Garuda Const. IPO review (Avoid)

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Review By Dilip Davda on October 3, 2024

•    The company is engaged in civil, industrial and infra related construction activities and providing related services.
•    It posted inconsistency in its financial performance for the referred periods.
•    It has an order book worth Rs. 1400+ cr. as of the date of filing this offer document.
•    Based on FY25 annualized super earnings, the issue appears aggressively priced. 
•    There is no harm in skipping this "High Risk/Low Return" bet. 

PREFACE:
PKH Ventures Ltd., one of the promoter group company came with its maiden IPO in the month of July 2023 for Rs. 379 cr. with a price band of Rs. 140 - 148 per share having a FV of Rs. 5 per share. The issue could not garner the required subscription and was withdrawn on the last day of the issue, under the pretext of bad market condition. Now this company is coming for an IPO to raise Rs. 264.10 cr. While its financial performance so far has been average, the issue is fully priced based on its annualized super earnings for FY25. Its trade receivables at Rs. 176.24 cr. as of March 31, 2024, and Rs. 182.56 cr. as of April 30, 2024 are worrisome. This surpasses its annual top lines. The only attraction is its order book of Rs. 1400+ cr. as of the date of filing this offer document.

ABOUT COMPANY:
Garuda Construction & Engineering Ltd.  (GCEL) is a growing civil construction company with growth in revenue from operations. It provides end-to-end civil construction for residential, commercial, residential cum commercial, infrastructure and industrial projects and additional services for infrastructure and also hospitality projects, Wherein, civil construction includes construction of residential, hospitality, industrial, infrastructural and commercial buildings, construction of concrete building structures and composite steel structures which are required for the civil construction. 

Its end-to-end civil construction starts with detailed route survey, designing, detailed engineering, mobilization of resources, micro scheduling of construction activities, obtaining construction permissions and conducting soil/water testing, hiring of contractor / manpower, procurement of material, lab testing, carrying out construction activities as per approved plan and finally handing over the project as per the agreed terms. Further, GCEL is also involved in sector pertaining to civil construction cum services. The construction of concrete building structures and composite steel structures are procured from underlying sub-contractors as per specified designs which may be mandated by overlying developers or by its own engineering teams. Further, the company also provides services such as operations and maintenance services ("O&M") and Mechanical, Electrical and Plumbing ("MEP") services and finishing works as a part of its construction services. 

Historically it has been majorly being an in-house construction company for Promoter Group and group related entities, where in the group entities and corporate Promoters bid for third party civil contracts as developers (private sector as well as where Government entities have a requirement where the bidding is as per publicly available tender documents and the Governments tendering process in certain cases) and sub-contract the construction work to the company as a contractual service. Going forward, GCEL is directly venturing into contracts with unrelated third parties and taking on a role of a professionally managed construction company. As of the date of filing this offer document, it had a strong order book worth Rs. 1408.27 cr. for 12 ongoing projects. As of the said date, it had 65employees on its payroll and is also hiring contract labourers as and when needed. 

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with its maiden combo book building route IPO of 27800000 equity shares of Rs. 5 each worth Rs. 264.10 cr. (at the upper cap). The company has announced a price band of Rs. 92 - Rs. 95 per share. The issue constitutes 18300000 fresh equity shares (worth Rs. 173.85 cr. at the upper cap), and an offer for sale (OFS) of 9500000 shares (worth Rs. 90.25 cr. at the upper cap).  The issue opens for subscription on October 08, 2024, and will close on October 10, 2024. The minimum application to be made is for 157 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE and NSE. The IPO constitutes 29.88% 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. 100.00 cr. for working capital, and the rest for general corporate purposes and unidentified inorganic acquisitions. 

The sole Book Running Lead Manager (BRLM) to this issue is Corpwis Advisors Pvt. Ltd., while Link Intime India Pvt. Ltd. Is the registrar to the issue. Syndicate members for this IPO are Alacrity Securities Ltd. And Swastika Investmart Ltd.

Having issued initial equity shares at par, the company issued/based on Rs. 5 FV) between October 2019 and December 2019. It has also issued bonus shares in the ratio of 100 for 125 in December 2019, 5 for 36 in March 2021, and 2 for 1 in September 2023. The average cost of acquisition of shares by the promoters is Rs. 0.81, Rs. 2.14, and Rs. 11.17 per share. 

Post IPO, company's current paid-up equity capital of Rs. 37.37 cr. will stand enhanced to Rs. 46.52 cr. Based on the upper cap of IPO pricing, the company is looking for a market cap of Rs. 883.90 cr. 

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, the company has posted a total income/net profit of Rs. 77.03 cr. / Rs. 18.78 cr. (FY22), Rs. 161.02 cr. / Rs. 40.80 cr. (FY23), and Rs. 154.47 cr. / Rs. 36.44 cr. (FY24). For M1 of fY25 ended on April 30, 2024, it earned a net profit of Rs. 3.50 cr. on a total income of Rs. 11.88 cr.

For the last three fiscals, the company has reported an average EPS of Rs. 4.67, and an average RoNW of 39.26%. The issue is priced at a P/BV of 5.80 based on its NAV of Rs. 16.39 as of April 30, 2024, but the RHP and the IPO price band ad is missing its post-IPO NAV data.

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 21.01, and based on FY24 earnings, the P/E stands at 24.23. The issue relatively appears aggressively priced.

Its trade receivables at Rs. 176.24 cr. as of March 31, 2024, and Rs. 182.56 cr. as of April 30, 2024 are higher than the top lines reported so far. This is worrisome and raises major concern.

The company reported PAT margins of 24.39% (FY22), 25.39% (FY23), 23.63% (FY24), 29.49% (1M-FY25), and RoCE margins of 40.46%, 70.85%, 46.69%, 3.87% for the referred periods, respectively. 

DIVIDEND POLICY:
The company has not declared any dividends for the reported periods of the offer document. It adopted a dividend policy in October 2023, based on its financial performance and future prospects. 

COMPARISION WITH LISTED PEERS:
As per the offer document, the company has shown PSP Projects, Capacite Infra, Vascon Engg., Ahluwalia Contracts, and B L Kashyap Sons, as their listed peers, they are trading at a P/E of 21.4, 21.1, 21.4, 35.3 and 35.7 (as of October 01, 2024). However, they are not truly comparable on an apple-to-apple basis. 

MERCHANT BANKER'S TRACK RECORD:
This is the 1st mainboard mandate from the BRLM associated with this issue that has handled overall 3 SME issues in the ongoing fiscals, out of the last 2 listings, 1 opened at par and 1 at a premium of 5% on the date of listing. 

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