Beside an assessment of overall business prospects, we carried out three important tests to assess the quality of Capacit’e Infraprojects’ IPO.
Capacit’e Infraprojects is a surprise gem from a sector that investors normally shy away from. The initial share sale of any company from troubled sectors like infrastructure and real estate deserves additional scrutiny. We, therefore, did a deep dive to check the real health of Capacit'e. The doctor's verdict is important and it suggests that the patient is healthy and can scale to the next level with elan.
Besides an assessment of overall business prospects, Moneycontrol Research has carried out three important tests to assess the quality of the company's IPO.
Using capital judiciously?
Capacit'e began life in 2012 and from FY14 to FY17, it has seen its revenue growing from Rs 214 crore to Rs 1157 crore -- a jump of Rs 942 crore in three years. Over this period, the company added Rs 278 crore to its net worth and generated Rs 122 crore of cash from operations with only Rs 39 crore addition to debt. This indicates that despite huge growth in revenue, it used internal cash and equity rather than relying on debt.
Control over working capital
Capacit'e has an asset light business. On Rs 255 crore of fixed assets it generated sales of Rs 1157 crore in FY17. In a typical real estate construction project, the client will hand over the work to Capacit'e and the company will execute the same, leveraging its capabilities in this space, which the clients may be lacking or won't be interested in managing so many sites.
Capacit'e will earn its margin (14 percent EBITDA in FY17) which is remunerative enough to put resources, (financial and others) and expertise in this space. However, an asset light model should not be confused with requirement of working capital.
The company has managed its working capital well. Over the last four years, the company's sales have jumped by 5.4 times whereas working capital has moved up by merely 3-fold indicating that higher sales did not result in higher working capital, which stood at 18 percent of sales in FY17. This is precisely the reason why its pre-issue debt to equity stood at 0.4 times, with interest coverage ratio at 4 times.
Despite working capital being under control, considering its current order book of Rs 4600 crore, it will need capital, going forward. Even at 20 percent of working capital to sales and execution cycle of 3 years, the annual working capital requirement would be close to Rs 300 crore as against cash from operation of mere Rs 62 crore in FY17.
The company will use Rs 250 crore of IPO proceeds to fund working capital along with cash from operations, which will bridge the gap without much reliance on debt. Post issue debt to equity would stand at around 0.2 times, which if leveraged to 0.5 times will help in raising debt to the tune of Rs 230 crore without adding much leverage to the balance sheet.
Are the cash flow reflecting real earnings?
Profits are often termed as accounting entry especially in companies with stretched working capital cycle. In construction business, sales are often booked based on internal estimates and could suffer from a management bias.
Capacit'e, in the last four years, earned a cumulative profit of Rs 155 crore. The company generated Rs 122 crore cash from operations and (except 2016) in all these years and the cash flow from operations have remained at par with profits reported, indicating that the quality of earnings is superior and it is actually making cash profits.
Strength of business
Apart from three risk criteria, what is worth noting is the strength of the business. "The company specialises in high-rise building construction, which gives it two distinct advantages. One, the resources can be used at their most optimum manner, at a single site rather than working on several different sites of smaller buildings. Second, as you go up the value chain, competition reduces because it may not be feasible for others.
What is interesting to note is that it is a pure contractor and does not buy land nor sell real estate to end consumers. Post RERA, it will be a big beneficiary because builders are looking to speed up construction and better manage their liquidity," said Arun Kejriwal, Founder, Kejriwal Research and Advisory
Post issue, the company will command market capitalisation of Rs 1697 crore, which is about 18 times earnings and price-to-book of 2 times based on our FY18 estimates.
Valuation is reasonable on an absolute basis but quite cheap if one includes the impact of IPO proceeds of Rs 400 crore or 1.4 times its net worth. Moreover, the company's valuation should be seen from the operating prudence it has demonstrated in the past and robust earnings visibility led by a strong order book in a growing market.Moneycontrol Research Page.