VKS Project
• VKS Project is coming out with a 100% book building; initial public offering (IPO) aggregating to Rs 55 crore of face value Rs 10 each in a price band Rs 55-60 per equity share.
• Up to 50% of the issue will be allocated to Qualified Institutional Buyers (QIBs), including 5% to the mutual funds. Further, 15% would be available for the non-institutional bidders and the remaining 35% for the retail investors.
• The issue will open on June 29, 2012 and will close on July 4, 2012.
• The shares will be listed on BSE as well as NSE.
• The face value of the share is Rs 10 and is priced 5.50 times of its face value on the lower side and 6.00 times on the higher side.
• Book running lead managers to the issue is Aryaman Financial Services.
• Compliance Officer for the issue is Supriya A Tatkar.
Profile of the company:
VKS Project is an ISO 9001:2008, OHSAS 18001:2007 & ISO 14001:2004 certified Engineering Procurement and Construction Company (EPC Contractor) engaged in the business of undertaking EPC contracts of CS/SS/alloy steel turnkey piping, civil land development, industrial / commercial infra projects, structural fabrication and erection of equipments, fire fighting projects and commissioning of chemical plants for various industries including but not limited to chemicals, oil and gas (on-shore and offshore), refinery, petrochemicals, dyestuff, pharma & bulk drugs, metallurgy, power and textiles.
The company’s key expertise is w.r.t Fabrication and Erection of Key Industry Equipments/Plants includes but is not limited to Reaction Vessels, Auto Claves, vacuum tray driers, storage tanks, chilling plants, hydrogenerators, fire fighting units, heat exchangers/condensers, rotary vacuum tray driers, centrifuges, WHR boilers, crystallizers, scrubbers, distillation units, and flakers etc.
The company’s operations are managed from its owned registered and corporate office situated at CBD Belapur, Navi Mumbai. Its revenues have grown at a CAGR of 106.57% between fiscal 2007 and fiscal 2011, increasing from Rs 330.93 lakh in fiscal 2007 to Rs 6025.43 lakh in fiscal 2011 and the restated profit after tax have grown at a CAGR of 150.00% between fiscal 2007 and fiscal 2011, increasing from Rs 8.09 lakh in fiscal 2007 to Rs 315.97 lakh in fiscal 2011. The company’s EBITDA margins have grown at the CAGR of 127.49% from 8.32% in 2007 to 12.24% in 2011.
As on December 31, 2011 the company employed 405 people (on site-and off site), of which 34 employees are on the company’s payroll and the remaining 371 are through contract labor arrangements or sub-contract agreements with external local contractors.
IPO Grading:
CRISIL has assigned IPO Grade 1/5 to the issue, indicating poor fundamentals.
Proceed is being used for:
• Meeting long-term working capital requirements
• Financing the procurement of Construction Equipment and Key Machineries
• Financing the setting up of Engineering Design Studio/Office and Training Centre in Chennai, Cochin, Delhi, Hyderabad and Ahmedabad
• General Corporate Purposes; and
• Meeting issue expenses
Industry Overview:
Engineering Procurement Construction (EPC) activity is integral to the overall infrastructure and industrial development and involves engineering construction services for setting up of pipelines, storage terminal and processing facilities, urban infrastructure, structural erection of equipment, townships, highways, roads, bridges, railroads etc. A significant part of global engineering construction activity is concentrated in the oil and gas industry, power sector and the metals and mining sector.
The market prospects for EPC Activities looks promising and the industry is expected to grow over the next 10 years at a rate which is linked to the growth expected in the core industries such as coal, steel, cement, fertilizers, mining, ports, power and petrochemicals and overall Infrastructure Development. India is in the midst of a substantial overhaul in infrastructure, with large investments required to maintain its targeted GDP growth of 9% and above. The strong resurgence seen in investment demand has driven India's industrial growth which rose to 11.6% for April-June, 2010-11 against 3.9% during the same period in previous year. This has facilitated a robust increase in order book for the EPC sector.
The setting up of green field projects and brown field expansions in power, steel, cement sectors provide opportunities for larger size contracts. Other sectors like coal mining, sugar, cogeneration and paper are also expanding their existing facilities and setting up new plants. Capacity creation in these sectors will be driving growth of the EPC industry in the coming years.
During the period between January 2010 and February 2011, a total of around 830 turnkey contracts were awarded with an aggregate value of approximately Rs 2.83 trillion.
Peer Group Comparison (Rs. in Millions)
Company Name Year End Net Sales PBDIT PAT EPS PBIDTM % PATM % ROCE % RONW %
VKS Projects 201103 596.84 68.03 31.60 3.95 11.40 5.29 36.92 39.58
Larsen & Toubro 201103 439049.10 56390.20 38870.50 63.84 12.84 8.85 24.32 19.38
JP Associate 201103 129023.70 29948.60 11677.80 5.49 23.21 9.05 11.33 13.43
JCB India 201103 44254.02 6974.52 4825.09 5315.90 15.76 10.90 63.76 41.78
IL&FS Trans &Network 201103 16158.03 5364.32 2880.36 14.83 33.20 17.83 18.05 17.14
Pros and strengths:
Diversified Client base : The company’s customer base comprises a different set of industries including chemicals, pharmaceuticals, petrochemicals, refineries, power, dairy, oil & gas explorations, synthetic fiber, sugar, paper, etc. Also, the company has experience of having executed projects in various locations including but not limited to Maharashtra, Gujarat, West Bengal, Karnataka, Punjab, Madhya Pradesh, and Tamil Nadu. The company is having strong relations with various clients in diversified sectors and locations, reduces the dependence on certain clients or certain sectors or certain geographical locations and reduces sector / geographical / client specific risk.
Expertise in Project execution and cost competitiveness: The company has been in the EPC business for the last thirteen years and has developed expertise in its line of operations which are characterized by its ability to minimize overheads, cost control and prevent overruns on project schedules along with strong skills in construction and contract management. The company’s strong in-house EPC and Project Management team and good relations with local subcontractors helps it control the entire process. It controls cost by eliminating unnecessary product features, procuring equipment and materials in cost efficient manner, optimizing logistics and maximizing labour efficiency.
Qualified and experienced management team: The company is managed by a team of professionals led by its Chairman and Managing Director - VK Sukumaran. The company’s executive directors and key managerial team have requisite qualifications and significant industry experience and this has been instrumental in the consistent growth of the company’s financial and operational performance.
Pre-qualification credentials: Pre-qualification is a basic requirement in the industry. It is necessary that bidder should have requisite qualification in terms of technical expertise, adequate capital, infrastructure, experienced manpower, value of projects executed in the past etc. The company’s track record of over thirteen years with over 40 completed projects enables it to meet customer’s prequalification requirements either independently or in association with joint-venture partners.
Risks and concerns:
Inability to win large EPC contracts: Substantially all the contracts are obtained through a competitive bidding process. Pre-qualification is pre requisite to the company’s winning most projects. At present, the company is qualified to bid for projects up to certain values commensurate with its track record of previously completed projects and current net worth vis-a-vis the project size and required net worth considered appropriate by the client, and therefore may not be able to compete with other engineering companies for larger, higher-value projects, on its own or find suitable joint venture partners. The ability to bid for and win larger value projects is dependent on its ability to find suitable joint venture partners and any inability to qualify for and win large EPC contracts and compete with other engineering companies could adversely affect the margins and results of operations.
Major part of revenue coming from few clients : The company’s business is significantly dependent on EPC requirements of various government and private companies. Its top five clients provided approximately 91.42%, 72.22% and 74.82% of its total revenue in fiscal year 2009, 2010 and 2011 respectively. Also these top five clients vary from period to period and hence the business is dependent on only a few clients each year. The company’s inability to execute the work order on time may affect the business. Its business and results of operations will be materially and adversely affected if the company is unable to maintain a continuing relationship or prequalified status with its clients and partners.
Dependency on third-party contractors and manufacturers: The significant part of the work performed under the contracts, particularly procurement of labour contracts and fabrication job works for equipments and key processes is performed by third-party subcontractors the company engaged. For the last financial year, approximately 66.07% of the project executions were carried out by third party sub contracting. All statutory liabilities under the various labour laws such as provident fund, state insurance, and other employee related benefits are maintained by the subcontractors. If the sub contractors fail to perform their obligation under the contract or fail to comply with the applicable laws, rules and regulations or obtain the necessary approvals, the company may be held responsible for such failure and this could have a negative impact on the business.
Dependency on senior management team: Sustained growth of the company is depending on its ability to attract, train, motivate and retain qualified and experienced industry professionals, including project managers, engineers, construction design experts and labor contractors etc. Its inability to attract and retain such skilled personnel could result in a decrease in the quality of the services and could have a material adverse effect on the results of operations. Further, the success is significantly dependent on the efforts, expertise and continued performance of the company’s directors and its senior management team. These directors and senior management team provide expertise which enables it to make well-informed decisions in relation to the business and future prospects. The company, however, do not maintain key-man insurance on its employees. The loss of their services or failure to recruit suitable or comparable replacements in a timely manner could have a material adverse effect on the business, financial condition, results of operations and cash flows.
Outlook:
VKS Projects is engaged in the business of undertaking EPC Contracts of CS/SS/Alloy Steel Turnkey Piping, Civil Land Development, Industrial / Commercial Infra Projects, Structural Fabrication and Erection of Equipments, Fire Fighting Projects and Commissioning of Chemical Plants. The company intends to enhance capital equipments base in order to increase on operational and financial efficiencies w.r.t project executions and also improve pre-qualification status. It also plans to expand operating activities by opening design studio/office and training centers at various locations across India.
On the concern side, weak revenue visibility is the major factor as of June 2011, the company’s order book of Rs 96.70 crore translated into 1.6x FY11 sales; this provides revenue visibility for the next 12-15 months only. Though the company has a fairly good execution track record in handling mechanical, piping and heavy equipment erections for various process industries, of late it has been accepting orders for civil construction or earthworks -- recently it accepted two such orders worth Rs 95 crore. These are not complex jobs and are positioned lower in the value chain; moreover, these orders could also be margin dilutive. Hence undertaking such jobs indicates that the company is not focusing on its core competency.
The company has came up with an IPO to raise Rs 55 crore in a price band of Rs 55-60. Based on the EPS of 3.30 for the year ended March 31, 2011 the P/E at the lower price band comes at 16.67x and at higher price band comes at 18.18x. The company is having good experience in the EPC business of over 13 years and its business has been increasing rapidly. Howeer, the company has been unable to win large contracts from marquee clients and though the company has in the past bagged orders from clients such as Reliance, Thermax, Deepak Fertilizer, Rashtriya Chemicals & Fertilizers (RCF), and IG Petro, but has been unable to get repeat orders of large magnitude from these clients, which is a matter of concern. The negative cash flow in the in the last 5 years is an indication the company’s weak bargaining strength and severity of competition. Though, the business of the company has been growing and intends to enhance capital equipments base in order to increase on operational and financial efficiencies, but high capital requirement will always be putting some constraint, hence we will recommend to Avoid the issue.
Financial Performance (Rs. in Millions)
Particulars Mar 2011 Mar 2010 Mar 2009 Mar 2008 Mar 2007
Net Sales 596.84 302.33 102.41 53.31 33.09
Total Income 602.54 302.38 107.88 53.49 33.11
PBIDT 73.73 38.26 6.31 3.35 2.75
PBT 47.22 32.57 3.03 1.31 1.30
PAT 31.60 20.04 1.94 0.90 0.81
Reserves and Surplus 48.14 26.04 5.99 4.06 3.15
Net Worth 128.14 31.54 6.49 4.56 3.65
Total Debt 131.61 51.60 11.52 15.07 7.27
ROCE 36.92 74.36 31.09 18.65 21.58
RONW 39.58 105.41 35.06 21.97 22.14
PATM(%) 5.29 6.63 1.89 1.69 2.45
CPM(%) 7.04 6.85 2.34 2.63 3.64
CEPS 5.25 37.63 47.96 28.06 24.08
Enterprise Value 203.48 56.09 9.93 14.99 7.11
Zerodha (Trading Account)
RHP
