Stock Fundamentals

Why you can subscribe to G R Infraprojects IPO

Maulik Madhu BL Research Bureau | Updated on July 03, 2021

Investors with a high-risk appetite can consider subscribing to the issue

G R Infraprojects, a Gujarat-based integrated road engineering, procurement and construction (EPC) company is set to raise around ₹963 crore at the higher end of the IPO price band of ₹828 to ₹837 per share.

The offer will be open from July 7 to 9, 2021. It will comprise an offer for sale of 1.15 crore shares by one of the promoters and other existing shareholders. There will be no fresh issue of equity. The company will not receive any proceeds from the issue.

Applications will be accepted for a minimum lot of 17 shares and in multiples thereof. Not less than 35 per cent of the issue will be reserved for retail investors.

A snapshot

Established in 1995, G R Infraprojects is an integrated EPC player focussed on road and highway construction projects, particularly across north India. The company has forayed into railway projects too. The company reported operational revenue of ₹7,844 crore and net profit of ₹953 crore for FY21.

There are positives on the business front and the stock valuation too is attractive compared to peers.

The company’s strong order book as of March-end 2021, timely execution and high profit margins during FY19 and FY21, and debt-to-equity ratio of just under 1 time are the positives. On debt-to-equity, G R Infraprojects fares better than highly-leveraged players such as Ashoka Buildcon and Sadbhav Engineering. The company’s EBITDA and net profit margins are at par with those of KNR Construction and higher than those of PNR Infratech, both of which are relatively less leveraged.

At ₹837, G R Infraprojects discounts its FY2021 earnings by 8.5 times. This is significantly lower than the price to earnings (P/E) multiples at which many listed infrastructure companies trade. Companies such as Ashoka Buildcon, PNC Infratech, KNR Constructions, Dilip Buildcon and IRB Infrastructure Developers trade at a trailing twelve month- P/E ratio ranging from 11 to 47 times.

That said, note that infrastructure projects are awarded through competitive bidding and the presence of many established players makes it a competitive space to operate in. A proven track record of regular inflow of orders is crucial as is the ability to sustain the current high margins. In the absence of sufficient long-term data for G R Infraprojects, this is hard to establish.

However, the low IPO pricing provides ample margin of safety and investors with a high-risk appetite can consider subscribing to the issue.

About the company

G R Infraprojects has been executing road projects as an EPC contractor as well as on build, operate and transfer annuity (BOT- annuity) and hybrid annuity model (HAM) basis.

EPC projects accounted for 68 per cent of the company’s consolidated revenue in FY21. The rest was largely from BOT annuity and HAM projects. According to the company, projects under both categories have a price escalation provision that allows for cost pass-through.

G R Infraprojects has one operational BOT annuity project and 14 HAM projects of which five are operational and another four are under construction.

Under EPC, the company is involved in project design and engineering, procurement and execution. The BOT model entails building and then operating and maintaining a project over the concession period of say 15 years in return for an annuity. At the end of this period, the project is transferred to the government. In contrast with BOT, under HAM, the project developer (G R Infraprojects in this case) has to finance only 60 per cent of the project cost. The rest is taken care of by the NHAI or other government agencies tendering the project.

What looks good

As on March-end 2021, G R Infraprojects had an order book of ₹19,026 crore. This translates into an order book to sales ratio of 2.4 times, providing revenue visibility for the next couple of years. This ratio was 2.6 times in FY20.

The company’s timely execution record over the past three years too lends some comfort. In FY19, G R Infraprojects completed 80 per cent of its projects before the scheduled completion date. Then in FY20 and FY21, it completed 50 per cent of the projects before time.

Between FY19 and FY21, G R Infraprojects grew its revenue 22 per cent (CAGR) to ₹7,844 crore. During this period, the company’s operating profit expanded 19.6 per cent (CAGR) to ₹1,624 crore and net profit rose 15.3 per cent (CAGR) to ₹953 crore. The company reported EBITDA margins of 24-25 per cent during FY19 to FY21. Though, impacted by higher depreciation and interest expense, the net profit margin went down from 13.5 per cent to 12.1 per cent during this period.

The government’s increased focus on infrastructure development too provides tailwinds on the macroeconomic front. NHAI’s plan to award ₹2.25 lakh crore of projects in FY2022 (up from ₹1.7 lakh crore a year ago) and the Ministry of Road Transport & Highways’ target to award projects worth ₹15 lakh crore projects in the next two years, should help create a robust order pipeline for companies in this space.

Published on July 03, 2021

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