% of order backlog is in Maharashtra. Moreover, 84.5% of its aggregate 55.36 million square feet of real estate projects are being developed in Maharashtra. As Pune city is to a large extent dependent on the fortunes of the IT/ITeS industry, in our view, any pruning of expansion plans by IT/ITeS companies will have negative fallout on VEL’s business and financial prospects.
Successful Implementation of Projects
VEL’s growth strategy and future success is closely knitted with its ability to complete its huge order book of projects on a timely basis without incurring cost overruns. If it is not able to do so, its ability to increase revenues and operating income would be impacted severely.
Company Background
Incorporated in 1986, Vascon Engineers Limited is engineering, procurement and construction services and real estate Development Company with operations in a number of states and union territories in India. Vascon have significant experience of 24 years in providing EPC services which include, constructing factories, hospitals, hospitality properties, office
and residential complexes, shopping malls, multiplexes, IT parks and other buildings.
In addition to developing and providing EPC services for real estate projects, Vascon also continue to own or operate certain projects subsequent to their completion. For example, they own the Vista do Rio, Vascon own an interest in the Galaxy Resorts in Goa, the Golden Suites service apartment complex in Pune, and Marigold Premises Private Limited, which owns
and operates the Mariplex mall and office complex. Additionally they are involved in developing a multi-level car parking for Delhi International Airport.
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