Capacite Infraprojects - Information Analysis

Note: This article has no recommendation to either buy or avoid this IPO. Instead, we have presented all the relevant information based on which you can make your own decision.

Capacite Infraprojects is essentially a building contractor. It builds homes on behalf of major builders such as Godrej, Rustomjee, Lodha and Oberoi, mostly in Mumbai. It employs about 10,000 contract workers and about 1700 permanent employees.

The company has a hefty order book which is nearly four times current revenues, meaning that business isn’t hard to come by. Revenues themselves have grown at a blistering CAGR of 182% over the past four years and profits have grown at 419% (albeit from a modest 3 crore loss in 2013). EBITDA and Net Margins at 13% and 6% respectively look good. It’s portfolio of blue-chip customers of repute is an advantage. The hardest part of real estate - obtaining approvals from various government bodies rest more with the developer rather than Capacite. The company also owns much of the equipment it uses, keeping a lid on costs.

On the other hand, the company is new and thus relatively unproven. The pledging of 19% of the pre-issue equity by the promoters is a worrying sign. Real estate is a murky business and a building collapse or other accident could expose the company to some harsh penalties. The company is also heavily exposed to the Mumbai real estate market. Valuations at 23 times earnings* and 2.3 times book* are not especially cheap. 

*On a post IPO fully diluted basis 

Where is it all going

• Money being raised - Rs 400 Crores
• Funding working capital requirements -  Rs 250 crores
• Funding purchase of capital assets - Rs 52 crores
• General Corporate Purpose - Rs 98 crores 

So what is the verdict to be? Use our questions to make up your mind.

Company / Business
1. Are the company's earnings before tax more than Rs 50 cr in the last twelve months?
Yes, Capacite’s consolidated earnings before tax for FY 2017 were Rs 107 crores, an increase of 44% over FY 2016. 

2. Will the company be able to scale up its business?
Yes, the company is expanding its operations at rapid pace. Increasing disposable incomes and a decline in interest rates will drive further expansion. As of May 31, 2017 Capacite had an order book of Rs 4,600 crore (90% from its residential business) which is about 4 times of its FY 2017 revenues.          

3. Does the company have recognizable brand/s, truly valued by its customers?
No, the company operates in a competitive market where lower cost construction service providers can take business away. The company also has very limited history giving it little or no brand value.            

4. Does the company have high repeat customer usage?
Yes, the company has received repeat orders from its customers which include reputed clients such as the Lodha Group, Godrej Properties and Puravankara Projects.   

5. Does the company have a credible moat?
No, the company operates in a competitive environment with an easy to replicate business, low entry barriers and little or no pricing power.  

6. Is the company sufficiently robust to major regulatory or geopolitical risks?
No, any change in government regulation or delay in approvals can impact its business to a large extent.

7. Is the business of the company immune from easy replication by new players?
No, construction service business is an easy to replicate business which does not requires very large capital investment.   

8. Is the company's product able to withstand being easily substituted or outdated?
No, in-house rather than outsourced construction of buildings is a substitute to the company’s product and is a major threat.  

9. Are the customers of the company devoid of significant bargaining power?
No, customers will award contracts to competitors if premium pricing is charged. Cost plays a very major role in this industry.   

10. Are the suppliers of the company devoid of significant bargaining power?
Yes. Steel and cement its primary raw materials are sold in highly competitive markets In any case, the company is able to pass on price increases in them to customers. 

11. Is the level of competition the company faces relatively low?
No, the level of competition faced by Capacite is high. Competitors include large established players such as L&T Construction company, Ahluwalia Contracts, Simplex Infrastructures and JMC projects.             

 Management
12. Do any of the founders of the company still hold at least a 5 per cent stake in the company? Or do promoters totally hold more than 25 per cent stake in the company?
Yes, combined ownership of promoters and promoters groups is 57 per cent of the pre IPO equity share capital. 

13. Do the top three managers have more than 15 years of combined leadership at the company?
No. The company was incorporated in 2012, just 5 years ago. Its Managing Director Rahul R. Katyal and Executive Director, Subir Malhotra have been working with it since incorporation. Prior to this, Mr Rahul Katyal and Rohit Katyal (its Chief Financial Officer) worked with Pratibha Industries.      

14. Is the management trustworthy? Is it transparent in its disclosures, which are consistent with Sebi guidelines?
Yes, we have no reason to believe otherwise. However, in the past, there have been instances where company has delayed repayment of loans and interest on delayed payments.    

15. Is the company free of litigation in court or with the regulator that casts doubts on the intention of the management?
Yes, we have no reason to believe otherwise.

16. Is the company’s accounting policy stable?
Yes, we have no reason to believe otherwise.

17. Is the company free of promoter pledging of its shares?
No, members of promoter group M/S Ashutosh Trade Links and Katyal Merchandise Private limited have pledged 19% of total outstanding pre IPO Equity to JM Financial as security for term loans taken by the company. The promoters have also given personal guarantees for financing arrangements availed by the company, aggregating Rs 632 crores, which are greater than the combined net worth of promoters.   
 
Financial
18. Did the company generate current and five-year average return on equity of more than 15 per cent and return on capital of more than 18 per cent?
Yes, Capacite's average 5-year ROE and ROCE was 26% and 27% respectively. Current, FY 2017 ROE and ROCE stands at 29% and 39% respectively.      

19. Was the company’s operating cash flow-positive during the previous year and at least four out of the last five years?
Yes, the company had positive operating cash flows in four out of five years of its operations. It generated cash flows of about Rs 61 crores from its operations in FY 2017.   

20. Did the company increase its revenue by 10 per cent CAGR in the last four years?
Yes, Capacite's revenue increased at a CAGR of 182% in past 4 years from Rs 18 crores in FY 13 to Rs 1,166 crores in FY 17. 

21. Is the company's net debt-to-equity ratio less than 1 or is its interest coverage ratio more than 2?
Yes, the company's net debt to equity ratio is 0.4 and its interest coverage ratio is 4.  

22. Is the company free from reliance on huge working capital for day to day affairs?
No, the company's business is working capital intensive. Its contractual payments are received in different phases of construction. Capacite's working capital cycle is also rising and part of the IPO proceeds will be used for working capital.

23. Can the company run its business without relying on external funding in the next three years?
No, Capacite will be in need of working capital loans at regular intervals since contracts are completed in phases with each phase requiring fresh working capital. Working capital requirements will increase with larger contract size and scale of business.   

24. Have the company’s short term borrowings remained stable or declined (not increased by greater than 15%)?
Yes, the company's short term borrowings have declined from Rs 98 crore in FY 2016 to Rs 64 crore in FY 2017. They are also on a declining trend when compared to net worth of the company. 
 
The Stock/Valuation 
25. Does the stock offer operating earnings yield of more than 8 per cent on its enterprise value?
No, Capacite offers an earnings yield of about 6% based on its price band.

26. Is the stock’s price to earnings less than its peers’ median level?
No, it is slightly overvalued at PE of 23* compared to its peers’ median PE of about 19.

27. Is the stock’s price to book value less than its peers’ average level?
Yes. Capacite’s price to book of 2.3 is roughly the same as the median price to book of its peers at 2.31.

BRLM- Axis Capital, IIFL Holdings and  Vivro Financial  Services

One or more of the authors may be applicants in this Initial Public Offering.