The IPO of Interarch Building Products, open till August 21, is a play on rising demand for industrial buildings. The company has the second largest installed capacity for pre-engineered steel buildings (PEB). PEBs are designed, manufactured and transported for installation in completely knocked down units to the client site. The company operates in building units starting from 50,000 sft up to 200,000 sft structures, which find application across industries: warehousing, aviation, manufacturing units, cement factories or FMCG operations.

The company should be a beneficiary of rising economic activity and is planning to commercialise two more units in the next three years, which should double FY24 revenues. We recommend investors subscribe to the IPO, which is priced at 17 times post-issue FY24 EPS. High fragmentation in the PEB industry and demand cyclicality are headwinds to the issue. But the IPO appears fairly priced when considering the scope for growth on the one hand, tempered by headwinds on the other. The company plans to raise ₹400 crore in OFS and ₹200 crore in fresh issue and is valued at ₹1,497 crore at the upper end of the IPO price band.

The company has revenue and PAT of ₹1,293 crore and ₹86 crore in FY24, which have grown at a CAGR of 24/124 per cent in FY22-24. This, as profit margins have normalised after the Covid impact. The company has net cash of ₹127 crore (net of debt) as on March 31, 2024.

Macro drivers

Implementation of GST in 2017 decentralised warehouse concentration and spread it across the country. This continues to be a driver for the PEB industry, including Interarch. Similarly, the rise of the e-commerce industry and need for cold storage solutions will drive warehousing needs. New age industries, including data storage, solar and battery technologies, are incremental additions to the industrial demand for building solutions.  

Several government policies starting with the National Infrastructure pipeline, Gati Shakti, airport and shipping connectivity, urban and rural low-cost housing and even PLI schemes, will lead to strong demand for Interarch as a direct or second order impact. The expected revival in private capex following five years of government-led spending should imply healthy demand for Interarch, as the company operates primarily with private players.

Expansion plans

Interarch currently has a capacity of 1,41,000 TPA. It has started expansion in Andhra Pradesh and Gujarat to add around 40,000 TPA in each state in the next three years, which should double revenues in the next three years. In Andhra Pradesh, the Phase-I expansion is nearing completion with trial production ongoing. Phase-2 expansion is expected to be completed before FY25-end. The expansion in Gujarat is in the early stages with land acquired and expected to be completed in next two-three years.

The company has earmarked ₹58 crore towards capital expenditure and ₹55 crore towards incremental working capital requirement from the fresh issue. The company has completed phase-1 from internal accruals. The total cost of the project (2 states) is expected to be around ₹200 crore.

The company currently has an asset turnover ratio of around 6 times. This is reflected in the high RoE of 20 per cent in FY24. This should allow the company to generate high return on the invested capital from the new investments.

Cyclicality

Core industries such as steel, cement and power face economic cyclicality and the PEB industry should be no different. The RHP states that the industry has faced negative rate of growth in FY14 and FY21. At 17 times FY24 earnings, the valuation may be reflective of the cyclicality of the industry despite the growth drivers. The revenue concentration is moderate for the company, with its top 5 clients accounting for 25 per cent of the revenues.

The company generated 81 per cent of its revenues from repeat orders, which is a positive in growth cycles, but can be a headwind in economic downturns. The industry is fragmented with the unorganised sector accounting for half of the industry.

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