SUBSCRIBE to IPO of A2Z Maintenance & Engineering Services Ltd (A2Z) : Nirmal Bang

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A2Z: An Engineering Marvel

A2Z is engineering its way to success in the FMS, EPC and waste management solutions business. High growth strategy and government support makes the company’s public o ffering quite attractive for investors with a long-term investment perspective






A2Z Maintenance & Engineering Services Ltd
(A2Z) operates in facility management
services (FMS) and engineering, procurement
and construction (EPC) projects.
FMS includes engineering maintenance (mechanical,
plumbing, electrical, HVAC, DG Set), energy-saving
solutions, janitorial services, parking management,
property lease management, telecommunication tower
maintenance and security services to public and private
sector clients.

Under EPC, the company provides services to the power
transmission and distribution sector, with primary focus
on the distribution segment. It is also diversifying into
providing EPC services to power generation companies
and companies in other sectors, including road and
telecommunication.

A2Z has been operating the EPC business since fiscal
2006 and has historically focused on the power distribution sector. EPC services include the installation of
distribution line infrastructure with capacities of up to 33
KV, the construction of substations of up to 33 KV and
participation in system-strengthening projects and rural
electrification projects.

In the power transmission sector, it has undertaken select
EPC projects like the construction of extra high voltage
(EHV) substations of up to 400 KV and EHV transmission lines of up to 765 KV. Its customers in EPC business
are state power utilities and central public sector utilities
such as PGCIL, NTPC and NHPC.

In addition to this, the company is diversifying its focus
on to other businesses that include the following:
1   Generating power from renewable energy sources
2   Providing municipal solid waste management services
(MSW)
3   Developing information technology (IT) solutions for
power utilities
The company’s business operations are geographically
spread across India.


The EPC segment revenue for FY10 was `1,123 crore
comprising 91.6% of total revenue of the company. The
Order Book for EPC business was  `1,292 crore as on
31st Jul ’10.


INVESTMENT RATIONALE
Successful Execution Capability In Distribution EPC
Business Is The Differentiator
A2Z derives over 90% of its revenue from the distribution EPC business. It has shown strong execution
capabilities by successfully completing various distribution EPC contracts, wherein its competitors have failed.
A2Z has been successful in managing and executing high
working, capital intensive and difficult-to-implement
ground-level distribution EPC contracts.
The direct implementation of projects instead of subcontracting has helped A2Z in completing projects on time
and managing the working capital cycle. Apart from this,
A2Z has also grown this business from  `35 crore in
FY06 to over `1,100 crore in FY10.
Integrated Approach To Municipal Solid Waste (MSW)
Management To Drive Profitability
A2Z started the municipal solid waste business in the
year 2008 and received initial success in its integrated
approach to the MSW business. The integrated contract
involves door-to-door collection, transportation to the
disposal site, processing the waste and capturing various
materials like plastic, metal, glass, etc for recycling; sand
for manufacturing bricks; producing composites (organic
fertilizer) for sale and Refuse Derived Fuel (RDF) to be
used as fuel for power plants.
It started its first processing plant in Kanpur in October
’10, which will capture the full benefit of the value chain
of municipal solid waste. A2Z is further integrating the
MSW business at Kanpur by setting up a 15 MW
biomass power plant to utilize RDF as fuel for the same.
Encouraged by its initial success in the municipal solid
waste business, A2Z has adopted an aggressive growth


strategy and has already taken up 20 contracts in different cities to manage 5,565 tonnes of municipal waste per
day. We feel that over the next two to three years, this
business will grow manifold and will be the key value
driver for the company.
Multi-fuel Biomass Power Plant Structure And Fuel
Security Through Integration Will Make The Biomass
Power Plant Highly Successful.
The basic problem of single fuel biomass power plant is
low availability of fuel, availability in part of the year,
rising cost of fuel, etc. By using multi-fuel plant structure
(used for the first time in India), the company can run this
power plant throughout the year. Further, by integrating
the biomass power plant with municipal solid waste or
rice processing mill, the company will secure fuel supply
at lower costs.
The company is setting up various small biomass power
plants of 10 MW to 15 MW capacities, aggregating to
285 MW. Of these, four power plants are expected to be
commissioned by March ’11, five by October ’11 and
one plant of 10 MW is expected to start in December ’11.
The successful implementation of these power plants will
help A2Z to diversify its revenue base.


The Company Is Growing Its Business In High-growth
Industries And Is Supported By The Government
Power distribution loss of over 30% - 40% is a big
concern for India and the government is aggressively
looking to bring down these losses. To achieve the same,
the government is consistently coming up with policy
measures like Restructured Accelerated Power Development and Reforms Programme (R-APDRP) to improve
the situation. In solid waste management, the government has come up with various incentive schemes under
programmes like National Urban Renewal Mission
(NURM) to encourage private sector participants in
waste management.
Likewise, the government has mandated all states to
generate 5% - 10% of power from renewable sources of
energy.  Government support and enough opportunity in
the target industry will keep the company’s growth
momentum intact.


RECOMMENDATION
A2Z is operating in an emerging and high-growth industry and has shown rapid growth capabilities in the past. Execution capability in the distribution EPC business, emerging opportunities in solid waste management and high growth
planned in the renewable energy business, supported by government policy, will drive growth for A2Z.
At the upper band of `410, though the shares seem to be offered at a higher PE multiple of 24 on historic earnings of
FY10, we feel the multiple on forward earnings will be attractive due to growth in all its businesses.
We recommend investors to subscribe to the company’s initial public offering with a long-term perspective. The issue
opens on 8th December ’10 and closes on 10th December ’10.