A2Z Infra

A2Z Maintenance and Engineering Services is entering the primary market on 8^th December 2010, with a fresh issue of Rs. 675 crore and offer for sale of 45.56 lakh equity shares of Rs. 10 each, both, in the price band of Rs. 400 to 410 per share. The company will make a fresh issue of 1.65-1.69 crore equity shares (about 22.5% dilution), while the offer for sale will range between Rs. 182 to 187 crore, depending on the price discovered. The Rs. 860 crore IPO closes on 10^th December 2010.

A2Z Maintenance is an FMS (facilities management services) and EPC (engineering, procurement and construction) company with focus on power distribution segment, and has recently forayed into municipal solid waste (MSW) management and renewable energy generation space. Funds raised via the fresh issue will be used by the company mainly towards:

•         Establishing 9 biomass-based power projects of 15 MW each in Punjab, Rajasthan and Kanpur - Rs. 213 crore

•         Establish rice mill and associated rice-husk-based power project in Punjab - Rs. 102 crore

•         MSW projects - Rs. 42 crore

•         Part-loan repayment - Rs. 42 crore

•         Working capital - Rs. 125 crore

The prominent shareholder selling in the offer for sale includes PE investor Beacon (effective purchase price Rs. 314), making a part-exit, which had invested in the company 14 months back, promoter Amit Mittal (effective purchase price Rs. 0.40) and a tiny portion by ace investor Rakesh Jhunjhunwala (effective purchase price Rs. 14), who is invested in the company since July 2006.

For FY10, the company reported sales turnover of Rs. 1,219 crore with EBITDA of Rs. 207 crore (EBITDA margin 17%) and net profit of Rs. 98 crore. While the company's topline is posting healthy growth of 60% CAGR during FY08-10, the EBITDA margins have been shrinking from 18.9% in FY08 to about 17% in the previous year. Likewise, even the PAT margins are facing pressure, having contracted from 10.4% in FY08 to just 8.0% in FY10. Even the return on equity (RoE) has declined substantially from 56.11% (FY08) to a very moderate 23.8% (FY10). Limited growth in EPC verticals backed with limited order flow and contracting margins are probably the reasons for company's diversification into the newer areas of MSW management and renewable energy space.

For 4 months ended 31^st July 2010, the company reported sales of Rs. 416 crore with net profit of over Rs. 26 crore. As on 31^st July 2010, its networth stood at Rs. 428 crore while it had debt of Rs. 572 crore, resulting in debt-equity ratio of 1.3:1. Its working capital remains quite high, especially debtors, which accounts for over 6 months sales equivalent. Going forward too, pressure of slow conversion cycle will remain, with debtors remaining as high as 5 months of sales, given the nature of its operations. Also, post-issue, equity will rise to Rs. 73.8 crore, which is quite high, given its scale of operations.

At the FY10 EPS of Rs. 17.28, share is presently being issued at PE multiple of 23.7 times based on historical earnings, at the upper end of the price band of 410, while the PBV multiple, at upper end, is 5.5x, based on BVPS of Rs. 75, as of 31^st July 2010. One can compare the company to other listed EPC players, as about 90% of its current revenues are contributed by this segment alone. KEC International which reported FY10 sales of Rs. 3,900 crore and EPS of Rs. 38.3 is presently quoting at PE of 11.75 and PBV of 2.9 times, with market cap of Rs. 2,274 crore. On the other hand, Kalpataru Power, with FY10 consolidated sales of about Rs. 4,000 crore, reported EPS of Rs. 13.50 on a low equity base of just Rs. 26.5 crore, is ruling at PE of 12.5x and PBV of 2.5x with market cap of Rs. 2,500 crore. 

On the other hand, post-listing market cap of A2Z Maintenance, at Rs. 410, works out to Rs. 3,000 crore, while enterprise value works out to Rs. 3,460 crore. This is definitely a very aggressive asking price, given the concern on sustained profit margins in the future. No doubt the company has a definite edge over other renewable energy companies like recently listed Orient Green Power or  I.T. solutions for power utilities companies like KLG Systel, but may keep away investors, who are not keen on taking exposure in the hybrid business models, that too with lower margins in the new business, coupled with the management issues of tiny power projects located at diverse locations.

Since Rakesh Jhunjhunwala continues to remain invested, his midas touch may keep the stock in 'premium list', getting an added advantage (read higher valuation) over peers, as seen in his other portfolio stocks such as Titan and Crisil, to name a few.

Purely on fundamentals, the issue is aggressively priced.