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A2Z Maintenance & Engineering Services IPO – Avoid - IPO Research report by Angel Broking
A2Z Maintenance & Engineering Services Ltd. (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 opens 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 Municipal Solid Waste (MSW)
projects in addition to funding the working capital requirements and general corporate
purposes.
Commencing operations as a Facility Management Services (FMS) provider in 2002, A2Z
gradually ventured into power distribution EPC during 2006, and has executed projects
involving the installation of distribution line infrastructure, construction of substations,
system strengthening and rural electrification projects. The acquisition of an existing
transmission EPC company during 2008 marked the entry of A2Z into the power
transmission segment. The company’s power transmission portfolio includes construction
of EHV substations of up to 400kV and EHV transmission lines of up to 765kV. The EPC
segment currently constitutes the bulk of the revenue (>90% of the total turnover).
During 2008, A2Z ventured into the MSW business. The company bagged contracts to set
up Integrated Resource Recovery Facility (IRRF) on a BOOT basis, with an aggregate MSW
capacity of 3,800 tonnes per 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 to 235MW in UP,
Rajasthan and Punjab. Most of the above projects are expected to be completed by
FY2012.
A2Z’s existing revenue and profitability are derived from the power EPC business, while 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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