RPP Infra

RPP Infra Projects has entered the capital market on 1^8th November 2010 with a public issue of 65 lakh equity shares of Rs. 10 each, in the price band of Rs. 68 to Rs. 75 per equity share. The issue comprises a fresh issue of 61 lakh equity shares, while 4 lakh shares are offer for sale by the existing promoters. The company is expected to raise Rs. 44-49 crore via the IPO, which constitutes 28.76% of post-issue paid-up capital of the company and closes on 22^nd November 2010. Retail application limit has been enhanced to Rs. 2 lakh by SEBI, form this issue onwards.

RPP Infra Projects is a South-India based civil construction contracting company, engaged in infrastructure development such as highways, roads and bridges. It has also diversified into SEZ development, water management, irrigation and power projects. Its order book position, as of June 30, 2010, was Rs. 613 crore, comprising of 20-22 projects, of which, 47.57% was building projects, 24.35% water management projects, 16.32% SEZ development and balance, power and irrigation projects.

The company pre-dominantly operates in Karnataka, Andhra Pradesh, Tamil Nadu, Pondicherry and Andaman Nicobar Islands and has a small team of 135 employees. It plans to expand its reach to states such as Bihar and Madhya Pradesh, and is also executing a railway project in Sri Lanka. The company has completed contracts for NTPC, Neyveli Lignite, IVRCL Infrastructure, L&T, BHEL, TNPL, Siemens and Lanco Infratech, in the past.

Of the Rs. 41-46 crore estimated to flow into the company's books via the fresh issue, Rs. 17 crore will be used to fund the margin requirement with banks for meeting additional working capital needs while Rs. 11 crore will be used to procure new capital equipment. Going forward, the company proposes to bid for BOT projects in JV with other players, for which Rs. 10 crore from issue will be used. Since the company lacks any sort of previous experience in the BOT space, doubt remain on its skill-sets and execution capabilities in this highly competitive and long gestation business segment.

For FY10, the company recorded sales of Rs. 145 crore with EBITDA of Rs. 17 crore, resulting in EBITDA margin of 11.8%. EBITDA margins have been around these levels for the company for a long time. However, for Q1FY11, although its revenues were flat at Rs. 37 crore, EBITDA margin suddenly expanded to 14.1%, although this got off-set by rising interest cost, resulting in normal net profit margin. Net profit for the company was Rs. 8.3 crore in FY10, resulting in net margin of 5.7% and EPS of Rs. 5.24.

Serious concerns remain on its Q1FY11 numbers, since debtors shot up drastically from Rs. 8.4 crore as on 31^st March 2010 to Rs. 24.1 crore, as on 30^th June 2010, without any significant jump in topline. Also, loans increased during this three months period, from Rs. 28 crore to Rs. 34 crore, signifying pressure on the company's working capital.

Its networth, as on 30^th June 2010, stood at Rs. 26 crore, which will increase to Rs. 72 crore, assuming price discovery at Rs. 75 per share. Post-issue, the promoter holding will reduce from 99.99% to 71.23%.

On the lower and upper end of the price band, the company is issuing shares at PE multiples of 13 and 14.3 times respectively, based on FY10 earnings. Much larger and established peers such as Pratibha Industries and J Kumar Infra are presently quoting at PE multiples of around 10 times in the secondary market. Even on a PBV basis, the issued is expensively priced at 4.2 and 4.7 times respectively, lower and upper bands.

Rising debt levels, small size of operations, likely venture into inexperienced waters and expensive valuations all put discomfort on the issue. On fundamentals, it is better to avoid this one!