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A2Z Maintenance & Eng. Services Ltd.
For additional information & risk factors please refer to the Red Herring Prospectus 07th December 2010
ENAM DIRECT
IPO NOTE
Issue highlights
A2Z Maintenance & Eng. Services Ltd. (AMESL) is a
prominent player in the Indian infrastructure space with
diversified business model focusing on high growth
segment of power, municipal waste management and
varied range of services. Quality management system in the
EPC business (T&D) is ISO 9001:2008 certified by Moody
International Certification.
Company’s near term revenue visibility is supported by the
strong order book of its EPC business whereas long term
BOOT contracts of MSW business provides long term
revenue and cash flow visibility for the company. Focus on
short term visibility and long term sustainability strengthens
business model.
Stellar historical performance has laid the strong foundation
for future growth and provided financial muscle to embark
on expansion and diversification. Total Income has grown at
a CAGR of 89%; EBITDA at 116% and PAT at 107% over
the period 2007-10.
Marquee private investor; Rakesh Jhunjhunwala will
continue to hold approx. 20% in AMESL post IPO.
CARE has graded 4/5 for the AMESL IPO indicating that the
fundamentals are above average relative to other listed
equity securities in India.
Objects of the issue (Rs cr)
- Investment in biomass power cogeneration projects 188.0
- Investment in subsidiaries 169.7
- Repayment of Loan 41.7
- Finance a portion of working capital requirements 125
BACKGROUND
Company and promoters
Incorporated in 2002; A2Z Maintenance & Eng. Services Ltd. (AMESL) is a diversified
infrastructure player with focus on business areas which include Facilities Management
Services (FMS), Power EPC business especially distribution, Power IT solutions, Municipal
Waste Management Services (MWS) and renewable energy generation. In the FMS business,
company has established itself as a multi-location, multi service provider, services approx.
27 States in India and the NCT of Delhi and Haryana. AMESL also provides FMS services to
the Indian Railways in 11 out of 16 railway zones. Quality management system in the EPC
business (T&D) is ISO 9001:2008 certified by Moody International Certification.
Mr. Surender Kumar Tuteja is the Chairman of the Company. Mr Tuteja holds bachelor’s
degree in Commerce, Master’s degree in commerce, and is a fellow member of the Institute
of Company Secretaries of India. Mr. Tuteja has experience of approx. 42 years in various
capacities in the Government; has also acted as a consultant to the World Bank on a project,
participated as a member of the Indian delegation to the 4th ministerial conference of WTO
held at Doha, Qatar and was a member of the executive committee of the International Sugar
Organization, London and the International Grain Council, London.
BUSINESS OVERVIEW
AMESL is a prominent player in the Indian infrastructure space with diversified business
model catering to a wide range of businesses.
EPC Business
AMESL commenced providing EPC services to the power transmission and distribution
(T&D) sector in FY 2006. As part of these services, company provides integrated design,
testing, installation, construction and commissioning services on a turn-key basis to its clients
in this sector.
AMESL participates in projects involving rural electrification, railway overhead
electrification, reduction of AT&C losses, feeder renovation, underground cabling, feeder
segregation, installing High Voltage Distribution System (HVDS) and Low Voltage
Distribution System (LVDS) distribution lines, substations and transmission lines.
Services to the power transmission sector include providing EPC services in respect of
transmission lines and substations. Company has capability with respect to the installation of
EHV transmission lines of up to 765 KV and EHV substation projects of up to 400 KV.
Order book
As of July 2010, outstanding order book from the EPC business (T&D) was approx. Rs 1,292
cr.
Renewable Energy Generation Business
In keeping with its strategy of expanding presence in the power sector, company has recently
diversified into power generation through renewable sources such as biomass, bagasse,
crop residue and RDF processed and generated in MSW projects.
MSW Business
Commenced MSW business in FY 2008 by identifying opportunities provided by new publicprivate
participation initiatives of the GoI in such projects. The Government provides
financial assistance and incentives for MSW projects through various schemes.
Company provides the following services;
1) AMESL collects and gathers the solid waste and recyclable materials, as well as the
transportation of these materials, to the location where the collection vehicle is
emptied.
2) At P&D facilities, the waste received from C&T operations is pre-sorted and presegregated.
3) Based on the product classification; waste is further treated for usage as well as
disposal.
FMS Business
AMESL is a multi-service FMS company providing comprehensive one-stop solutions to
clients. Company assists its clients in adopting preventive maintenance and energy saving
solutions.
FMS services include engineering maintenance (mechanical, plumbing, electrical, HVAC, DG
Set), energy saving solutions, parking management, property lease management,
telecommunications tower maintenance & security services to public & private sector clients.
Existing contracts require AMESL to undertake and provide management of shopping malls,
integrated facility management, project management consultancy and quality assurance
services.
In addition, AMESL also provides specialized services to the Indian Railways under the CTS
scheme, OBHS scheme and IRC scheme in 11 of the 16 railway zones in India.
Current and significant customers include the Indian Railways, National Highway
Authority of India, Airport Authority of India, BSLI, Apollo Munich and other leading
insurance companies in India, Firstsource Solutions, Aircel, and Delhi Metro Rail
Corporation.
Power IT Solutions
The Company together with its consortium partner, Sterlite Technologies Ltd, has been
empanelled by Power Finance Corp. of India Ltd, as a system integrator to provide IT
applications for reduction in AT&C losses under R-APDRP.
INDUSTRY OVERVIEW
Power Sector in India
The Tenth and Eleventh Plans were supposed to add to the capacity, providing a total of
100,000MW, with approx. 40,000 MW and 66,000 MW under the Tenth and Eleventh Plans,
respectively. However, the Tenth Plan saw capacity additions of only 21,095 MW. The revised
estimate for the Eleventh Plan has been adjusted accordingly to 50,500 MW.
Energy demand will increase at a CAGR of 8.4% to 969 bn kWh during the Eleventh Plan
period (2007-2012). Peak demand is projected to register a CAGR of 12.3% to 167,054MW.
The average outlay for transmission and distribution in the Five Year Plans has been only
about 25-30% of the total outlay for the power sector. Thus, the present transmission and
distribution system is characterized by low reliability and high losses of approx. 28%,
compared with 10-15% in developed countries.
Distribution is typically considered to be the transfer of less than 66 KV range of power to end
consumers. Distribution is considered as the weakest link in the power sector due to the large
energy losses occurring at the distribution end. T&D losses in India are very high at 26.91%
as per PFC in 2008.
In order to accelerate and upgrade the Indian T&D infrastructure, the GoI consolidated
various distribution schemes during the 10th Five Year Plan including; Accelerated Power
Development and Reforms Program (APDRP) and Rajiv Gandhi Grameen Vidyutikaran
Yojana (RGGVY) schemes.
APDRP was targeted at densely populated urban areas with the main objective to cut losses
in the system and bring the total AT&C losses to 15% in all towns. Although the program
led to some loss reduction, the target of 15% was not achieved. The total programme size is
expected to be Rs 51,577 cr that includes Rs 10,000 cr for Part A activities, Rs 40,000 cr for
Part B activities, Rs 1,177 cr for Part C activities and Rs 400 cr as incentives for utilities.
Waste Water Sector in India
It is estimated that in 2006 the total amount of Municipal Solid Waste (MSW) generated
globally reached 2.02 bn tons, representing a 7% annual increase since 2003.
About 100,000 MT of MSW is generated daily in the country and per capita waste
generation in major cities ranges from 0.20 kg to 0.6 kg. The collection efficiency ranges from
70%-90% in major metro cities and below 50% in some smaller cities. Urban local bodies
spend about Rs 500 to Rs 1,500 per ton on solid waste for collection, transportation,
treatment and disposal.
In some of the areas with a population of about 1 cr or more and still growing, the daily
production of more than 3,000 tons of municipal solid waste is a major management
problem. The MSWM business in India is governed by the Municipal Solid Wastes Rules,
2000.
Biomass power generation in India
As of Dec 2009, there was 2,136 MW of aggregate installed capacity of biomass power in
India. Bagasse based co-generation projects account for 1,307 MW, approx. 61% and nonbagasse
biomass-based power projects account for 829 MW, or approx. 39% of total biomass
power. The aggregate installed capacity of biomass-based power has increased at a CAGR
of 24.4% during FY 2002 to FY 2009.
Currently, India is estimated to produce approx. 500 mn metric tons of biomass per year, of
which approx. 120-150 MMT are surplus which can be utilized for power generation of up to
16 GW. In addition, there is also approx. 5 GW of power generation potential from bagassebased
cogeneration.
Potential by state for bagasse-based (excluding biomass) power in India as at Oct 2009
State Potential (MW)
Maharashtra 1,250
Uttar Pradesh 1,250
Karnataka 450
Tamil Nadu 450
Gujarat 350
Andhra Pradesh 300
Bihar 300
Punjab 300
Haryana 350
Total 5,000
Strategy
EMESL will continue to bolster its position in the power segment. The company
intends to focus on all the segments where it has a presence as well as enter newer
segments. The following are the steps expected;
1) In EPC business: Leverage on the opportunity in the Indian power sector with a focus
on power distribution projects. Increase participation in larger projects, including in
the transmission segment on a BOOT basis.
2) Enter into distribution franchise arrangements with power utilities; explore
opportunities in providing controlled impediance solution, limiting fault current
solutions and other applications for superconductors in the power sector.
3) EMESL intends to expand Renewable Energy Generation business by exploring
opportunities in other energy sources and entering into fuel linkages with MSW
projects and other third parties.
EMESL intends to diversify its EPC business to other infrastructure sectors such as
road, telecommunications and water infrastructure. Company intends to grow its
MSW business by offering integrated waste management solutions, strengthening offtake
value chain and focusing on award of projects on a cluster-based approach.
Company intends to focus on obtaining more BOOT contracts for long term sources of
revenue and cash flow stability. In FMS business, company intends to focus on large
customers, offer multiple services under longer term contracts and increase the range
of services.
EMESL intends to establish its presence in international markets by leveraging
domestic experience and seeking cost and operational advantages. Company is
evaluating projects in EPC business in Africa and is pre-qualified for MSW projects
in Nepal and Maldives, although no definitive contract has been entered yet.
EMESL intends to establish strategic alliances or enter into mergers and acquisitions
or joint ventures with companies whose resources, skills and strategies are
complementary to and are likely to enhance its business opportunities
ISSUE PROFILE
Positives
Business diversification to reduce dependence risk and open newer growth avenues:
AMESL was primarily an FMS player. However, over the years company has tapped the
available opportunity in the infrastructure space and successfully created a niche for
itself. It has targeted the high growth and GoI backed infrastructure space of power and
waste Management.
The Planning Commission envisages a planned additional capacity of 78,700.4 MW
through investments of Rs 495,100 cr during the 11th five year plan. For solid waste
management, the 11th five year plan has determined there should be 100% population
coverage and it is estimated that the fund requirement for solid waste management
during such plan period will be approx. Rs 2,212 cr.
AMESL has not only diversed across regions and businesses but has been successful to
win contracts and orders in these new business areas which speak volumes about the
company’s growth going forward.
Multiple revenue capability of MSW business will augment profitability going forward :
AMESL not only earns the Collection and Transportation charges (based on weight of
waste) from Government; but also has several avenues to reap benefits out of the waste.
The following are a few examples;
1) Production and sale of plastic granules from the plastic waste.
2) Combustible waste converted to RDF and sold as fuel.
3) Production and sale of compost and vermin-compost from organic and compostable
materials to fertilizer companies (mandatory for them to use).
4) Construction debris used to make interlocking tiles and bricks.
5) Income from CER’s.
Thus, AMESL has multiple revenue channels to tap and earn from the waste generated
which will augment revenue and margins going forward.
Focus on short term visibility and long term sustainability strengthens business model:
Although AMESL has ventured into diverse business segments; they complement each
other and also provide synergistic benefits. For instance; certain waste derived from
MSW segment is utilized as fodder for biomass plants to produce electricity.
Moreover, company near term revenue visibility is supported by the strong order book
of its EPC business whereas long term BOOT contracts of MSW business provides
long term revenue and cash flow visibility for the company. Moreover, renewable
energy business not only provides revenue visibility but is also high margin business
thereby supporting company’s margin expansion.
International foray and focus on strategic tie ups will help supplement long term
growth:
AMESL has plans to venture overseas and pursue available growth opportunities.
Company is already evaluating projects in EPC business in Africa and is pre-qualified for
MSW projects in Nepal and Maldives. Moreover, strategic tie ups and Joint ventures are
being sought which will aid the company in joining hands with experienced and
specialized players thereby gaining expertise in business. Moreover, such strategic tie
ups also help the company to create an inroad in newer territories.
CARE has graded 4/5 for the AMESL IPO indicating that the fundamentals are abpve
average relative to other listed equity securities in India.
Risk factors
AMESL generally agrees to a fixed rate for providing EPC services for the part of the
project contracted. The contracts in MSW business are also executed on a fixed price
basis (other than the C&T operations at Patna and Indore) which provide for limited
escalation of price after a specified period of time. Unanticipated costs or delays in
performing part of a contract can also have compounding effects by increasing costs of
performing other parts of the contract. Depending on the size of a project, these
variations from estimated contract performance could have a significant adverse effect
on results of operations.
AMESL’s business requires a significant amount of working capital, which varies
depending upon the nature of the project. EPC contracts provide for progressive
payments from clients with reference to the volume of work completed upon reaching
certain milestones. Delays in progressive payments or release of retention money or bank
guarantees from clients may increase working capital requirements. Company may
experience significant cash outflows to satisfy any indemnity and liability claims.
Continued increases in working capital requirements may have an adverse effect on
financial condition and results of operations.
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