Ashoka Buildcon IPO: Analysts seem positive, but the market is fragmented & highly competitive
Moneylife Digital Team 23 September 2010

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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