SP Group’s Afcons receives Sebi approval for its Rs 7,000-cr IPO; how has the company performed in last 5 years, what do experts suggest?

Afcons Infrastructure, a prominent infrastructure company of the Shapoorji Pallonji Group, has recently received Sebi approval for its Rs 7,000-crore IPO. Shapoorji Pallonji currently has five listed companies—Sterling and Wilson Renewable Energy, Eureka Forbes, Vascon Engineers, Forbes & Company, and Gokak Textiles, the combined market capitalisation of which is Rs 30,000 crore.

Data available from ACE Equity and company’s draft red herring prospectus (DRHP) shows that in FY23, Afcons posted revenue of Rs 12,637 crore, a 15% jump over the previous year. Its top line has surged 92% (with a CAGR of 14%) in the last 5 year—from Rs 6,596 crore in FY18 to Rs 12,637 crore in FY23. As of September 30, 2023 it has an order book of Rs 34,888 crore with over 68% of the total orders from the government sector.

Its operating profit (EBITDA) stands at Rs 1,517 crore in FY23, surging 28% in the last year and had a CAGR of 15% for the last five years. Similarly, its profit after tax (PAT) for FY23 stands at Rs 411 crore with an annual growth of 20% for the last 5 years.

On the other hand, it had a total debt of Rs 1,561 crore in FY23. Afcons’ total debt has declined 7% in last 5 years from Rs 1,675 crore in FY18. Its debt-to-equity ratio improved to 0.49X in FY23 from 0.93X in FY18. In FY23, the company had Rs 2,654 crore as reserves and surplus, recording a growth of 109% in 5 years from Rs 1,269 crore in FY18. 

Rajesh Sinha, Sr. Research Analyst at Bonanza Portfolio, said Shapoorji Pallonji Group’s flagship infrastructure engineering and construction company, Afcons Infrastructure Limited, has received final approval from Sebi for its Rs 7,000-crore initial public offering (IPO) as the group seeks to reduce its debt.

The IPO, with a face value of Rs 10 per equity share, will be a mix of fresh issue of shares worth Rs 1,250 crore and an offer for sale of up to Rs 5,750 crore by Goswami Infratech Pvt. Ltd., a promoter group company.

The company plans to use the fresh issue proceeds for capital expenditure towards the purchase of construction equipment, funding long-term working capital requirements, and prepayment of borrowings. ICICI Securities, DAM Capital Advisors, Jefferies, Nomura, Nuvama, and SBI Capital are the book-running lead managers.

Highlighting on order book and growth prospects Sinha says, “Afcons Infrastructure operates across diverse infrastructure sectors including marine, surface transport, urban infrastructure, hydro & underground and oil & gas projects. Afcons’s order book has risen at an annual rate of 7.6% from Rs 26,248.46 crore in FY21 to Rs 30,405.77 crore in FY23 and further improved to Rs 34,888.39 crore as of September 30, 2023. This is the second IPO from the Shapoorji Pallonji Group; the first was Sterling and Wilson Renewable Energy Ltd., which got listed in August 2019, which was later acquired by Reliance Industries Ltd. after the Group divested shares to reduce debt.”

Tarun Singh, Founder and MD, Highbrow Securities said, Afcons Infrastructure’s (AIL) debt obligations and dependence on government projects may pose some risk. While the company’s diversified infrastructure business and strong order book are positives, the high valuation multiples and limited retail investor participation may impact demand.

Investors should carefully evaluate AIL’s financials, growth prospects, and regulatory risks. “The IPO’s success will depend on investor appetite for infrastructure stocks and the company’s ability to justify its valuation”, Singh commented.

Samir Bahl, CEO - Investment Banking at Anand Rathi Advisors said while the company’s strong performance in the infrastructure sector is well-established, it is important to note that a significant portion of the IPO (Rs 5,750 crore) will be through an offer for sale by the promoter, Goswami Infratech Private Limited. Such proceeds from the offer for sale may be directed towards the promoter’s debt reduction efforts.

He added that the fresh issue of Rs 1,250 crore, however, will be allocated to support the company’s capital expenditure, working capital, and debt repayment plans. “Despite the large offer for sale component, the company’s strong pedigree and proven capabilities make this IPO a potential opportunity for investors seeking exposure to the infrastructure space”, Bahl said.