Capacit’e Infraprojects IPO Review: Big and beautiful

When Capacit’e Infraprojects IPO opens for subscription next week, it will be 23^rd mainboard public offer to open this year in India. The Mumbai-based construction company, which builds residential, commercial and institutional buildings, plans to raise INR400 crore by issuing new shares. The IPO is priced in the range of INR245 – 250 per share and will remain open till 15 September. Investors will be looking forward to this IPO as a string of recent offers have gone overboard in terms of pricing. Through Capacit’e Infraprojects IPO review, we try to find out if there is sanity in pricing of this IPO.

Before we dive deeper in the analysis, here are some essential details about the IPO.

Capacit’e Infraprojects IPO Review: No OFS

All the shares offered in Capacit’e Infraprojects IPO will be fresh shares and there is no sale by existing shareholders. The company aims to raise INR400 crore which will are proposed to be used towards:

• Funding working capital requirements: INR250 crore
• Funding purchase of capital assets (system formwork): 95 crore
• General corporate purposes

Paragon Partners owns 8,136,303 shares or 15.7% equity stake in the company while NewQuest Capital Partners holds 6,617,254 shares or 12.8% stake. Paragon is a private equity (PE) venture of Siddharth Parekh, the son of HDFC chairman Deepak Parekh. Infina Finance is another investor with a small stake of 2.4% (1,265,439 shares). None of these investors are exiting through the IPO, although it is noteworthy that the investment was made early this year only.

Capacit’e Infraprojects IPO Review: Building blocks

As mentioned above, Capacit’e Infraprojects is into constructing residential, commercial and institutional buildings. The company predominantly operates in the Mumbai metropolitan region (MMR), the National Capital Region (NCR) and Bengaluru. Its operations are geographically divided into MMR and Pune (West Zone), NCR and Patna (North Zone) and Bengaluru, Chennai, Hyderabad and Kochi (South Zone). As on 31 May 2017, projects in the West Zone, North Zone and South Zone constituted, approximately 58.93%, 14.29%, 26.79% of its total projects, respectively.

The fast-growing company has a concentrated focus on construction of buildings without diversifying into other activities such as land development or infrastructure development. It counts established names including Kalpataru, Oberoi Constructions Limited, The Wadhwa Group, Saifee Burhani Upliftment Trust, Lodha Group, Rustomjee, Godrej Properties, Brigade Enterprises and Prestige Estates among its clients and has won repeat business with several of these.

As of 31 May 2017, its order book stood at INR4602.5 crore, nearly 4 times the consolidated revenue from operations for the financial year ended 31 March 2017 and consisted of orders for construction of 12 Super high rise buildings (40 or more floors), 23 High rise buildings (7 or more floors), six other buildings, 14 gated Communities and one Villament.

Capacit’e Infraprojects IPO Review: Soaring revenues and profits

Capacit’e Infraprojects is a fast-growing company and this is visible in the its revenues which surged from INR18.3 crore in FY2013 to INR1,166 crore in FY2017. This is spectacular growth by any standard in construction business which is not known to be scalable. In line with growing revenues, expenses have also increased but the growth in profits has been faster. The company earned a profit of INR69.7 crore in the latest year, maintaining the trend of improving profits.

Capacit’e Infraprojects has also shown a consistent improvement in its net margins which topped at 6% in FY2017. This has been made possible by a strong control on costs and a rapidly improving balance sheet also played its part. Debt equity ratio has shown a regular decline in recent years and stood at 0.51 as of 31 March 2017. This is remarkable for capital intensive construction business.

*For the period 9 August 2012 to 31 March 2013 

The company’s three promoters Rahul Katyal, Rohit Katyal and Subir Malhotra have vast experience in the construction field and this has played an important role in ramping up the business to the current scale. Katyal brothers worked for Pratibha Industries Limited before starting Capacit’e Infraprojects. Subir Malhotra is a qualified civil engineer from BITS Pilani.

Capacit’e Infraprojects IPO Review: Should you invest?

So far in our review, the company comes across as a solid business with fast growth, strong balance sheet, trustworthy promoters and the presence of PE investors is a further vote of confidence to the business. We have not been fans of construction companies as mostly such businesses prosper (and suffer) as a result of their proximity to a certain political party. However, Capacit’e Infraprojects impresses on this front with almost all business being non-governmental.

In terms of valuations, the price band of INR245 – 250 per share and the Earnings Per Share (EPS) of INR74.36 values the business at the P/E ratio of 17.49 – 17.84. These valuations are in line with its competitors Ahluwalia Contracts (P/E 22.57), JMC Projects and Simplex Infrastructures (P/E 17.75). Meanwhile, its Return on Net Worth (RONW) stood at 23.15% as of 31 March 2017 which is better than its peers. PSP Projects, a smaller peer which disappointed investors with poor listing earlier this year, sold its shares in the IPO at a P/E ratio of 26.72. Considering the valuation of peers, Capacit’e Infraprojects’ IPO pricing looks reasonable.

Overall, Capacit’e Infraprojects IPO review tells us the offer is reasonably priced for a fast growing business with strong fundamentals. Continued investment by PE firms also bolsters our confidence in the business. The IPO is also noteworthy as almost every other offer coming on the street is priced in a way that captures all the positives. To know what other investors think about the IPO and to know the latest grey market movements, head to our IPO grey market and discussion pages.