A2Z IPO subscribed 0.8 times; should you invest?

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A2Z IPO subscribed 0.8 times; should you invest?

The initial public offering (IPO) of engineering, procurement and construction (EPC) service provider A2Z Maintenance and Engineering Services will be closed for subscription on December 10, which has subscribed 80% as per NSE website.

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The initial public offering (IPO) of engineering, procurement and construction (EPC) service provider A2Z Maintenance and Engineering Services will be closed for subscription on December 10, which has subscribed 80% as per NSE website.

A2Z Maintenance provides services to the power transmission and distribution sector with a focus primarily on the distribution segment. The company aims to raise around Rs 860 crore through IPO; out of which it already raised Rs 125 crore from anchor book on Tuesday.

Majority of brokerage houses recommended avoiding the issue and even Investment Advisor, SP Tulsian feels that issue is quite expensive at Rs 400-410.

"If we see the present business model of the company, they are into the T&D but they have been more focusing themselves on the distribution front because on transmission you have the lower margin. They have done well on the distribution front but I think that maybe the saturation is coming up on that account. That is the reason we have seen that in spite of the growing topline they have seen the fall or stagnated EBITDA margin. And now they have been focusing more on the scattered and the small business like the municipality waste management and the biomass power projects of 15 megawatt each at different locations," he said.

"These kinds of things are very difficult to manage. If I take a call on FY10 performance, the share is issued at a P/E multiple of 22-23 times. I don't think that it justifies and even if I take a call going forward for FY11, we may see an increase in the topline by about maybe 20-25% but the bottomline is going to disappoint with a fall in the EBITDA margin with fall in the PAT margin taking all this into consideration, I think the stock is quite expensive at Rs 400-410," he reasoned.

Brokerage houses

According to Angel Broking, "Currently, A2Z derives its revenue and profitability from the power EPC business; 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 Rs 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."