Ircon IPO opens today, should you subscribe?

The initial public offer (IPO) of Ircon International (Ircon) opens today for subscription. The government plans to divest around 10 per cent in its railway subsidiary.

Established in 1976, this Miniratna is an integrated engineering and construction company (EPC), specialising in major infrastructure projects, including railways, highways, flyovers, tunnels, aircraft maintenance hangars etc. 

Issue details

The issue consists entirely of an offer for sale (OFS) of 9,905,157 shares with 5 per cent shares being reserved for Ircon’s employees. The retail investors and employees will be offered a discount of Rs 10 per share. As the issue is 100 per cent OFS, the company will not receive any funds raised from the issue.
 

The price band of the offer has been fixed between Rs 470-475 per share of the face value of Rs 10 each. At the upper end of the price band, the IPO is expected to fetch Rs 470 crore. The number of shares in each lot has been fixed at 30. 

So, should you invest in the public offer? Here's a list of what top brokerages have to say. 

ICICI Securities

Ircon has generated healthy profitability margins and a comfortable liquidity position. Since inception, it has not defaulted in repayment of its borrowings, which has helped the company present a strong credit profile to potential lenders and avail alternatives sources of financing when necessary. Revenues grew at 29.4 per cent CAGR to Rs 4,001.2 crore in FY16-18. The order book was at a robust Rs 22,407 crore, which implies an order book to bill ratio of 5.6x on FY18 numbers, indicating revenue growth getting better ahead. At the IPO price band of Rs 470-475, the stock is available at 10.7-10.9x FY18 EPS. Adjusting for subsidiary investments worth ~ Rs 700 crore, the issue is available at 9.2x FY18 EPS on higher band, which is attractive valuation vis-à-vis its peer companies. Hence, we have a SUBSCRIBE recommendation on the issue at the offer price only for listing gains.

Nirmal Bang Securities

IRCON has one of the highest order book-to-sales ratio across all EPC companies at 5.6x FY18 sales, and possesses a healthy balance sheet, which can support further growth in order book. The stock is being offered at a valuation of 10.9x FY18 (versus private road EPC companies’ average of 9.3x). Thus, based on the business capabilities, industry growth prospects and valuations, we believe IRCON is attractively priced and recommend subscribing to the issue.

Centrum Research

At the higher end of the price band of Rs 475, the issue is priced at P/E (price to earnings) of 10.9x (post dilution) on FY18 basis, which the brokerage firm finds attractive. The company has no listed peers. The order book as of March 31, 2018 stands at Rs 2,240.7 million (5.6x FY18 revenue), which provides revenue visibility. Over FY15-17, IRCON’s growth was muted, with the same picking up in FY18 (revenue up 31 per cent and PAT up 24 per cent). Given the government focus on infrastructure spends (initiatives like Metro, Bharatmala, Economic corridors), healthy order book and attractive valuations, we suggest that investors subscribe to the issue.

Choice Broking

The issue seems to be attractively priced considering its strategic importance in the Indian Railway, future growth outlook, limited competition, virtually debt-free operations and healthy financial performance. In June 2018, an Indian Railway entity RITES debuted in the market with a demanded P/E valuation of 10.2x, which was well received by the investors. Currently, it is available at a trailing twelve months (TTM) P/E valuation of 15.5x. We expect a similar performance from IRCON. We assign a “SUBSCRIBE” rating to the issue.

Antique Stock Broking

The headline return on capital is marred by cash, investments, and passes through items. To understand it separately, the core business is remarkably asset light. For instance, the gross block turnover is 8x+. The working capital need is negligible. More importantly, the scalability of core business is huge. The INR150bn plus Delhi-Howrah-high speed rail corridor project is not yet a part of the order backlog, though company is all set to add it anytime. Further, add company's own cash and investments to the core business, the issue make a compelling SUBSCRIBE.