Vascon Engineers

A presence in real estate business raises the possibility of an exponential growth in future, however, its pricing includes the upside

IPO details:
Price Band: Rs 165-185 per share
Net issue size: Rs 177-198 crore
Date: January 27 - 29

PUNE based Vascon Engineers is an engineering, procurement and construction (EPC) services and realty company. Vascon commenced operations primarily as a construction company, lately it has diversified into real estate development. As of December 31, 2009, Vascon has completed 181 EPC contracts valuing Rs 8,89 crore, out of which 157 EPC contracts representing 75% of the total value were for third parties, and the remaining for its own projects. The company proposes an initial public offer of 1.07 crore shares of face value of Rs 10 each to raise around Rs 200 crore and at the higher price band it is valued at Rs 1656 crore.

   The net issue represents around 11.95% of the post-issue capital of the company. The company intends to use Rs 115 crore of the issue proceeds for EPC contracts and realty projects. Around Rs 39.6 crore to be used for debt repayment and the balance to be used for meeting issue and corporate expenses.

   Company's financial analysis and peer comparison shows that the issue is richly priced. Though its presence in realty segment warrants an exponential growth in the future, long term investors are advised to invest post listing.

BUSINESS:

Started in 1986, Vascon is engaged in EPC activity with an estimated total contract value of Rs 40,14 crore with an order backlog of Rs 32,27 crore as on 31st December 2009. Out of this 30% represent third party contracts and the other 50% totalling Rs 2012 crore is for group projects. So far, Vascon has developed an aggregate saleable area of over 4.99 million square feet. In addition, it has sold land and land development rights aggregating 2.04 million square feet. Out of 55 mn sq ft land bank, about 30 mn is under sole company ownership. HDFC Real estate fund holds 12.85% equity stake post issue in Vascon.

FINANCIALS:

The company's net sales have grown at compounded annual growth rate (CAGR) of 38.3% since FY06 to reach Rs 502 crore in FY09. Similarly, profits have grown at a CAGR of 10.9% during the period to stand at Rs 30.6 crore at the end of FY09. This is on account of a slowdown in the realty sector. In FY09, contribution from realty development declined to 5% of Vascon's net sales as against 42% a year ago. However revenues from the EPC grew 48% during the same time thus insulating the company against downturn in realty business. Its operating and net profit margins stand at 16% and 6% respectively, in line with the construction industry. Going ahead, the management expects realty business to be a major contributor to both revenue and profit

VALUATIONS:

The post issue valuation comes to 29x to 33x of its annualised estimated earnings of FY10. This is much higher than the existing listed players like Pratibha Industries (13x) and J Kumar (10x). Though, this will not be a fair comparison as none of the above companies have a presence in the high margin-high risk realty sector as Vascon has.However, being a new entrant, the company must come at a discount to its peers. Risk averse investors can wait for its listing while those willing to take the risk may subscribe to the issue.