Prakash Constrowell - IPO: Avoid :Business Line,

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Stocks in the construction and infrastructure space have been at the receiving end in the markets for months now, with most established and large-sized players trading at valuations of less than 15 times trailing earnings.

In this situation, investors can avoid subscribing to the initial public offer of Prakash Constrowell, a construction contractor for civil and infrastructure projects. Geographic and client concentration, small order-book size and limited scale of operations make the offer a risky bet. In its price band of Rs 130-138, the offer is priced at 15.8 to 16.4 times per share earnings for FY-11 on a post-issue equity.

GEOGRAPHIC CONCENTRATION

The company executes construction contracts in infrastructure (roads, bridges and industrial parks which constitutes 52 per cent of order book), civil construction (government staff quarters and hostels, 45.5 per cent of order book) and residential buildings (2.7 per cent of order book), affording it a degree of segment diversification.

Concentration of orders in terms of geography and client-base, however, detracts from a wider segment presence. All contracts executed thus far as well as the current order book are located in Maharashtra. Further, the company relies on public sector orders, with over half the revenues in the past three years stemming from two clients in this space. While it does have an established relationship with the clients which results in repeat orders, scaling up requires the company to move to other regions. Given that states would have forged similar relationships with other construction companies, geographic diversification with the company's existing areas of operation may be an uphill task.

FUNDING SQUEEZE

About Rs 35 crore of the Rs 60 crore being raised is to fund working capital. Receivables due for more than six months have gone up over five times in FY-11. The time to convert debtors into sales in FY-11 jumped to 41 days from nine days in FY-10. This suggests that the company may be suffering delays in receiving payments due.

However, debt is low, at 0.33 times (pre-issue equity) with term loans being entirely paid off in FY-10. Interest costs eat away 1 per cent of revenues and interest cover is healthy at 12.2 times in FY-11. Raising debt should ideally not be difficult. About Rs 9.3 crore of issue proceeds is earmarked for the acquisition of equipment and Rs 2.3 crore will go towards investment in subsidiaries and general corporate purposes.

SMALL SCALE OF OPERATIONS

The company may also not be able to procure bigger orders easily, given its small size of operations and limited range of projects executed, which restrict bidding qualification for projects. Its current order book stands at just Rs 150 crore (1.2 times FY-11 revenues) with the average order size a mere Rs 5 crore. Though it plans to partner other companies to boost qualification, it has not in the past undertaken any such joint ventures.

Revenues have clocked a three-year compounded annual growth of 68 per cent, while net profits have grown 49 per cent in the same period. The company owns part of its own equipment; operating margins were strong at 15 per cent in FY-11 and net margins stood at 8 per cent