Rajesh Power Services IPO analysis

Rajesh Power Services IPO (initial public offering) will open for subscription on November 25, 2024, and close on November 27, 2024. Through this IPO, the SME (small and medium enterprise) aims to raise nearly Rs 160 crore.

Below is a breakdown of the power sector contractor's strengths, weaknesses and growth prospects to help investors make an informed decision.

Rajesh Power Services IPO in a nutshell

• Quality: Between FY22 and FY24, Rajesh Power reported an average three-year ROE and ROCE of around 18.4 per cent and 14.4 per cent, respectively.
  
• Growth: During FY22-24, its annual revenue and net profit growth were 39.2 per cent and 194.4 per cent, respectively.
  
• Valuation: The company's stock is valued at a P/E and P/B of 23.2 times and 2.9 times, respectively.
  
• Overview: Rajesh Power stands to benefit from growing demand for power and India's target to achieve 500 GW of renewable energy by 2030. Moreover, during the Union Budget in July 2024, the government allocated 50 per cent more funds towards green hydrogen, solar power and green energy corridors compared to last year, which may further boost Rajesh Power's growth prospects. However, factors like competition from large corporations and high working capital requirements can pose hurdles.

About Rajesh Power Services

Incorporated in 2010, Rajesh Power Services is an EPC (engineering, procurement and construction) contractor for the renewable and non-renewable power sector. It maintains, operates and sets up extra-high-voltage cables and transmission lines, solar plants, power transformers and substations (part of the power distribution system). The company also provides consultancy services pertaining to the design of substations and cable systems.

Rajesh Power Services clientele comprises private, semi-government and government companies in the power sector. Further, a significant chunk of its revenue comes from Gujarat (95 per cent).

Strengths of Rajesh Power Services

• Strong order book: As of November 13, 2024, the company had an order book of around Rs 2,400 crore, which is 8.4 times its FY24 revenue. Such high numbers provide some degree of predictability regarding the company's future prospects.

Weaknesses of Rajesh Power Services

• Heavy reliance on the government: Rajesh Power Services largely depends on infrastructure projects undertaken by the government, where it places bids to acquire contracts. As a result, the company derives close to 60 per cent of its revenue from the government, and hence, a decline in broader government capex or policy changes can affect its financials.

Risk report

Company and business

• Did Rajesh Power report earnings before tax of Rs 20 crore or more in the last 12 months?
  Yes. The company reported earnings before tax of Rs 34 crore in FY24.
  
• Will the company be able to scale up its business?
  Yes. The Indian power transmission sector is experiencing significant growth, driven by the need to meet renewable energy targets and expanding electricity demand.
  
• Does the company have recognisable brands with client stickiness?
  No. There is no client stickiness as the company depends on accepting the bids submitted towards infrastructure projects.
  
• Does the company have a credible moat?
  No. There are many EPC contractors present in the infrastructure space.

Management

• Do any of the company's founders still hold at least a 5 per cent stake? Or do promoters hold over a 25 per cent stake in the company?
  Yes. After the IPO, the promoters' stake will increase to 73.4 per cent.
  
• Do the top three managers have over 15 years of combined leadership at Rajesh Power?
  Yes. The company's managing director, Kurang Panchal and whole time director, Rajendra Patel, have been with the company since 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 Rajesh Power free of promoter pledging of its shares?
  Yes. The promoters have not pledged any of their shares.

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?
  No. Rajesh Power reported a three-year average ROE and ROCE of 18.4 per cent and 14.4 per cent, respectively. In FY24, it had an ROE and ROCE of around 36.4 per cent and 23.7 per cent, respectively.
  
• Was the company's operating cash flow positive during the last three years?
  No. Rajesh Power Services reported a negative cash flow from operations in FY24.
  
• Is the company's net debt-to-equity ratio less than one?
  Yes. As of six months ended September 2024, the company's net debt-to-equity ratio was 0.7.
  
• Is the company free from reliance on huge working capital for day-to-day affairs?
  No. The company operates in the engineering, procurement and construction sector which is working capital intensive due to a longer execution period.
  
• Can the company run its business without relying on external funding in the next three years?
  No. Since Rajesh Power had an inconsistent cash flow position in the past, it may need to rely on external funding, given it operates in a capital-intensive space.
  
• Is the company free from meaningful contingent liabilities?
  No. The company's contingent liabilities stood at 44 per cent of net worth as of September 2024.

Valuations

• Does the stock offer an operating earnings yield of more than 8 per cent on its enterprise value?
  No. Rajesh Power's stock offers an operating earnings yield of 4.9 per cent on its enterprise value.
  
• Is the stock's price-to-earnings less than its peers' median level?
  Yes. The stock is valued at a P/E ratio of 23.2 times compared to the median of 60 times of its listed peers.
  
• Is the stock's price-to-book value less than its peers' median level?
  Yes. The stock is valued at a P/B ratio of 2.9 times compared to the median of 9 times of its listed peers.

A word of caution

While SME IPOs offer growth opportunities, they demand careful evaluation, given their elevated risk profile. Since SMEs usually have a limited operating history, they are more prone to market swings than larger, more established firms. Further, their limited financial disclosures make it harder for investors to evaluate their long-term potential.

Moreover, SME stocks often experience lower trading volumes, leading to price volatility during transactions. Lastly, the lighter regulatory framework for SMEs may also present governance and compliance risks, making it riskier to invest in these companies.

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

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