Ramky Infrastructure Limited (Ramky) is entering in the capital markets with an initial public offering (IPO) of up to13.1 mn equity shares of Rs. 10 each at a price band of Rs. 405–468 to raise up to Rs. 5.3 bn. The issues consisting of a fresh issue of up to 8.6 mn equity shares aggregating up to Rs. 3.5 bn by the company and an offer for sale of equity shares aggregating up to Rs. 1.8 bn by Mr. Alla Ayodhya Rami Reddy, Tara India Fund III trust and Tara India Holdings A Limited. The issue, which will be through a 100% book building process, will constitute 28.0% of the post-issue paid-up equity capital of the company.
Valuation and recommendation:
We value Ramky’s stock at Rs. 504, by using the DCF method (WACC of 14.8% and terminal growth of 5%), which offers an upside potential of 24% over the lower end of the price band and 8% over the upper end of the price band. We expect the Company to continue enjoying better margins over the average of its peer set (IVRCL Infrastructures & Projects Ltd., Nagarjuna Construction Co. Ltd., Consolidated Construction Consortium Ltd. and Simplex Infrastructure Ltd.) with an EBITDA margin and a net margin of 13.8% and 5.7%, respectively, as compared to an EBITDA and a net profit margin of 9.6% and 3.9%, respectively, of its peer set for FY11E. This is primarily attributable to its operating efficiencies and diverse order book . The issue appears attractive with a forward P/E of 13.1x at the lower end of the price band and 15.2x at the upper band for FY11E, as compared to the average P/E of 15.3x for FY11E for its peer set. Thus we recommend investors to subscribe to the issue.
The issue opens on September 21, 2010 and closes on September 23, 2010.