Deepak Builders & Engineers IPO analysis

Deepak Builders & Engineers IPO (initial public offering) will open for subscription on October 21, 2024 and close on October 23, 2024. Below is a breakdown of the infrastructure company's strengths, weaknesses and growth prospects to help investors make an informed decision.

Deepak Builders & Engineers IPO in a nutshell

• Quality: Between FY22-24, Deepak Builders & Engineers reported a three-year average ROE and ROCE of 35 and 33 per cent, respectively.
  
• Growth: During FY22-24, its revenue and net profit grew by 19 and 85 per cent per annum, respectively.
  
• Valuation: Post-listing, the stock will trade at a P/E and a P/B ratio of 15.7 and 2.5 times, respectively.
  
• Overview: Sectoral tailwinds support the company's growth prospects. The government's focus on railways and infrastructure development will help the company scale up. However, price-based competition with a wide number of players in the market poses a threat to its prospects.

About Deepak Builders & Engineers

Deepak Builders & Engineers is an Engineering, Procurement, and Construction (EPC) company, which executes large-scale infrastructure and construction projects, particularly in the railway sector. It builds railway bridges and also undertakes development and redevelopment of railway stations. Its other construction projects include administrative and institutional buildings, hospitals and flyovers, among others. The company had orders worth Rs 1,380 crore as of FY24, of which 66 per cent were from the railways.

Strengths of Deepak Builders & Engineers

• Strong order book: The company's order book of Rs 1,380 crore is nearly three times its FY24 revenue, providing solid visibility for the business. Between FY22 and FY24, the company almost doubled its order book, demonstrating its strong execution capabilities and consistent success in securing government contracts.

Weaknesses of Deepak Builders & Engineers

• Geographical concentration: The company's revenue is geographically concentrated, with 33 per cent coming from Punjab alone, exposing it to regional risks.
  
• High dependence on government contracts: The company's order book entirely consists of contracts awarded by the government. A slowdown in government spending can significantly dent the business.

Risk report

Company and business

• Were Deepak Builders & Engineers earnings before tax more than Rs 50 crore in the last 12 months?
  Yes. Its earnings before tax was Rs 82 crore in FY24.
  
• Will Deepak Builders & Engineers be able to scale up its business?
  Yes. Increased government focus on infrastructure development and railways is expected to help the company keep securing orders and scale up its operations. Moreover, the company has impressively been growing its order book, nearly doubling it in the last three years.
  
• Does Deepak Builders & Engineers have recognisable brands with client stickiness?
  No. The company is engaged in the construction business, which has low differentiation and high price-based competition.
  
• Does the company have a credible moat?
  No. Deepak Builders & Engineers operates in an environment with stiff competition from both small and large players. The low differentiation in the construction industry makes it difficult for the company to have a competitive advantage over peers.

Management

• Do any of the company's founders still hold at least a 5 per cent stake? Or do promoters have over 25 per cent stake in the company?
  Yes. Post the IPO, the promoters' stake will be 72.5 per cent.
  
• Do the top three managers have over 15 years of combined leadership at Deepak Builders & Engineers?
  Yes. Managing Director Deepak Kumar Singal has been with the company since its incorporation in 2017.
  
• Is the company's 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 Deepak Builders & Engineers free of promoters pledging their shares?
  Yes. The company is free of promoters pledging their shares.

Financials

• Did the company generate a current and three-year average ROE of more than 15 per cent and an ROCE of more than 18 per cent?
  Yes. The company's three-year average ROE and ROCE were 35 and 33 per cent, respectively. In FY24, it reported an ROE and ROCE of 53 and 43 per cent, respectively.
  
• Was the company's operating cash flow positive during the last three years?
  No. The company reported negative cash flow from operations (CFO) of Rs 27 crore in FY24.
  
• Is Deepak Builders & Engineers net debt-to-equity ratio less than one?
  No. Its net debt-to-equity ratio was one as of FY24.
  
• Is Deepak Builders & Engineers free from reliance on significant working capital for day-to-day affairs?
  No. The company's working capital requirement is very high due to the nature of long-term projects. As of FY24, it had a high working capital cycle of 172 days.
  
• Can the company operate its business without relying on external funding in the next three years?
  No. The business is capital-intensive. The company has taken debt in the past to meet its capital requirements. As a result, its debt has soared by almost two times between FY22-24. Further, it would require high working capital to execute its order book. These factors will necessitate raising funds.
  
• Is Deepak Builders & Engineers free from meaningful contingent liabilities?
  No. As of FY24, its contingent liabilities as a percentage of equity was around 188 per cent.

Valuations

• Does the company's stock offer an operating earnings yield of more than 8 per cent on its enterprise value?
  Yes. The stock offers an operating earnings yield of 9.5 per cent.
  
• Is the stock's P/E ratio less than its peers' median level?
  Yes. It is valued at a P/E ratio of 16 times compared to its peers' median of 21 times.
  
• Is the stock's P/B value less than its peers' average level?
  Yes. It is valued at a P/B ratio of 2.5 times compared to its peers' median of 3.5 times.

Disclaimer: This is not a stock recommendation. Do your due diligence before investing.

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