K2 Infragen NSE SME IPO review (May apply)

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Review By Dilip Davda on March 24, 2024

•    KIL is an integrated EPC with a focus on power engineering and project engineering.
•    It marked static top lines for FY21 and FY22, with a whooping loss for FY22. 
•    Set of financial results of FY23 and H1-FY24 brought huge surprises with bumper profits. 
•    It is operating in a highly competitive field, sustainability of such margins raise concern.
•    Well-informed investors may park moderate funds for the medium to long term rewards. 

ABOUT COMPANY:
K2 Infragen Ltd. (KIL) is an integrated engineering, procurement and construction ("EPC") with a focus on Power Engineering and Project Engineering having experience in design and construction of various projects across 8 States in India viz. Uttar Pradesh, Rajasthan, Madhya Pradesh, Karnataka, Haryana, Gujarat, Punjab & Delhi. It provides services across the value chain, ranging from design, procurement, construction supervision, subcontract management and work order management to post-construction activities to clients. 

The company has been accredited with various registrations as a contractor with various departments and agencies viz. Public Works Department, Rajasthan (Class AA), Public Works Department, Madhya Pradesh, Bhopal (Class AA), pursuant to which it is also eligible to participate and undertake projects awarded by various other departments and agencies. It has in-house capabilities to deliver a project from conceptualization to completion with faster turnaround time and focus on de-risking wherever possible. KIL's core competence lies in professionally managing the value chain and attracting and retaining talent to maximize value creation.

KIL's business is broadly divided into two categories: 1. Engineering, Procurement and Construction (EPC) a. Contract Business, b. Service Business, and 2. Trading Business.

As of the date of the Red Herring Prospectus, its equipment base comprised over 13 construction & mining machinery and 25 vehicles. As of February 29, 2024, it had an order book worth Rs. 395+cr. 

The Company is specializing in the procurement of materials such as non-ferrous waste from the open market and, at times, through auction processes. These materials are carefully serving as an intermediary that bridges the gap between material sourcing and supply through mark-up model, its trading business plays a pivotal role in optimizing the supply chain and supporting various stakeholders in the value chain. 

The end use of the said products to the customers involves recycling scrap materials by melting them and produce various products for railways, power, automobile, telecom, constructions, handicrafts, and many industrial and domestic items. The nature of customers under this vertical include manufacturers. This trading business operates as a critical link in the supply chain, facilitating the efficient flow of materials from the broader market to manufacturing units. Its commitment to quality control and customer-specific requirements ensures that the manufacturing clients receive precisely the raw materials they need to maintain product integrity and consistency. Whether sourcing materials from the open market or participating in auctions, this business's expertise in material selection and quality segregation enhances KIL's reputation as a trusted partner in enabling seamless, high-quality production processes for its manufacturing customers.

As of the date of RHP, it had 61 employees on its payroll. In addition, it also hires contractual labourers as and when required. 

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with its maiden book building route IPO of 3406800 equity shares of Rs. 10 each to mobilize Rs. 40.54 cr. at the upper cap. It has announced a price band of Rs. 111 - Rs. 119 per share. The issue opens for subscription on March 28, 2024, and will close on April 03, 2024. The minimum application to be made is for 1200 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on NSE SME Emerge. The issue constitutes 27% of the post-IPO paid-up capital of the company. From the net proceeds of the IPO, it will utilize Rs. 16.00 cr. for working capital, Rs. 8.31 cr. for capex, and the rest for general corporate purposes. 

The issue is solely lead managed by Expert Global Consultants Pvt. Ltd., and KFin Technologies Ltd. is the registrar of the issue. Rikhav Securities Ltd. is the market maker for the company. 

Having issued initial equity shares at par, the company issued further equity shares in the price range of Rs. 11 - Rs. 119 between July 2016 and August 2023. It has also issued bonus shares in the ratio of 2.90 for 1 in July 2023. The average cost of acquisition of shares by the promoters is Rs. 3.82, Rs. 4.57, Rs. 5.44, Rs.5.46, and Rs. 8.48 per share. 

Post-IPO, company's current paid-up equity capital of Rs. 9.21 cr. will stand enhanced to Rs. 12.62 cr. Based on the upper IPO price band, the company is looking for a market cap of Rs. 150.16 cr.  

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, the company has (on a consolidated basis) posted a total income/net profit/ -(loss) of Rs. 35.68 cr. / Rs. 0.22 cr. (FY21), Rs. 36.85 cr. / Rs. - 3.11) cr. (FY22), Rs. 74.90 cr. / Rs. 11.32 cr. (FY23). For H1 of FY24 ended on September 30, 2023, it earned a net profit of Rs. 6.07 cr. on a total income of Rs. 59.68 cr. While it posted huge loss for FY22, the quantum jump in bottom line for FY23 not only raise eyebrows, but also concern over the sustainability of such a high margin. 

For the last three fiscals, it has reported an average EPS of Rs. 5.80, and an average RONW of 129.20%. The issue is priced at a P/BV of 4.32 based on its NAV of Rs. 27.53 as of September 30, 2023. The IPO price band ad is missing the post-IPO NAV data at the lower and upper cap. 

If we attribute annualized FY24 earnings to its post-IPO fully diluted paid-p capital, then the asking price is at a P/E of 12.36. Thus the issue appears fully priced on the basis of reported super profits.

For the reported periods, the company has posted PAT margins of 0.63% (FY21), - (8.51) % (FY22), 15.14% (FY23), 10.23% (H1-FY24), and RoCE margins of 8.41%, - (4.98) %, 46.22%, 19.91% respectively for the referred periods. 

DIVIDEND POLICY:
The company has not declared any dividends since incorporation. It will adopt a prudent dividend policy based on its financial performance and future prospects. 

COMPARISON WITH LISTED PEERS:
As per the offer document, the company has shown Markolines Pavement, WS Industries, Udayshivakumar Infra and Advait Infra as their listed peers. They are trading at a P/E of 16.4, 24.6, 13.4 and 00 (as of March 22, 2024). However, they are not comparable on an apple-to-apple basis.

MERCHANT BANKER'S TRACK RECORD:
This is the 8th mandate from Expert Global in the last two fiscals, out of the last 6 listings, 1 opened at discount, 1 at par and the rest with premiums ranging from 10.47% to 90% on the day of listing.

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