>Vascon Engineers Limited: IPO Grading (CRISIL)

CRISIL IPO Grade ‘3/5’: CRISIL Research has reaffirmed CRISIL IPO Grade ‘3/5’ for the proposed initial public offering of Vascon Engineers Ltd. (VEL) (CRISIL Research has undertaken a fresh grading exercise for VEL as the grading assigned to the company on Dec 31, 2007 had expired.) The grade indicates that the fundamentals of the issue are average relative to other listed equity securities in India. However, this grade is not an opinion on whether the issue price is appropriate in relation to the issue fundamentals.

Company Background
VEL is a Pune-based player, engaged in real estate construction and development. The company was incorporated in January 1986, and commenced operations with the construction of Cipla’s Patalganga factory in November 1986. Up to 1998, the company was a real estate contractor - executing contracts for third parties.

VEL’s real estate business comprises construction of residential and office complexes along with IT parks, industrial units, shopping malls, multiplexes, educational institutions and hotels. As of August 31, 2009, the company completed construction contracts worth Rs 8.8 billion, out of which Rs 6.4 billion was for third parties. In terms of saleable area, VEL has constructed over 4.58 million square feet during the last 5 years. In 2008-09, the construction business and development business contributed to around 93 per cent and 6 per cent respectively to the company’s total revenues.

Grading Highlights

Business Prospects
• Strong EPC order book provides comfort on revenues and margin front.
• Third EPC Order book concentration (around 33 per cent of the total order book) towards industrial, hospital, educational and airport clients gives better revenue visibility.
• Being in the construction business for over two decades, the company has built strong technical and design expertise. A large part of the company’s reputation in the Pune market is on account of its track record in providing timely delivery to clients.
• The joint development model reduces the working capital requirement as the contribution towards land cost is only in the form of deposits with the land owners. The risk of a fall in property prices is shared with the land owner. In this business model VEL acts as a real estate contactor as well as developer thereby earning a larger share of the revenues.
• The company’s real estate development business is primarily concentrated in Maharashtra, especially in-andaround Pune, exposing it to a high level of geographic and price risk. Also, Pune city, in terms of demand for residential and commercial space, is to a large extent dependent on the fortunes of the IT/ITES industry.

Financial Performance
• Healthy revenue growth at a CAGR of 54 per cent driven by high growth in EPC business over the past 3 years.
• EPC business in which the company undertakes civil construction of buildings etc formed close to 93 per cent of the company’s sales in 2008-09. The EBITDA margin in EPC business improved from 13.5 per cent in 2005-06 to 15 per cent in 2008-09. Real estate development business accounted for ~ 6 per cent of sales in 2008-09. Real Estate development business has also witnessed EBITDA margin expansion from 31.0 per cent in 2007-08 to 76.0 per cent in 2008-09.
• In spite of the Indian real estate sector going through a downturn, the company’s EPC business witnessed a healthy CAGR of 20.0 per cent from Rs 3,624 Mn in 2006-07 to Rs 5,114 Mn in 2008-09.
• The company postponed around 90 per cent of its projects on the development front. This though impacted revenues and lead to postponement of cash flows, it helped the company to maintain low gearing and also weather the demand uncertainty.

Management Capabilities
• Mr.Vasudevan provides the company leadership and direction. He is a qualified engineer - BE (civil) - from the University of Pune and has worked with organization such as Maharashtra Industrial Development Corporation, Hindustan Construction Company Ltd, Atul Constructions Company Ltd and Beck Engineer Company Pvt Ltd.
• The company has a strong and capable second line of management who has been with the company since its inception.

Corporate Governance
• VEL’s corporate governance meets the required corporate governance standards.

To read the full report: VASCON ENGINEERS