Rachana Infrastructure coming with an IPO to raise Rs 77.97 crore

Rachana Infrastructure

• Rachana Infrastructure is coming out with an initial public offering (IPO) of 56,50,000 equity shares of face value of Rs 10 each for cash at a fixed price of Rs 138 per equity share.
  
• The issue will open on May 20, 2022 and will close on May 25, 2022.
  
• The shares will be listed on NSE Emerge Platform.
  
• The share is priced 13.80 times higher to its face value of Rs 10.
  
• Book running lead manager to the issue is Interactive Financials Services.
  
• Compliance Officer for the issue is Smit Shah.
  

Profile of the company

Rachana Infrastructure is one of the mid-size private sector company engaged in the business of Construction of Road projects on Bill of Quantities (BOQ) and EPC basis. In the very initial periods, the company got the contracts from the Government (Zilla Panchayat) at a very small scale. In addition, it got sub contracts from the infrastructure Companies from Gujarat, Maharashtra and many other states. Over a period of time, the company got expertise in the traditional construction of Buildings, Road Construction, Irrigation, Hydro power Project and Mining. With time and experience, it started expanding its business in the other states of the India like Maharashtra, Madhya Pradesh, Jharkhand and Rajasthan. 

The company has successfully completed many projects in various departments of Government of India. It benefited significantly from the experience and relationship established by its Promoters. The company has an established track record of executing projects with over 2 decades of experience in construction activities. Some of its satisfied clients are Public Works Department of Madhya Pradesh, Road and Building Department of Gujarat State, Madhya Pradesh Road Development Corporation, Power Grid Corporation of India, Gujarat Minerals Development Corporation, Road Construction Department of Jharkhand, ONGC Petro-Additions Limited, Ahmedabad Municipal Corporation, and Ahmedabad Urban Development Corporation etc.

With good credential and qualification criteria, the company has been awarded and has undertaken Major Projects, Financed by State Government, Central Government and also International Banks like Asian Development Bank. Over the years, it has acquired resources with vertical integration like it has its own stone mines and stone crushers for basic excavation of stone aggregate which is the core and basic material for all road infrastructure construction.

Proceed is being used for:

• Repayment of secured loans.
  
• Working capital requirement.
  
• General corporate purpose.
  
• Meeting public issue expenses.
  

Industry Overview

India has the second-largest road network in the world at about 62.16 lakh km. The National Highways/ Expressways measure 1,36,440 km and State Highways measure 1,76,818 km and Other Roads measure 59,02,539 km in FY 2020-21. Ministry of Roads and Highways constructed 34 Km of National Highways per day in 2020-21. India have a world record of making 38 KMs per day his target is going upto more than 100 KMs per day. Historically, the government has been the primary stakeholder in investments in the transport sector. However, to boost private sector participation, the Ministry of Road Transport and Highways has laid down comprehensive policy guidelines for private companies to participate in the development of National Highways. Highest ever construction of 34 km per day of National Highways in 2020-21. 12,205.25 km National Highways constructed in India during FY 2020-21. Ministry has constructed 1,470 km of National Highways in May 2021 as compared 847 km in May 2020.

The government offers various incentives to attract Private Investment and Foreign Direct Investment in the roads and highways sector. About USD 1.4 Tn will be invested on infrastructure in India from 2020 to 2025. The National Infrastructure Pipeline (NIP) set up by the government unveils the infrastructure projects across various states which will receive this funding. To build domestic capacity and enhance execution by private sector participants, NIP promotes collaborations and joint ventures with strong global infrastructure developers. Roads and Highways will receive total funding of about USD 26.9 Bn under the NIP projects. About 39 of these projects are proposed to be implemented by the private sector. The government has taken many e-initiatives such as Bhoomi Rashi Porta, Enterprise Resource Planning (ERP) Project-eDISHA, E-tolling to simplify the processes in the roads and highways sector and bring transparency to it. Ministry plans to take up about 131 new National Highway projects at an approximate estimated cost of about 84,193 crore, in the North-Eastern States, within the next three years, under the National Infrastructure Pipeline.

Pros and strengths

Leading road focused BOQ and EPC Contractor: The company is leading road focused BOQ and EPC contractor. It construct the Road on BOQ and EPC basis for Government and Private Clients. It is also getting the sub contact work for road construction from the leading infrastructure of the India. The quality of the Construction and completion of the project in time which is very crucial for the infrastructure projects, it is the key factor for the growth of the Company. The road infrastructure contributes major revenue of the Company.

Management and integrated in-house project team:  The company’s management team has experience in the infrastructure sector. Led by the Promoter and Managing Director Girish bhai Raval (who has extensive experience in the infrastructure construction business), the company consider the strength of its management team to be fundamental to its success. The stability of its management team and the industry experience brought on by its employees will enable it to continue to take advantage of future market opportunities and expand into new markets. It has qualified in-house teams who are responsible for different aspects of its projects starting from identifying prospective projects to the completion of the projects.

Robust order book: The order book position of the company is an indicator for the future performance since it represents the future revenue generation. It is not focused on adding the order book only but evaluate the tender looking to the complexity of the project, its strength and the profit margin before bidding. Having experienced of the promoter and the management team, it book order from different geographical regions and different business.

Risks and concerns

Depends on technological developments in construction industry: The company’s recent experience indicates that its clients are increasingly developing larger, more technically complex projects using more advanced technologies. Its future success will depend, in part, on its ability to respond to technological advances and emerging technology standards and practices on a cost-effective and timely basis. To meet its clients‘ needs, it must continuously update its existing systems and develop new technologies for its construction projects. In addition, rapid and frequent technological and market demand changes can often render existing technologies and equipment obsolete and result in requirements for additional and substantial capital expenditures and/or significant write downs of its assets. The cost of upgrading or implementing new technologies, upgrading its existing equipment or expanding capacity could be significant. If the company fails to anticipate or respond adequately to its clients‘ changing requirements or keep pace with the latest technological developments, its business, prospects, financial condition and results of operations may be materially and adversely affected.

High working capital requirements: The company is engaged in Construction activity and majority of the constituent of the current assets are not eligible for the bank finance. The company had to provide performance bank guarantee for the work awarded to the Company and for that the company had to provide cash margin. Apart from that the clients are keeping certain percentage of the contact value after the completion of the Project as Retention Money. All this require huge working capital requirement.

Operate in highly competitive environment: The company face intense competition in the bidding process from domestic as well as foreign companies. Several foreign companies have bid with domestic companies to participate in Infrastructure projects in India. It face similar competition in other jurisdictions where it operate. In recent years, with the opening of these sectors, foreign companies have entered these markets with greater contracts so as to maintain its respective market share. As a result of this competition, it face substantial margin pressure which could have a material adverse effect on its business, prospects, financial condition, and results of operations resources and assets than it and so they may be able to achieve better economies of scale allowing them to bid profitably at more competitive rates. In addition, new entrants to these industries may reduce their margin in order to gain market share. The nature of the bidding process may cause it and its competitors to lower prices to win.

Outlook

Rachana Infrastructure offers infrastructure and civil construction services. Rachana Infrastructure is a mid-size private sector company engaged in the business of construction of roads and highways, irrigation, hydropower project and mining and pipeline construction. It is expanding business in the other states of India like Maharashtra, Madhya Pradesh, Jharkhand and Rajasthan. The roads project that the company has executed are MPRDC- ADB Loan IV, OPAL Petrochemical Refinery Road work at Dajeh SEZ, C.C Road Construction for MP PWD and Vadodara-Mumbai 6 Lane Highway. It has an in-house integrated system and machinery for all stages of mining, right from Mining/Extraction of raw material from the mine up to Crushing and Finished Production of Black Trap Stone Aggregate. On the concern side, the company’s operations depend upon the productivity of its workforce, which may be affected by labour disputes involving its subcontractors or employees. It may experience business disruptions due to strikes, work stoppages or demands for wage increases. Besides, its business operations require it to obtain and renew from time to time, certain approvals, licenses, registration and permits, some of which may expire and for which it may have to make an application for obtaining the approval or its renewal.

The company is coming out with a maiden IPO of 56,50,000 equity shares of Rs 10 each at a fixed price of Rs 138 per share to mobilize around Rs 77.97 crore. On performance front, in the FY21, company's total revenue is Rs 10705.67 lakh, which is decreased by 32.42% in compare to FY20 total Income Rs 15840.55 lakh. PAT is Rs 455.31 lakh for the FY21 in compare to Rs 597.13 lakh in FY20. The PAT was 4.25% of total revenue in FY21 compared to 3.77% of total revenue in FY20. Meanwhile, the company will evaluate the execution of each and every project and on that basis it will improve its execution to get maximum returns from the projects. It will set the time line ahead of scheduled time line for completion of the project which will reduce the cost and enhance the profitability of the company. Besides, the company plan to continue its strategy of diversifying across states and increase orders from other states apart from the existing five states.