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A2Z Maintenance & Engg. Services
High on Valuations
A2Z Maintenance & Engineering Services Ltd. (A2Z) was incorporated in January
2002 as a facility management services (FMS) provider. The company was
acquired by Mr. Amit Mittal during FY2003–04. In 2006, the company ventured
into power distribution EPC and executed projects involving the installation of
distribution line infrastructure, construction of substations, system strengthening
and rural electrification projects. The acquisition of a transmission EPC company
during 2008 marked the entry of A2Z into the power transmission segment.
Foray into unrelated business: During 2008, A2Z ventured into the municipal
solid waste (MSW) management business and bagged contracts to set up
integrated resource recovery facility (IRRF) on a BOOT basis, with an aggregate
MSW capacity of 3,800 tonnes/day in six cities. Having established its presence in
the EPC and MSW space, A2Z has recently forayed into the power generation
business, choosing renewable energy sources of fuel such as biomass, agro waste
and refuse-derived fuel (RDF) generated from its MSW projects. The company
would be setting up a number of cogeneration and biomass-based power
generation projects totaling 235MW in Uttar Pradesh, Rajasthan and Punjab.
Most of the above projects are expected to be completed by FY2012.
Key concerns
High working capital requirements: The EPC business requires significant amount
of working capital, which varies according to the nature of the project. Large
amount of working capital gets tied up to finance the purchase of materials and
the performance of engineering, construction and other work on projects before
payment is received from clients.
Lack of experience in MSW or power generation: A2Z’s promoters do not have
prior experience in the development and operation of power generation projects
or the MSW business. The deployment of large amount of the IPO proceeds in
these unrelated businesses where the company has no prior experience may
further strain the financial position of its profitable EPC division. It is pertinent to
note that despite being highly profitable, the EPC business has been reporting
negative cash flows.
Outlook and valuation: Currently, A2Z derives its revenue and profitability from
the power EPC business; the MSW and power generation projects are expected to
contribute meaningfully from FY2013. Since FY2011 and FY2012 revenue would
largely be dominated by the power distribution EPC business, the appropriate
peer comparison would be with Jyoti Structures, KEC International and Kalpataru
Power Transmission Ltd. Even at the lower price band of `400, A2Z would trade
at a P/E multiple of 23x FY2010 earnings, while its peers are currently trading at
an average P/E of 12.5x their TTM earnings, thus placing the scrip relatively
expensive. Hence, we recommend Avoid on the IPO.
Company background
A2Z was originally incorporated in January 2002. The company was acquired by
the current promoter, Mr. Amit Mittal, during FY2003–04. Commencing its
operations as an FMS provider in 2002, the company gradually ventured into
power distribution EPC during 2006. A2Z has executed various projects involving
the installation of distribution line infrastructure, construction of substations, system
strengthening and rural electrification projects. The acquisition of a transmission
EPC company during 2008 marked the entry of A2Z into the power transmission
segment. A2Z‘s power transmission portfolio includes the construction of EHV
substations of up to 400kV and EHV transmission lines of up to 765kV.
During 2008, A2Z ventured into the MSW management service business, where it
bagged contracts to set up IRRF on a BOOT basis with an aggregate MSW
capacity of 3,800tonnes/day in six cities. Recently, A2Z forayed into the power
generation business choosing renewable energy sources of fuel such as biomass,
agro waste and RDF generated from its MSW projects.
A2Z operates in five business segments: EPC, FMS, MSW management, renewable
energy generation and power IT solutions. The businesses are carried out by group
companies of A2Z Maintenance and Engineering Services.
Business segments
EPC: In the EPC segment, the company mainly focuses on the power distribution
sector, providing services such as the installation of distribution line infrastructure
with capacities of up to 33kV, the construction of substations of up to 33kV and
participation in system strengthening projects and rural electrification projects.
In the power transmission sector, A2Z undertakes select projects involving the
construction of extra high voltage (EHV) substations of up to 400kV and EHV
transmission lines of up to 765kV.
Since FY2006, the company has been receiving EPC contracts to install
~21,000ckm of HT distribution line, 19,500cKm of LT distribution line, 1,200cKm
of transmission line, 5,800km of aerial bunched cable, 124,000 transformers,
930,000 poles and 735 substations of different capacities up to 220kV; and to
provide connections to approximately 1,200,000 below-poverty-line households.
As of July 31, 2010, the company’s outstanding order book in the EPC business
(T&D) stood at ~ `1,292cr.
FMS: In this segment, A2Z provides services such as engineering maintenance,
energy saving solutions and security services to public and private sector clients.
The company also provides specialised services to Indian Railways under various
schemes in 11 out of 16 railway zones.
MSW management services: In this segment, A2Z involves in the collection,
transportation, processing, disposal and treatment of MSW across various cities in
India. The company has been awarded various contracts for setting up IRRFs on a
BOOT basis with an aggregate MSW capacity of 3,800tonnes/day in six cities. The
company has also bagged contracts for the collection and transportation of MSW
for an aggregate capacity of 910TPD in two cities and the processing and disposal
of MSW for an aggregate capacity of 855TPD in 12 cities in India.
Renewable energy generation: The company recently forayed into the power
generation business through renewable energy sources of fuel such as biomass,
agro waste and RDF generated from its own MSW projects. The company would
be setting up a number of cogeneration and biomass-based power generation
projects totaling 235MW in Uttar Pradesh, Rajasthan and Punjab. Most of the
above projects are expected to be completed by FY2012.
Power IT solutions: A2Z has recently diversified into the power IT solutions
business, wherein it would be executing projects as a systems integrator by
developing solutions for AT&C loss reduction. The company along with its
consortium partner, Sterlite Technologies Ltd., has been empanelled by Power
Finance Corporation of India Ltd. as a system integrator to provide IT applications
for reduction in AT&C losses.
IPO details
IPO details: A2Z will be accessing the capital market with an initial public offering
(IPO) of 2.1cr equity shares of `10 each at a price band of `400–410/share.
The IPO comprises fresh issue of up to 1.65cr equity shares and an offer for sale
of 0.46cr equity shares by existing shareholders. The issue opened on December
8, 2010, and closes on December 10, 2010. The issue proceeds would be utilised
to fund the company’s forays into biomass-based power generation and MSW
management projects in addition to funding its working capital requirements and
for general corporate purpose.
Order book: Order backlog in the EPC segment (T&D) stood at ~ `1,292cr as
on July 31, 2010. Notable orders won include the HVDS project from
Uttar Haryana Bijli Vitran Nigam Ltd. for the conversion of existing LT lines to new
11kV lines along with pole-mounted dedicated distribution transformers with
capacities ranging from 6.3kVA to 40kVA. The company has also received
contracts worth `26.7cr from the Rural Electrification Agency, Uganda, to construct
power lines and associated power networks of Government Priority Rural
Electrification Projects in Uganda.
Industry overview
Engineering, procurement and construction (EPC): Demand for EPC services in the
power transmission lines and power distribution businesses is largely dependent on
the development, demand and new investments in the power generation,
transmission and distribution sectors. India has traditionally focused on investment
into power generation and, in the process, the T&D segment has attracted
significantly less investment. Given the fact that India's electricity generation
resources are distributed unevenly, there is a critical requirement for a reliable
transmission system. As more and more investments get committed towards
expansion of power generation capacities, there would be an urgency to
facilitate the rapid development of the regional transmission network and
inter-regional capacities.
Transmission: In India, the T&D system is a three-tier structure comprising
distribution networks, state grids and regional grids. These networks are primarily
owned and operated by respective SEBs or State Governments (through state
electricity departments). Most of the inter-state transmission links are owned and
operated by PGCIL, though some are jointly owned by the concerned SEBs.
In addition, PGCIL owns and operates many inter-regional transmission lines
(forming part of the national grid) to facilitate the transfer of power from a region
of surplus to one with deficit.
Distribution: After the unbundling of state electricity boards, most of the states have
separate distribution corporations engaged in the business of electricity
distribution. Distribution is considered as the weakest link in the power sector due
to large energy losses occurring at the distribution end. In order to accelerate and
upgrade the Indian T&D infrastructure, the Government of India consolidated
various distribution schemes during the Xth Five-Year Plan (FYP), including
Accelerated Power Development and Reforms Programme (APDRP) and Rajiv
Gandhi Grameen Vidyutikaran Yojana (RGGVY).
APDRP
APDRP targets the densely populated urban areas. The main objective of the
programme is to cut losses in the system and bring the total AT&C losses to 15% in
all towns. Although the programme led to some loss reduction, the target of 15% is
not yet achieved. In FY2009, the Government of India revised the scheme and
renamed it as Restructured Accelerated Power Development and Reforms
Programme (R-APDRP). The funds received under the R-APDRP scheme are being
utilised to upgrade and modernise the sub-transmission and distribution (below
33kV or 66kV) networks. The plan is to cover towns/cities with population of more
than 30,000. The plan’s targets include an annual reduction of 3% in AT&C losses
for utilities that have greater than 30% losses. It also targets an annual 1.5% AT&C
loss reduction for utilities with less than 30% losses.
RGGVY
The RGGVY aims at electrifying all villages and habitations, providing access to
electricity to all rural households, providing electricity connections to belowpoverty-
line families free of charge, establishment of rural electricity distribution
backbone (REDB), with 33/11kV (or 66/11kV) sub-stations of adequate capacity in
blocks where these do not exist, creation of village electrification infrastructure (VEI)
with provision of distribution transformer of appropriate capacity in
villages/habitations and decentralised distributed generation (DDG) systems based
on conventional and non-conventional energy sources where grid supply is not
feasible or cost effective. Under the programme, 90% grant is provided by the
Government of India and 10% as loan by Rural Electrification Corporation (REC) to
state governments.
MSW management
MSW predominantly includes household waste and commercial wastes collected by
a municipality within a given area. The rapid increase in the volume and types of
solid and hazardous waste as a result of continuous economic growth,
urbanisation and industrialisation is becoming a burgeoning problem for national
and local governments to ensure effective and sustainable waste management.
About 100,000MT of MSW is generated daily in the country and per capita waste
generation in major cities ranges from 0.20kg to 0.60kg. The collection efficiency
ranges from 70% to 90% in major metro cities and below 50% in some smaller
cities. Urban local bodies spend about `500–1,500/tonne on solid waste for
collection, transportation, treatment and disposal.
The problems of collection, transportation, proper use and disposal have become
a huge task, straining both financial resources of the civic bodies and their physical
capabilities, in addition to the problem of availability of disposal sites. Landfill sites
have not yet been identified by many municipalities and, in several municipalities,
landfill sites have been exhausted and the respective local bodies do not have
resources to acquire new land.
Renewable energy in India
Renewable energy-based power capacities have registered the highest pace of
growth in the overall capacity additions in India as compared to non-renewable
energy sources. The share of renewable energy-based power capacities has been
increasing from 2% in FY2003 to around 10% in FY2010. Nonetheless,
contribution from renewable energy sources towards overall generation has been
low at around 3% due to low plant load factors of renewable capacities. Capacity
addition of around 49,000MW in the aggregate is envisaged for the XIIth and XIIIth
FYPs. According to the Planning Commission, renewable power capacity by the
end of the XIIIth FYP period is projected to reach 53,000MW, comprising
39,000MW of wind power, 7,500MW of biomass power and 6,500MW of mini
hydroelectric power.
The key drivers for the renewable energy sector in India include:
(i) The demand-supply gap, especially as population increases
(ii) Regulatory incentives and the availability of CDM benefits and/or Indian
renewable energy certificates (RECs), when fully implemented by the Indian
government
(iii) A large untapped potential
(iv) Environmental concerns regarding the use of fossil fuels
(v) The desire to strengthen India’s energy security
(vi) A viable solution for rural electrification
Business strategy
Strengthen presence in the power sector
A2Z would be focusing on consolidating its presence across various segments in
the power sector. In the EPC business, the company expects to consolidate its
presence in power distribution projects and would seek to increase its participation
in larger projects, including the transmission segment on a BOOT basis, as well as
enter into distribution franchise arrangements with power utilities. The company is
also mulling on opportunities to participate in transmission line projects for
REC/PFC on BOOT basis through a tariff-based competitive bidding process in
consortium with other parties. A2Z also intends to expand its renewable energy
generation business by exploring opportunities in other energy sources and
entering into fuel linkages with its MSW projects and other third parties.
Continued expansions across existing businesses
A2Z plans to diversify its EPC business by providing EPC services to other
infrastructure sectors such as road, telecommunications and water
infrastructure. The company intends to participate in Provision of Urban
Amenities in Rural Areas (PURA) projects and has submitted bids for certain
projects.
In the MSW business, A2Z intends to expand its offering of integrated waste
management solutions using innovative engineering practices, strengthening
the MSW off-take value chain by establishing better sales channels for the
byproducts generated and focusing on award of projects on a cluster-based
approach.
In the renewable energy generation business, the company plans to
significantly increase its power generation capacity through various sources of
renewable energy. A2Z expects the BOOT projects in MSW business and the
renewable energy generation business to generate long-term sources of
revenue and cash flow stability and would be focusing on obtaining more
BOOT contracts.
In its FMS business, A2Z would 1) focus on large customers, 2) offer multiple
services under long-term contracts, 3) increase its range of services to include
maintenance of telecommunication towers and industrial/plant maintenance
and 4) continue to provide energy savings solutions.
Key concerns
High working capital requirements: The EPC business requires significant amount
of working capital, which varies according to the nature of the project. Large
amount of working capital gets tied up to finance the purchase of materials and
the performance of engineering, construction and other work on projects before
payment is received from clients. In addition, retention monies, which may range
up to 40%, are withheld by the client and released upon the testing of the product
or the supply date or the commissioning of the project.
Lack of experience in MSW or power generation: The promoters do not have prior
experience in the development and operation of power generation projects or the
MSW business. The deployment of large amount of the IPO proceeds in these
unrelated businesses where the company has no prior experience may further
strain the financial position of the its profitable EPC division. It is pertinent to note
that despite being highly profitable, the EPC business has been reporting negative
cash flows.
Non-availability of fuel stock to impact profits: In the renewable energy segment,
the sourcing of fuel stock at competitive prices is likely to be a key concern going
forward. Projects that are dependent on bagaase and other crop residues would
need to source alternative feedstock in the off-season. Delays or failure in the
timely sourcing of fuel stock could negatively impact the optimum utilisation and
reduce the profitability of these projects.
Outlook and valuation: Currently, A2Z derives its revenue and profitability from
the power EPC business; the MSW and power generation projects are expected to
contribute meaningfully from FY2013. Since FY2011 and FY2012 revenue would
largely be dominated by the power distribution EPC business, the appropriate peer
comparison would be with Jyoti Structures, KEC International and Kalpataru Power
Transmission Ltd. Even at the lower price band of `400, A2Z would trade at a P/E
multiple of 23x FY2010 earnings, while its peers are currently trading at an
average P/E of 12.5x their TTM earnings, thus placing the scrip relatively
expensive. Hence, we recommend Avoid on the IPO.
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