Afcons Infrastructure IPO: Should you invest in this engineering major?

Size and performance matter in an industry where project complexity and cost control in execution are critical. One among the largest infrastructure, engineering, and construction players – Afcons Infrastructure – is coming out with an initial public offering (IPO) of shares from October 25 to October 29. It is a leading firm from the Shapoorji Pallonji group.

Afcons Infrastructure is involved in engineering and construction projects in areas such as urban infrastructure (underground, elevated metro, bridges and elevated corridors), hydro & underground, surface transport, marine & industrial, and oil & gas.

The total size of the company’s IPO is ₹5,430 crore, with ₹1,250 crore being a fresh issue and ₹4,180 crore coming as an offer for sale. Goswami Infratech, one of the promoters, will take the offer for sale proceeds.

A strong execution track record in executing complex engineering projects, large and well-diversified order book, healthy mix of marquee domestic and overseas clientele led by governments, and reasonably healthy financials are positives for the company.

At the upper end of the price band of ₹440-463, the offer asks for 38 times its FY24 per-share earnings on a post-offer diluted equity basis. This is lower than KEC International and Kalpataru Projects , which trade at 72 times and 40 times, respectively over their FY24 earnings.

Investors with a high-risk appetite can subscribe to the Afcons Infrastructure IPO.

However, though relatively cheaper, the offer is not inexpensive relative to the markets or even on an absolute basis. But given the expertise of the company in executing unique projects, a higher valuation multiple may be justified.

So, investors need to stay on with a 2-3-year perspective and not with a view of any listing pop.

The company’s revenues grew at a reasonable pace of 9.7 per cent over a two-year period FY22-FY24, to Rs 13,267 crore in FY24, while net profits rose at a CAGR of 12.1 per cent over the same period to ₹450 crore by FY24. On the operating profit front, EBITDA expanded at a strong 20.8 per cent annually over the two-year period to ₹1,365 crore in FY24.

The company’s EBITDA margin of 10.3 per cent in FY24 is among the highest in the industry at this large scale, as is its return on equity of 13.3 per cent.

Building legacies

Afcons commenced operation nearly 65 years ago and was acquired by a Shapoorji Pallonji company in 2000.

Over the decades, the company has completed some of India’s most complex engineering and construction projects and many other countries.

Atal Tunnel in Himachal Pradesh, Ghana Rail, Sohar Jetty in Oman, Howrah Metro Station (India’s deepest metro station), Jammu Udhampur hill road, 4-layer transportation system at Gaddigodam Railway Crossing, Developing the racecourse in Dubai and many other completed projects form Afcon Infrastructure’s impressive portfolio.

As of June 2024, the company had an order book of ₹31,747 crore. This is an impressive 2.4x its FY24 revenues, thus lending Afcons considerable visibility on the sales front.

The order is also quite diversified. Urban Infra - UG & Elevated Metro-37 per cent, Hydro & Underground 28 per cent, Urban Infra - Bridges & Elevated Corridor-11 per cent, Surface Transport 10 per cent, Marine & Industrial 9 per cent and Oil & Gas 6 per cent is the order book composition.

Two other aspects of the order book also need some highlighting. Around 76 per cent of the order book is domestic, while the remaining 24 per cent actually comes from overseas, making for a sound geographic mix as well.

Another key factor to note is that government clients (State and Central) in India and overseas locations make up 70 per cent of the order book. Another 20 per cent is secured from multilateral agencies (projects are funded by Government of India in other countries). The remaining 10 per cent of the book comes from private clientele.

Thus, there is a fair degree of certainty on client traction and scope of work.

Afcons Infrastructure’s client list is quite impressive. Reliance Industries, Petronet LNG, Bangalore Metro Rail Corporation, ONGC, Border Roads Organization, MSRDC, National High-Speed Rail Corporation, Ghana Rail Development Authority, Irrigation & CAD Department, and Government of Telangana, among many others, form its formidable customer list.

A Fitch industry report indicates that India’s infrastructure industry – roads & bridges, airports & ports, railways, and energy & utilities – is set to grow at a CAGR of 10 per cent from FY23 to FY28 and reach a size of ₹14.4 lakh crore.

Afcons, with a significant presence in most of these segments, appear well-placed to take advantage of the trend. It has considerable capabilities in terms of access to strategic equipment, a highly skilled workforce, and expertise at its disposal.

Financials and IPO proceeds

Given the scale at which the company operates, margins tend to be modest. Even so, at 3.4 per cent net profit margin, it is higher than that for peers such as KEC, Kalpataru and Dilip Buildcon, which are at 1.7-2.6 per cent.

The debt-equity ratio is not too uncomfortable at 0.7 times as of FY24. With 600 crore of IPO proceeds earmarked for repayment and prepayment of a few borrowings and an expanded equity base, the debt:equity figure is likely to come down significantly over the coming few quarters.