Friday, January 7, 2011

A2Z Maintenance - Buy

Gurgaon-based A2Z Maintenance & Engineering Services (A2Z) is coming out with its maiden IPO to fund its expansion plans. The issue is slated to open on December 8, 2010 and will close on December 10, 2010. The company is following a book-building process and has already set a price band of around Rs 400-410 per share. The IPO is a combination of a fresh issue and an offer for sale for 45.56 lakh equity shares. Through this issue the company expects to garner a total of around Rs 857.24 - 861.79 crore, of which Rs 675 crore would be used to meet its expansion plans, while Rs 182.24 - 186.79 crore would go to the offloading shareholders.

The offloading shareholders include members of the promoter and the promoter group and other investors such as Beacon, which is offloading 4 per cent of its total shares and Rakesh Jhunjunwala who is offloading a mere 0.17 per cent of his shares. Beacon currently holds 12.04 per cent stake on a pre-issue basis which post-issue would be around 5.79 per cent, while Rakesh Jhunjunwala, who holds 21.03 per cent in the company on a pre-issue basis, will continue to hold 15.51 per cent on a post-issue basis. Of the Rs 675 crore that would come to the company, Rs 68.03 crore would be invested in three biomass-based power projects of 15 MW each in Punjab, while Rs 120 crore would be deployed towards five biomass power projects of 15 MW each in Rajasthan.

An amount of Rs 169.67 crore would be invested in A2Z’s subsidiaries whereas Rs 42 crore and Rs 125 crore would be deployed towards the repayment of a loan granted by L&T Infrastructure Finance and working capital requirement. The balance will be used for general corporate purposes. As for the business of the company, A2Z is basically an engineering, procurement and construction (EPC) company providing services to the power transmission and distribution sector with a clear focus on the distribution segment. Its work in the EPC domain includes installation of distribution line infrastructure with capacities of up to 33 KV, the construction of sub-stations of up to 33 KV, participation in system strengthening projects, and rural electrification projects. A2Z’s order book as on July 31, 2010 was around Rs 1,292 crore.

However, the company is diversifying further to provide services to power generation companies and other sectors such as road and telecommunications. That apart, the company also provides municipal solid waste management services (SWMS) and facility management services (FMS). Currently, 93 per cent of its revenues come from the EPC business while the balance is derived from the SWMS and FMS businesses. The company has also forayed into the power generation space using renewable energy sources and is implementing nine generation projects of 15 MW each in Punjab (three projects), Rajasthan (five projects), and Kanpur (one project). All these power generation projects are in an implementation stage and around four projects aggregating 60 MW are expected to be commissioned by March 2011.

On the financial front, A2Z’s revenues increased by 69 per cent to Rs 1,225.29 crore (Rs 723.88 crore) while its profits increased by 66 per cent to Rs 97.87 crore (Rs 59.04 crore) respectively. As for the valuations, on fully diluted capital and the set price band, A2Z is available at PE of 30-30.87x and EV/EBIDTA of 16.28-16.56x. This certainly looks steep for an EPC company when Shriram EPC, a comparable peer, is available at PE and EV/EBIDTA of 20x and 10x respectively. Besides, most of the IPO proceeds are to be utilised for the company’s biomass-based power generation projects.

One should also note that the power sector on a whole has been out of favour for the investors’ fraternity and investors haven’t really taken a fancy to companies that are engaged in the biomass-based power generation space. Hence it is unlikely that this company would be able to command a premium from investors, but the scrip may attract attention due to the fact that Rakesh Jhunjunwala has invested in the company and therefore one can expect listing gains for this IPO. Investors would therefore do well to opt for this one.

Our Recommendation :
Buy around Rs.300 and hold for a target price of Rs.450 holding period 6-9 months.

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