IPO Review: RPP Infra Projects

RPP Infra Projects has average fundamentals with a rising debt account of high working capital. Investors can avoid the



Company Name: RPP Infra Projects
Issue Size: 49 crore
Price Band: 68-75
Issue Date: Nov 18-Nov 22


RPP Infra Projects (RPP), a small-size construction firm in the southern part of the country, is looking to raise up to 49 crore in a public float through a mix of fresh issue of 61 lakh shares besides offer for sale of four lakh shares by the promoters. The IPO proceeds will be used to meet working capital needs and to purchase capital equipment and for investment in buildown-transfer (BOT) projects.

BUSINESS:

Since its incorporation in 1995, RPP has executed around 200 civil construction projects in various segments. Its portfolio includes civil construction work of buildings, road projects under transportation segment besides irrigation and industrial construction of power plants. The construction segment accounts for close to half of the total revenue (for the financial year ended March '10), which makes its fortunes closely linked to the company's bagging and executing standalone building projects. The second most important revenue generator is irrigation followed by other segments such as power and transport projects.

   RPP had an order book size of 612 crore as of June 31, 2010, which is four times its revenue for the twelve months till end March 2010. It expects to translate close to 40% of these orders by March 2011 and execute the rest within the next financial year.

FINANCES:

RPP clocked 40% compounded annual growth rate (CAGR) of revenues over the last four years, while net profit grew 70% year-on-year during the same period. For the last two years, in particular, when construction sector had seen a slowdown, the company's revenue was driven by 26% growth in construction segment.

   While revenue and profit growth has been impressive, the firm has not been able to maintain positive operating cash flows for the last one year owing to high inventory level despite having robust growth in the topline.

   This has resulted in huge debt with debt-equity ratio of 1.27 as of June 30, compared to 1.15 as of March 31, 2010. This is a cause for concern for the company going forward as it is in an industry, which requires high working capital.

   For the financial year ended March 2010, RPP's revenue grew 45% to 146 crore, while net profit grew 93% to 8.3 crore. The company was able to maintain its operating margin at 11-12% over the last couple of years aided by building construction business and increased contribution from roads segment that brings stable margins.

VALUATIONS:

At the upper-end of the issue price band on an expanded capital base, the company is eyeing a valuation of around 18.8 times its net profit for the year ended March 2010. This looks expensive compared with the industry average of 12 for the small and medium construction firms.

   As the company has average fundamentals with rising debt pile on account of high working capital, any delay in project execution can impact the company's earning going forward. So, investors can avoid the issue and watch out for the company's earnings in the coming quarters before taking any exposure in the near term.