Garuda Construction and Engineering IPO analysis

Garuda Construction and Engineering IPO will open for subscription on October 8, 2024 and close on October 10, 2024. We break down the construction company's strengths, weaknesses, and growth prospects to help investors make an informed decision.

Garuda Construction and Engineering IPO in a nutshell

• Quality : Between FY22 and FY24, it recorded an average ROE and ROCE of around 53 per cent each.
  
• Growth : Its revenue and net profit grew nearly 42 and 39 per cent per annum, respectively, during FY22-24.
  
• Valuation : Post the IPO, the stock will be valued at a P/E and P/B ratio of 24 and 3 times, respectively.
  
• Overview: The company is expected to benefit from the government's focused spending on infrastructure projects and the growing domestic construction sector. However, the cyclical nature of the construction sector and its long intermittent periods of underperformance risk affecting the company's growth.
  
  Note that Garuda Construction parent PKH Ventures had floated its unsuccessful IPO last year in June 2023, which was cancelled due to under subscription on valuation concerns. It was subscribed only 65 per cent. PKH Ventures is now selling a 30 per cent stake via Garuda's IPO.

About Garuda Construction and Engineering

Garuda Construction provides construction services for residential, commercial, infrastructure, and industrial projects. The company also provides operation and maintenance (O&M) and mechanical, electrical, and plumbing (MEP) services. As of FY24, it derived 90 per cent of its revenue from engineering, procurement, and construction (EPC) contracts.

Garuda Construction and Engineering's strengths

• Strong order book: The company's order book with contracts worth Rs 1,400 crore is nine times its FY24 revenue, providing solid topline visibility.

Garuda Construction and Engineering's weaknesses

• Client concentration: The company earned 80 and 96 per cent of its revenue in FY24 and FY23, respectively, from its top five clients.
  
• High receivables and debtor days: The company's debtor days have shot up from 143 in FY22 to 417 in FY24, which means it takes more than a year for the company to receive payments from its debtors. As a result, its net profit is not translating into operating cash flows, given most of the cash is stuck in accounts receivables.

Risk report

Company and business

• Did Garuda Construction and Engineering report earnings before tax of Rs 50 crore or more in the last 12 months?
  Yes. The company reported a profit before tax of nearly Rs 50 crore in FY24.
• Will the company be able to scale up its business?
  Yes. The Indian construction sector has grown in double digits during FY18-23 and is expected to remain buoyant, given the government's priority for infrastructure spending, which will help the company scale up.
• Does the company have recognisable brands with client stickiness?
  No. Infrastructure projects are typically awarded through a competitive bidding process.
• Does the company have a credible moat?
  No. The construction sector is competitive and highly fragmented with many large civil construction companies.

Management

• Do any of the company's founders still hold at least a 5 per cent stake? Or do promoters hold more than a 25 per cent stake in the company?
  Yes. After the IPO, the promoters' stake will be around 68 per cent.
• Do the top three managers have more than 15 years of combined leadership at Garuda Construction and Engineering?
  Yes. The company's Managing Director and Chairman, Pravinkumar Agarwal, has been associated with the company since its incorporation in 2010.
• Is the management trustworthy? Is it transparent in its disclosures, which are consistent with SEBI guidelines?
  Yes. There is no information to suggest otherwise.
• Is the company's accounting policy stable?
  Yes. There is no information to suggest otherwise.
• Is Garuda Construction and Engineering free of promoter pledging of its shares?
  Yes. No shares have been pledged.

Financials

• Did the company generate a current and three-year average return on equity of more than 15 per cent and a return on capital employed of more than 18 per cent?
  Yes. Its three-year average ROE and ROCE were around 53 per cent each. In FY24, its ROE and ROCE were around 36 and 47 per cent, respectively.
• Was the company's operating cash flow positive during the last three years?
  No. The company reported negative operating cash flow in FY24.
• Is the company's net debt-to-equity ratio less than one?
  Yes. The company is net cash positive, which means it has a negative net debt to equity ratio.
• Is the company free from reliance on huge working capital for day-to-day affairs?
  No. Garuda Construction has significant working capital requirements. Its working capital commitments were worth Rs 92 crore as of FY24 against a net worth of Rs 119 crore.
• Can the company run its business without relying on external funding in the next three years?
  No. The company needs over Rs 380 crore in the next two years to meet its working capital requirement. It plans to partially finance this spending from external funds.
• Is the company free from meaningful contingent liabilities?
  Yes. The company had no contingent liabilities as of FY24.

Valuations

• Does the stock offer an operating earnings yield of more than 8 per cent on its enterprise value?
  No. After listing, the stock will offer an operating earnings yield of around 6 per cent on its enterprise value.
• Is the stock's price-to-earnings less than its peers' median level?
  No. After listing, the stock will be valued at a P/E of 24.5 times compared to its peers' median of 22 times.
• Is the stock's price-to-book value less than its peers' average level?
  No. After listing, the stock will be valued at a P/B of 3 times compared to its peers' average of 2.8 times.

Disclaimer: This is not a stock recommendation. Investors should do their due diligence before investing.

Also watch: Should you invest in IPOs?