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Review By Dilip Davda on March 21, 2024

•    SCL is an engineering construction company specializing in roads, tunnels, slope stabilization works with related services.
•    It marked growth in its top and bottom lines indicating improved scope post pandemic.
•    It has orders on hand worth Rs. 1199+ cr. as of December 31, 2023.
•    Based on annualized FY24 earnings, the issue appears fully priced. 
•    Considering orders on hand and the scope ahead, investors may park funds for the medium to long term rewards.

ABOUT COMPANY:
SRM Contractors Ltd. (SCL) is an engineering construction and development company engaged primarily in the construction of roads (including bridges), tunnels, slope stabilization works and other miscellaneous civil construction activities in the Union Territories of Jammu & Kashmir and Ladakh. It undertakes construction works both as an EPC contractor and on an item rate basis for infrastructure projects. The Company also undertakes sub-contracting assignments of infrastructure construction projects. It has a track record of successful execution of road, tunnel and slope stabilization projects in the difficult terrain of union territories of Jammu & Kashmir and Ladakh. 

The Company has emerged as a key player in infrastructure construction industry in the Union Territories of Jammu & Kashmir and Ladakh and has developed technical capabilities to execute projects in hilly/ challenging terrain in the region (Source: D&B Report). SCL is an ISO 9001:2015 certified company and is also registered as class A contractor with Public Work (R&B) Department, Jammu & Kashmir. It is pre-qualified to bid independently on projects, tendered by departments of governmental authorities and other entities funded by the GoI, of contract value up to Rs. 300 cr. and Rs. 500 cr. for EPC contracts pertaining to construction of roads (including bridges) and for construction of tunnel respectively As a result of the growth of its road and tunnel construction business as well as the recent government initiatives and support to develop the infrastructure of union territories of Jammu & Kashmir and Ladakh, the company has further forayed into executing other infrastructure projects such as standalone bridges, larger slope stabilization works and other miscellaneous civil construction activities in order to capitalize on such rising opportunities. Recently, the company has also been awarded with a contract for slope stabilization work in the state of Uttarakhand.

As an EPC contractor, the scope of its services includes detailed engineering of the project, procurement of construction materials, plant and machinery, construction and execution of the project and its operation and maintenance in accordance with the contractual provisions. Its manpower, resources and fleet of machinery and equipment, together with its engineering capabilities, enables SCL to execute a large number of projects simultaneously. It undertakes contracts independently or whenever required, through project-specific joint ventures with other infrastructure and construction entities when a project requires them to meet specific eligibility requirements in relation to certain large projects, including requirements relating to particular types of experience. The Company also undertakes sub-contracting assignments from third party major infrastructure and construction entities.

SCL was incorporated in September 2008 and has gradually increased its execution capabilities in terms of the size of projects that it is now bidding for and executing. Since incorporation, the Company, independently and through project-specific joint ventures, has completed thirty-eight (38) infrastructure construction projects having an aggregate contract value of Rs. 1411.66 cr. which includes thirty-two (32) roads projects, three (3) tunnel projects, one (1) slope stabilization works and two (2) other miscellaneous civil construction activities. Out of the thirty-eight (38) projects executed by the Company, thirty (30) infrastructure construction projects, including sub-contracting assignments, have been executed independently by it and eight (8) projects have been executed through project specific joint ventures. 

As on January 31, 2024, its order book consists of twenty-one (21) infrastructure construction projects which includes eleven (11) roads projects (including bridges), five (5) tunnel projects, four (4) slope stabilization project and one (1) other miscellaneous civil construction activities. Out of the twenty-one (21) ongoing infrastructure construction projects, fifteen (15) infrastructure construction projects, including sub-contracting assignments, is being executed independently by us and six (6) infrastructure construction projects are being executed with our project-specific joint ventures. 

Its order book in terms of value of contracts, including subcontracting assignments, was Rs. 1199.31 cr. as of January 31, 2024 that covers around 60% for slope stabilization projects having high margins.

Among the twenty-one (21) infrastructure construction projects that we are currently executing, eleven (11) projects aggregating to a total contract value of Rs. 720.56 cr. relates to road construction, five (5) projects of total contract value of Rs. 258.22 cr. relates to tunnel construction, four (4) projects of total contract value of Rs. 203.89 cr. relates to slope stabilization works and one (1) project of total contract value of Rs. 166.56 cr. relates to other construction activity. At present, we are primarily bidding for construction of roads including bridges, tunnel works, slope stabilization works and other miscellaneous civil construction activities in the Union Territories of Jammu & Kashmir and Ladakh and state of Uttarakhand. As of January 31, 2024, it had 275 employees comprising both skilled and on-site workers engaged in various projects.

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with its maiden book building route IPO of 6200000 equity shares of Rs. 10 each to mobilize Rs. 130.20 cr. at the upper cap. It has announced a price band of Rs. 200 - Rs. 210 per share. The issue opens for subscription on March 26, 2024, and will close on March 28, 2024. The minimum application to be made is for 70 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE and NSE. The issue constitutes 27.02% of the post-IPO paid-up capital of the company. From the net proceeds of the IPO, it will utilize Rs. 31.50 cr. for capex on purchase of equipment/machineries, Rs. 10.00 cr. for repayment/prepayment of certain borrowings, Rs. 12.00 cr. for investment in joint venture project, Rs. 46.00 cr. for working capital, and the rest for general corporate purposes.

The sole Book Running Lead Manager (BRLM) to this issue is Interactive Financial Services Ltd. and Bigshare Services Pvt. Ltd. is the registrar of the issue. 

The company has issued/converted entire equity shares at par so far, it has also issued bonus shares in the ratio of 5 for 1 in January 2017, and 10 for 1 in March 2023. The average cost of acquisition of shares by the promoters is Rs. NIL, and Rs. 49.00 per share.

Post-IPO, company's current paid-up equity capital of Rs.16.74 cr. will stand enhanced to Rs. 22.94 cr. Based on the upper price band of the IPO, the company is looking for a market cap of Rs. 481.83 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 of Rs. 161.95 cr. / Rs. 8.27 cr. (FY21), Rs. 265.51 cr. / Rs. 17.57 cr. (FY22), and Rs.300.65 cr. / Rs. 18.75 cr. (FAY23). For 9M of FY24 ended on December 31, 2023, it earned a net profit of Rs. 21.07 cr. on a total income of Rs. 242.28 cr.  

For the last three fiscals, the company has reported an average EPS of Rs. 80.46 and an average RoNW of 28.21%. The issue is priced at a P/BV of 4.17 based on its NAV of Rs. 50.31 as of December 31, 2023. The IPO price band ad has garbled the post IPO NAV data and hence is not given. The ad mentions post IPO NAV of Rs. 200 (at lower cap) and Rs. 210 (at upper cap) which is the IPO price band.

 If we attribute FY24 annualized earnings to its post-IPO fully diluted paid-up equity base, then the asking price is at a P/E of 17.14. Thus on prima facie, the issue appears fully priced.

For the reported periods, it has posted PAT margins of 5.17% (FY21), 6.66% (FY22), 6.24% (FY23), 8.98% (9M-FY24), and RoCE margins of 31.17%, 42.16%, 35.04%, 29.43% respectively, for the referred periods. 

DIVIDEND POLICY:
The company has not declared any dividends for the last five fiscals. It has already adopted a dividend policy in the month of August 2023, based on its financial performance and future prospects. 

COMPARISON WITH LISTED PEERS:
As per the offer document, the company has shown Man Infra, ITD Cementation, Likhitha Infra, and Udayshivakumar Infra, as their listed peers. They are trading at a P/E of 23.1, 23.1, 15.4, and 12.7 (as of March 20, 2024). However, they are not comparable on an apple-to-apple basis. 

MERCHANT BANKER'S TRACK RECORD:
This is the 15th mandate from (the BRLM) Interactive Financial in the last three fiscals, out of the last 10 listings, 2 opened at discount, 2 at par and the rest with premiums ranging from 1.46% to 20.74% on the day of listing.

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