A2Z Maintenance & Engineering Services (A2Z), in which renowned investor Rakesh Jhunjhunwala holds about 21 per cent stake (on pre-IPO capital), has come out with an IPO to fund its growth plans. While the company is present in some of the promising businesses, lack of experience in new businesses, intense competition, heavy dependence on ongoing capex for future growth, the highly working capital intensive nature of its businesses and expensive IPO pricing need investors’ attention.
A2Z’s main business includes the EPC (engineering, procurement, construction) work for the power transmission and distribution (T&D) sector from where it drives almost 92 per cent of its revenue. On the back of opportunities in the sector, this segment has clocked a threefold jump in revenue during the last two years. The company has in-house capabilities in the business and enjoys relatively high operating margins. Its strong order book of Rs 1,292 crore, which is more than one time its FY10 revenue, and opportunities in the T&D space should ensure healthy growth in the near future.
Pillars of growth
Apart from the power T&D sector, the company is also working towards growing in other segments. It has ventured into the renewable energy and municipal solid waste management businesses. Both these businesses hold a promising future on the back of large opportunities in India. Through the proceeds of the issue of Rs 675 crore (excluding the Rs 187 crore offer for sale by existing investors), the company intends to invest in these businesses. For instance, in municipal solid waste management, the company has already made significant progress. It has a total capacity of 5,198 tonnes per day and has presence in several cities in UP, MP, Bihar, West Bengal and J&K. In the renewable energy space, the company has plans for about 145 Mw of generation capacity based on different fuels such as sugar bagasse, rice husk and biomass, most of which the company claims it will commission during 2011. The revenue from these two segments is expected to start accruing over the next two years. Also, due to expectations of relatively higher margins (about 45-50 per cent), they will make a larger contribution to A2Z’s net profit and overall growth.
| GROWING FAST | |||
| in Rs crore | FY09 | FY10 | FY11# |
| Revenue | 716 | 1,219 | 1,247 |
| % change y-o-y | 49.4 | 70.3 | 2.3 |
| EBIDTA (%) | 17.7 | 16.5 | 17.9 |
| Net profit | 59 | 98 | 104 |
| % change y-o-y | 18.7 | 66.2 | 6.3 |
| NPM (%) | 8.3 | 8.1 | 8.4 |
| Net worth | 223 | 414 | 1,207 |
| PE (x)* | 51.2 | 30.8 | 29 |
| P/BV* | 13.5 | 7.3 | 2.5 |
| # FY11 figures are annualised based on four months ended July 2010. For book value and net worth, issue proceeds have been considered based on the upper price band of Rs 410 per share * Based on upper price band | |||
Valuations
On the basis of the existing businesses and the annualised financials of the company, the price to earnings works out to 29 times and price to book 2.5 times, which is very expensive. However, if we account for the revenue and profits coming from the new businesses over the next 2-3 years, the valuations seem reasonable. But, in that case the risk — in terms of execution of these projects and flow of revenues and profits — will remain with the investors. Investors with a high risk appetite and patience may apply. Offer opens on December 8, closes December 10.
