Garuda Construction IPO - Valuation, Issue Details, Strengths, Key Risks And More: Anand Rathi

Anand Rathi Report

Garuda Construction and Engineering Ltd. will launch its initial public offering tomorrow and the offer closes for subscription on Oct. 10 and the listing is expected to take place on Oct.15. The minimum order lot for subscription is 157.

The Mumbai-based infrastructure development company that specialises in civil construction, infrastructure development and engineering services has fixed the price band in the range of Rs 92-95 Apiece.

The Rs 264.1 crore IPO comprises of a fresh issue of Rs 173.85 crore and offer for sale of Rs 90.25 crore.

Object of the issue

• Funding working capital requirements of the Company;

• General corporate purposes.

Key Risk:

• Companies total revenue comes from their top 10 clients, mainly their promoter related entities and group companies. The loss of any of their significant clients may have an adverse effect on their business, financial condition, results of operations, and prospect.

• As a construction company, their limited experience in dealing with unrelated third-party entities presents challenges for their growth. If company cannot establish themselves successfully as developers or contractors beyond their promoter group and associated companies, their long-term growth, operational results, and profits may be constrained. Notably, their revenue heavily relies on construction projects related to their group companies and promoters being 100.00%, 44.82%, 94.62% and86.65% in period ended April 30, 2024, March 31, 2024, March 31, 2023 and March 31, 2022 respectively.

• The construction industry is cyclical and sensitive to changes in the economy and this could have a significant impact on their operations and financial results.

• One of their Promoter- Mr. Pravin Kumar Brijendra Kumar Agarwal is involved in a criminal proceeding initiated by Airport Police Station which is currently pending before the Hon’ble Metropolitan Magistrate at Andheri, Mumbai. Any such proceedings, or any adverse action as a result of such proceedings, may affect the reputation of their promoter and subsequently that of their business.

• Company had negative cash flow in recent fiscals. Sustained negative cash flow could adversely impact their business, financial condition and results of operations.

• Business and profitability are significantly dependent on the performance of the real estate market generally in India and particularly in the Mumbai Metropolitan Region. Varying market conditions in the MMR may affect their ability to ensure sale of their projects and the pricing of units in such projects, which may adversely affect their results of operations and financial condition.

• Their contracts are mostly of the nature of EPC contracts and they are exposed to inherent risks related to their contractual framework.

Valuation

Garuda Construction primary focus is civil construction of residential and commercial buildings with track record of successfully executing a diverse mix of construction projects i.e., residential, hospitality and commercial projects with visible growth through increasing order book and strong project management and execution capabilities to accomplish their projects on schedule while keeping high construction quality.

At the upper price band company is valuing at P/E of 24.28 times, with a market cap of Rs 8,839 million post issue of equity shares and return on net worth of 36.14%.

We believe that the IPO is fully priced and recommend a “Subscribe" Long term” rating to the IPO.

Strengths:

• Exclusive and focused business approach.

• Strong project management capacity and execution capabilities.

• Visible growth through increasing order book.

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