Ashoka Buildcon IPO: Analysts seem positive, but the market is fragmented & highly competitive

The company has an excellent execution track record in EPC and BOT projects, but intense competition in a highly fragmented road development market can lead to aggressive bidding and potentially low returns


Price: Rs297-Rs324 per equity share with a face value of Rs10 per equity share.
Bid lot: 21 equity shares and in multiples thereof.
Issue size: Rs225 crore.
Issue Open: 24 September 2010 - 28 September 2010
Listing: BSE and NSE
Book running managers: Enam Securities Pvt Ltd, IDFC Capital Limited and Motilal Oswal Investments Advisors Pvt Ltd


Business model

Incorporated in 1993, Ashoka Buildcon Limited is a Nashik, Maharashtra-based construction company involved in the business of building and operating roads and bridges in India. Ashoka Buildcon is the operator of the highest number of toll-based BOT (build, operate and transfer) projects in India.

The company is also involved in engineering, designing and maintenance of roads, bridges, electricity substations, commercial buildings and industrial buildings for third parties. Other businesses of the company include manufacture and selling of ready-mix concrete and bitumen and collecting of tolls on roads and bridges owned and constructed by third parties.

The company was first awarded a BOT project in 1997 - the Dhule bypass in Maharashtra. The company currently operates or has an interest in 21 BOT road projects totalling approximately 2,523 kilometres of lanes in Maharashtra, Madhya Pradesh and Chhattisgarh. Six BOT projects are under execution.

1) To meet working capital requirements.

2) To invest in capital equipment.

3) Prepayment/repayment of project loans of the company.

4) Funding certain subsidiaries for prepayment/repayment of their loans.

5) General corporate purposes, and

6) To achieve the benefits of listing equity shares.

Financial Snapshot: (Rs crore)

The net worth of the company as of 31 March 2010 is Rs449 crore.

Analyst Notes
The issue has been graded by CRISIL Limited as CRISIL 'IPO Grade 4/5' indicating that the fundamentals of the IPO are "Above Average" relative to the other listed equity securities in India.

The report says the grading reflects the company's dominant position in the build-operate-transfer (BOT) road space and its established track record - most of its projects have been completed on time. The grading is supported by the strong management background with domain expertise, proven execution capabilities in the engineering procurement construction (EPC) segment and the company's integrated business model.

The grading also takes into account intense competition in a highly fragmented road development market, which leads to aggressive bidding and potentially low returns.

IPO Positives

Company's strengths:

  •  The company is a well-established player in toll-based BOT projects in India with a proven ability to partner with other well-established players in the industry.
  • As of 31 May 2010, the company's order book totalled Rs1,615.36 crore, of which orders of Rs1,408.92 crore were related to work for third parties and associated companies.
  •  Most of the company's projects have been executed on time or prior to the scheduled completion date.

IPO Concerns

Risk factors:

1) There are as many as 152 outstanding cases against the company, directors, promoters and promoter group companies.
2) The company's portfolio is increasingly concentrated in large-scale projects which increases its exposure to potentially higher cost overruns and exposes it to the risk of a default by joint venture partners if it has entered into a joint venture to undertake the project.

3) Some of the subsidiaries and promoter group companies have incurred losses during the past three financial years.

4) The company has substantial working capital requirements and if it is unable to obtain working capital loans to help finance these requirements, it would a have significant adverse effect on the business, results of operations and financial condition.

5) The company faces significant competition and if it fails to compete effectively it will have an adverse effect on the business, financial condition and results of operations.

6) The company also faces the risk of uncertain tax benefits for BOT projects, long gestation period and regional concentration of its projects.

Concluding notes

At Rs297-Rs324, the company is demanding a valuation, around 19 times its FY10 earnings. Post-IPO, PE between 17 and 19 is lower to PE of competitors in the infrastructure sector


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Thursday Closing Report: Expect movement in a narrow downward band

The market opened on a steady note in the absence of any concrete cues from the global arena. It entered the negative zone in a short while and stayed there till the end. Today’s slide was led by heavy-weights while the broader indices were instrumental in preventing further losses to the market.

The market witnessed a flat opening based on tepid global cues as most Asian markets were closed for local holidays today. Besides, bourses in the US settled lower in overnight trade also kept investors on the sidelines. Retreating from the opening highs, the indices were range-bound in the negative zone despite the influential European indices opening in the green. The market ended in the red amid a high degree of volatility.

At the end of the session, the Sensex ended 80.71 points (0.40%) lower at 19,861. The index touched a high of 19,998 and a low of 19,771 today. The Nifty was down 31.45 points (0.52%) at 5,959. The benchmark scaled an intraday high of 6,007 and a low of 5,932 during the session.

The market breadth was negative. The Sensex ended with 17 declining stocks against 12 advancing stocks while one scrip returned unchanged. The Nifty had 34 declining stocks, 15 gainers and one stock was unchanged. The broader indices, which ended higher, lent a helping hand in preventing further losses to the market. The BSE Mid-cap index ended 0.21% higher and the BSE Small-cap index added 0.07%.

The top gainers on the Sensex were Hindustan Unilever (up 1.71%), Oil and Natural Gas Corporation (ONGC) (up 1.49%), ITC (up 1.32%), Mahindra & Mahindra (M&M) (up 1.11%) and Jaiprakash Associates (up 1.04%). The losers were ICICI Bank (down 2.25%), Reliance Industries (RIL) (down 2.11%), Bharti Airtel (down 1.89%), Cipla (down 1.64%) and DLF (down 1.40%).

The only appreciable gainer in the sectoral space was BSE Fast Moving Consumer Goods (FMCG) index, up 1.10%. The sectoral losers were BSE Realty (down 1.97%), BSE Bankex (down 1.21%) and BSE Oil & Gas (down 1.01%).

The Asian pack witnessed subdued trade with low volume as most markets were closed for local holidays. Speculations that central banks in the region might hike rates to curb rising inflation also played on investors’ minds. Among the ones that were open, Jakarta Composite was down 0.18%, KLSE Composite was down 1.13% and Straits Times was down 0.29%. On the other hand, Taiwan Weighted added 0.07%.

Food inflation advanced to 15.46% in the week ended 11th September, up by 0.36 percentage points from 15.10% in the previous week. The rise in inflation has been attributed to an increase in the cost of cereals, select vegetables and milk due to supply disruptions caused by unusually heavy rains in many parts of the country.

This is the fourth consecutive week that the rate of food prices has risen, although signs of moderation had appeared in July and stayed on through the first half of August.

Meanwhile, fuel inflation for the week in review was unchanged at 11.48%.

The US market closed lower on Wednesday on subdued earnings outlook by technology giants Adobe Systems and Microsoft Corporation. Stocks reversed their earlier gains after the Federal Housing Finance Agency said US home prices tumbled 3.3% in July from a year earlier, the eighth consecutive decline, as foreclosed properties swamped the market. The Dow tripped 21.72 points (0.20%) to 10,739. The S&P 500 slid 5.50 points (0.48%) to 1,134. The Nasdaq shed 14.80 points (0.63%) to 2,334.

Finance minister Pranab Mukherjee today exuded confidence that the Indian economy will post better growth than 8.75% this fiscal, as projected by the economic survey.

"I am optimistic that at the end of this year we will be able to surpass our gross domestic product (GDP) growth forecast of 8.5%-8.75% given in the Economic Survey," Mr Mukherjee said at a function in New Delhi.

Indian economic growth slowed down to 6.7% in 2008-09 from 9% in the previous three years, as an aftermath of the global financial crisis.

Foreign institutional investors were net buyers of Rs914 crore in the equities segment on Wednesday. Domestic institutional investors net sold stocks worth Rs974 crore on the same day.

The Wockhardt hospital group, belonging to pharma major Wockhardt (up 0.70%), has forayed into Goan market by entering into a tie up with National Union of Seafarers of India (NUSI) for their hospital property at Cuncolim village.

"The facility in Goa is a tertiary care hospital with 180 beds and five operation theatres meeting international standards," Wockhardt group chairman Dr Habil Khorakiwala said. The facility will have round-the-clock dedicated dialysis and physiotherapy centres, he added.

Infrastructure and engineering major Larsen and Toubro (L&T) (up 0.17%) today said it would form a joint venture (JV) company with the South Africa-based Befula Investments to explore opportunities in the power sector in the African nation.

L&T and Befula Investments, South Africa have signed an agreement to form a joint venture firm Larsen & Toubro T&D SA, a company release said. The JV company would capitalise on the power transmission and distribution opportunities in South Africa.

IT major Wipro (down 0.58%) today said that Dow Jones Sustainability Index (DJSI) has chosen the Indian outsourcing major as its member. DJSI is an international indicator, which tracks the financial performance of companies having outstanding sustainability conduct.

The selection was done on the basis of an exhaustive, rigorous evaluation of Wipro's sustainability performance on several dimensions like ecological sustainability, supplier standards, digital inclusion, corporate governance, innovation in sustainability, Wipro said in a statement.


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