Ircon: Good order book position
Ircon International, a 99.7 per cent government-owned company, provides engineering and construction services to the infrastructure sector. Although the company’s primary focus is on the railway sector, in order to diversify the business, it has expanded itself into allied sectors like highway and road construction. Ircon also provides services in the international market (15 per cent of FY18 revenue), wherein it has offices in Malaysia, Sri Lanka, Bangladesh, South Africa and Algeria. Going ahead, Ircon is looking at increasing its presence in the international market and allied sectors and is focusing on high value projects. Recommendation: At the higher end of the price band of Rs 475, the issue is priced at P/E of 10.9x (post dilution) on FY18 basis, which is attractive. The company has no listed peers. Ircon’s order book as of March 31, 2018 stands at Rs 22,407 crore (5.6x FY18 revenue), which provides revenue visibility. Over FY15-17, Ircon’s growth was muted, with the same picking up in FY18 (revenue up 31 per cent and PAT up 24 per cent). Historically debt free, in FY18 it has acquired debt of Rs 3,203 crore from the Indian Railway Finance Corporation (IRFC) at the interest rate of 8.77 per cent to pay upfront lease premium to Rail Land Development Authority (RLDA) for the acquisition of a project site. Given the govt focus on infrastructure spends (Metro, Bharatmala, Economic corridors), healthy order book and attractive valuations, investors are suggested to subscribe to the issue. Objects of the issue: The IPO consists entirely of an offer for sale (OFS) of 0.99 crore shares (10.5 per cent of post-dilution equity) by the government of India. Of the total issue, 5.0 per cent shares, that is 5,00,000 shares shall be reserved for the employees of Ircon. The retail investors and employees will be offered a discount of Rs10/share. As the issue is 100 per cent OFS, the company will not receive any funds raised from the issue. Business diversification to bode well: Given Ircon’s focus on expanding geographic presence and foray into allied infrastructure segments like roads and highways could bode well owing to the current infra spends by the government. As per Crisil, over FY19-22, the construction sector is expected to increase 54 per cent to Rs 22.2 lakh crore. Healthy order book position: Ircon’s order book grew 19 per cent YoY to Rs 22,407 crore. In order to maximise margins, it is looking at international orders along with high value orders (> Rs 500 crore). Currently, it has 20 high value order projects. The complexity and stringent pre-qualification capabilities for these projects have resulted in low competitive intensity. As Ircon is already executing these projects, it could be a beneficiary of the high entry barriers.