Deepak Builders IPO review (May apply)

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Review By Dilip Davda on October 18, 2024

•    The company is an EPC contractor specializing in various types of construction projects.
•    The company posted growth in its top and bottom lines for the reported periods. 
•    It has an order book worth Rs. 1380+ cr. as of June 30, 2024, with major contribution coming from railways. 
•    The sudden boost in margins from FY24 raises eyebrows.
•    Well-informed investors may park moderate funds for long term. 

ABOUT COMPANY:
Deepak Builders & Engineers Ltd.  (DBEL) is an integrated engineering and construction company, specializing in execution and construction of administrative & institutional buildings, hospitals and medical colleges, industrial building, historical memorial complex, stadium and sports complex, residential complex and various developmental and other construction activity ("Construction Projects"). While its primary focus and strength are deeply rooted in Construction Projects, it has diversified in undertaking specialized structural work such as flyovers, rail under bridge, rail over bridges, approach roads and development and redevelopment of railway stations ("Infrastructure Projects") (Construction Projects and Infrastructure Projects collectively referred to as "Construction & Infrastructure Projects"). It undertakes Construction & Infrastructure Projects both, as EPC services on a fixed-sum turnkey basis as well as on an item-rate basis/percentage basis. 

As an engineering and construction company, it has a proven track record of executing turnkey projects comprising of architectural & structural work, civil works, HVAC, Mechanical Electrical & Plumbing ("MEP") works, firefighting & fire alarm systems, public health services, information technology system, modular operation theatre, medical gas pipeline systems and external development work, including landscaping work. It has transitioned into an established EPC player, demonstrating expertise in various construction and infrastructure development projects including specialized structures across four (4) states of India, i.e. Punjab, Haryana, Rajasthan, Uttarakhand and two (2) Union Territories i.e. Chandigarh and National Capital Territory of Delhi.

Currently, the Company has twelve (12) ongoing projects, including seven (7) EPC projects and five (5) item-rate/percentage rate contracts. Of its total ongoing projects, Construction Projects comprises of four (4) hospital and medical college projects, one (1) administrative & institutional buildings; one (1) industrial building; and Infrastructure Projects comprises of four (4) projects relating to upgradation/development/redevelopment of Railway Station and related work, and two (2) roads & bridges projects relating to rail over bridges. Further, it also undertakes operation and maintenance ("O&M") activities in accordance with its contractual obligations under the projects.

The company had an order book worth Rs. 1380.39 cr. as of June 30, 2024. As of the said date, it had 632 employees on its payroll, it also hires contract workers as and when required. 

The amount involving criminal and civil litigation relating to projects of the Company as on June 30, 2024 is Rs. 37.55 cr. (to the extent quantifiable). There are other litigations pending at various stages amounting to Rs. 50.90 cr. This remains major concerns for a while.

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with its maiden combo book building route IPO of 12810000 equity shares of Rs. 10 each worth Rs. 260.04 cr. (at the upper cap). The company has announced a price band of Rs. 192 - Rs. 203 per share. The issue constitutes 10700000 fresh equity shares (worth Rs. 217.21 cr. at the upper cap), and an offer for sale (OFS) of 2110000 shares (worth Rs. 42.83 cr. at the upper cap).  The issue opens for subscription on October 21, 2024, and will close on October 23, 2024. The minimum application to be made is for 73 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE and NSE. The IPO constitutes 27.50% of the post-IPO paid-up equity capital of the company. From the net proceeds of the fresh equity issue, the company will utilize Rs. 111.96 cr. for working capital, Rs. 30.00 cr. for repayment/prepayment of certain borrowings, and the rest for general corporate purposes and unidentified inorganic acquisitions. 

The sole Book Running Lead Manager (BRLM) to this issue is Fedex Securities Pvt. Ltd., while KFin Technologies Ltd. is the registrar to the issue. Syndicate member for the issue is Khandwala Securities Ltd.

The company has issued/converted entire equity capital at par value so far. The average cost of acquisition of shares by the promoters/selling stakeholders is Rs. 9.87, and Rs. 10.00 per share. 

Post IPO, company's current paid-up equity capital of Rs. 35.88 cr. will stand enhanced to Rs. 46.58 cr. Based on the upper cap of IPO pricing, the company is looking for a market cap of Rs. 945.59 cr. 

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, the company has posted a total revenue/net profit of Rs. 363.05 cr. / Rs. 17.66 cr. (FY22), Rs. 433.46 cr. / Rs. 21.40 cr. (FY23), and Rs. 511.40 cr. / Rs. 60.41 cr. (FY24). For Q1 of FY25 ended on June 30, 2024, it earned a net profit of Rs. 14.21 cr. on a total income of Rs. 105.11 cr. The quantum jump in bottom lines for FY24 raise eyebrows and concern over its sustainability going forward. 

For the last three fiscals, the company has reported an average EPS of Rs. 11.23, and an average RoNW of 39.86%. The issue is priced at a P/BV of 4.68 based on its NAV of Rs. 43.42 as of June 30, 2024, and is at a P/BV of 2.54 based on its post-IPO NAV of Rs. 80.08 per share (At upper cap). Its Net Debt/EBITDA Ratio at 4.83 as of June 30, 2024 raises concern.

If we attribute FY25 annualized super earnings to its post-IPO fully diluted paid-up equity capital, then the asking price is at a P/E of 16.64.  Based on FY24 earnings, the issue is at a P/E of 15.65. The issue relatively appears fully priced.

The company reported PAT margins of 4.87% (FY22), 4.94% (FY23), 11.81% (FY24), 13.52% (Q1-FY25), and RoCE margins of 27.26%, 26.10%, 41.72%, 8.97% for the referred periods, respectively. 

DIVIDEND POLICY:
The company has not declared any dividends for the last five fiscals. It adopted a dividend policy in February 2024, based on its financial performance and future prospects. 

COMPARISION WITH LISTED PEERS:
As per the offer document, the company has shown IRCON Intl., Ahluwalia Contracts, PSP Projects, and ITD Cementation, as their listed peers, they are trading at a P/E of 21.06, 36.7, 21.2, and 31.3 (as of October 18, 2024). However, they are not truly comparable on an apple-to-apple basis. 

MERCHANT BANKER'S TRACK RECORD:
This is the 34th mandate from Fedex Securities in the last four fiscals (including the ongoing one). Out of the last 10 listings, all opened with premiums ranging from 1.43% to 55.04% on the date of listing.

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