K2 Infragen coming with IPO to raise upto Rs 40.54 crore

K2 Infragen 

• K2 Infragen is coming out with initial public offering (IPO) of 34,06,800 shares of Rs 10 each in a price band Rs 111-119 per equity share.  
• The issue will open for subscription on March 28, 2024 and will close on April 3, 2024.
• The shares will be listed on NSE Emerge Platform.
• The face value of the share is Rs 10 and is priced 11.10 times of its face value on the lower side and 11.90 times on the higher side.
• Book running lead manager to the issue is Expert Global Consultants.
• Compliance Officer for the issue is Jyoti Lakra.

Profile of the company

The company is an integrated engineering, procurement and construction (EPC) with a focus on Power Engineering and Project Engineering having experience in design and construction of various projects across 8 States in India viz. Uttar Pradesh, Rajasthan, Madhya Pradesh, Karnataka, Haryana, Gujarat, Punjab & Delhi. It provides its services across the value chain, ranging from design, procurement, construction supervision, subcontract management and work order management to post-construction activities to its clients. 

The scope of the company’s services includes detailed design & engineering of the project, procurement of key materials, and project execution at the sites with overall project management up to the commissioning of the projects. It has design and engineering, procurement, project management and quality management teams along with fleet of 13 construction equipment and 25 vehicles. Majorly its in-house teams deliver its projects from design to completion. This reduces its dependency on third parties for key materials such as stone aggregates, bitumen and services such as design and engineering, transportation and logistics required in the development and construction of its projects. 

The company is specializing in the procurement of materials such as non-ferrous waste from the open market and, at times, through auction processes. These materials are carefully selected and segregated based on the specific quality requirements outlined by customers. This meticulous process ensures that the materials supplied to customers meet their exact specifications, contributing to the evolving relationship with customers. By serving as an intermediary that bridges the gap between material sourcing and supply through mark-up model, its trading business plays a pivotal role in optimizing the supply chain and supporting various stakeholders in the value chain. Its promoters and senior management team have played a significant role in the development of its business including this trading business, and it benefits from their technical expertise, industry knowledge and relationships with various stakeholders.

Proceed is being used for:

• Working capital requirement.
• Capital Expenditure.
• General corporate purposes.

Industry overview

Infrastructure sector is a key driver for the Indian economy. The sector is highly responsible for propelling India’s overall development and enjoys intense focus from Government for initiating policies that would ensure time-bound creation of world class infrastructure in the country. Infrastructure sector includes power, bridges, dams, roads, and urban infrastructure development. In other words, the infrastructure sector acts as a catalyst for India’s economic growth as it drives the growth of the allied sectors like townships, housing, built-up infrastructure, and construction development projects. To meet India’s aim of reaching a $5 trillion economy by 2025, infrastructure development is the need of the hour. The government has launched the National Infrastructure Pipeline (NIP) combined with other initiatives such as ‘Make in India’ and the production-linked incentives (PLI) scheme to augment the growth of infrastructure sector. Historically, more than 80% of the country's infrastructure spending has gone toward funding for transportation, electricity, and water & irrigation. While these sectors still remain the key focus, the government has also started to focus on other sectors as India's environment and demographics are evolving. There is a compelling need for enhanced and improved delivery across the whole infrastructure spectrum, from housing provision to water and sanitation services to digital and transportation demands, which will assure economic growth, increase quality of life, and boost sectoral competitiveness.

In Budget 2023-24, capital investment outlay for infrastructure is being increased by 33% to Rs.10 lakh crore ($ 122 billion), which would be 3.3 per cent of GDP. As per the Union Budget 2023-24, a capital outlay of Rs. 2.40 lakh crore ($ 29 billion) has been provided for the Railways, which is the highest ever outlay and about 9 times the outlay made in 2013-14. Started with 6,835 projects, the NIP project count now stands at 9,142 covering 34 sub-sectors, as per news reports. Under the initiative, 2476 projects are under development phase with an estimated investment of $ 1.9 trillion. Nearly half of the under-development projects are in the transportation sector, and 3,906 in the roads and bridges sub-sector. The Indian Railways expects to complete total revenue from traffic of Rs. 2,64,600 crore ($ 32.17 billion) for FY24. India’s logistics market is estimated to reach $ 410.75 billion in 2022 and is expected to reach $ 556.97 billion by 2027, growing at a CAGR of 6.28%. India intends to raise its ranking in the Logistics Performance Index to 25 and bring down the logistics cost from 14% to 8% of GDP, leading to a reduction of approximately 40%, within the next five years.

Pros and strengths

Focused EPC player: The company has over 8 years of experience in executing EPC projects which have been in the building, roads, structure work, civil construction, railway work and turnkey water supply projects. Since 2015, it has executed 38 projects. It has historically had a focus on the executing EPC projects and accordingly has established its credentials as an EPC player capable of executing a range of these infra projects while working with renowned infrastructure companies and PWDs. Its focused approach shall enable it to benefit from future market opportunities and expand into newer markets.

Established track record of timely execution: With over Eight years of collective experience of the company’s Promoters and Senior Management, it has successfully executed various types of infrastructure projects since 2015. This track record highlights its capability in project management and execution, utilizing trained manpower, efficient equipment deployment and an integrated in-house model. These factors have enabled it to compete on projects within or ahead of scheduled timelines. Its in-house supply chain management ensures timely delivery of construction materials to its facilities and sites, enhancing process management and optimizing inventory. Its project management team, in collaboration with the engineering team, oversees project execution processes to maintain operational efficiencies.

In-house integrated model: The company embarks on its business in an included manner as it has developed competencies and resources in-house to deliver a project from conceptualization until completion. Its model includes a design and engineering team, facility for processing of bitumen which it uses for its projects, located in Kota, Rajasthan. Its facilities help reduce its dependence on third party suppliers for its key materials i.e., bitumen emulsion. It ensures timely transportation of key materials such as bitumen and diesel to project sites by tankers owned by it and through third party vendors, which reduces pilferage and adulteration. 

Risks and concerns

Derive significant portion of revenues from limited number of clients: The company’s business heavily relies on its customer base, and the potential loss of any of its customers could have a negative impact on its sales and, consequently, its overall business and financial performance. If it was to lose one or more of its significant or key customers or experience a reduction in the volume of business they provide, it could result in adverse consequences for its business, financial health, and cash flow. It cannot guarantee that it will be able to maintain the same levels of business as it has historically or secure long-term contracts with its major customers on mutually beneficial terms. Additionally, reducing its dependence on a few key customers may pose challenges in the future. Furthermore, factors such as a decline in its product or service quality, increased competition, or shifts in market demand could jeopardize its ability to retain these valuable customers.

Dependent on few suppliers: The company’s top ten suppliers contribute 63.67% of its total purchase for the period ended September 30, 2023, and 100% of its total purchase for Fiscal 2023, Fiscal 2022, Fiscal 2021. It cannot assure that it will be able to get the same quantum and quality of supplies, or any supplies at all, and the loss of supplies from one or more of them may adversely affect its purchases of stock and ultimately its revenue and results of operations. However, the composition and amount of purchase from these suppliers might change as it continues seek new suppliers for product for better quality and price in the normal course of business. Though it will not face substantial challenges in maintaining its business relationship with them or finding new suppliers, there can be no assurance that it will be able to maintain long term relationships with such suppliers or find new suppliers in time. 

Business is working capital intensive: The company’s infrastructure projects typically demand significant working capital and entail extended implementation timelines, necessitating diverse financing sources. As of September 30, 2023, its short-term borrowings amounted to Rs 1,870.27 lakh. It may need to secure further debt in the future. The acquisition of additional debt financing may lead to heightened interest expenses and impose additional constraints through restrictive covenants within its financing agreements. Conversely, seeking additional equity financing may dilute its earnings per Equity Share and ownership stake in the Company, potentially exerting adverse pressure on the company's Equity Share price. Its working capital requirements may be affected due to factors beyond its control including force majeure conditions, delay or default of payment by its clients, non-availability of funding from banks or financial institutions. Accordingly, such working capital requirements may not be indicative of the actual requirements of the company in the future and investors are advised to not place undue reliance on such estimates of future working capital requirements. 

Outlook

K2 Infragen is emerging Project Engineering, Power Engineering and EPC organization of India. It is founded by group of professionals having vast exposure in Project & Power Management with rich financial backup to meet the desire objective. The company is certified for ISO 14001:2015 (Environment Management System), 45001:2018 (Occupational Health & Safety Management System), and 9001:2015 (Quality Management System) by Globus Certifications Private Limited. It has been accredited with various registrations as a contractor with various departments and agencies viz. Public Works Department, Rajasthan (Class AA), Public Works Department, Madhya Pradesh, Bhopal (Class AA), pursuant to which it is also eligible to participate and undertake projects awarded by various other departments and agencies. It has in-house capabilities to deliver a project from conceptualization to completion with faster turnaround time and focus on derisking wherever possible. Its core competence lies in professionally managing the value chain and attracting and retaining talent to maximize value creation. On the concern side, the cost of construction materials, fuel, labour and equipment maintenance constitutes a significant part of its operating expenses. It is vulnerable to the risk of rising and fluctuating steel and cement prices, which are determined by demand and supply conditions in the global and Indian markets as well as government policies. 

The company is coming out with an IPO of 34,06,800 equity shares of face value of Rs 10 each. The issue has been offered in a price band of Rs 111-119 per equity share. The aggregate size of the offer is around Rs 37.82 crore to Rs 40.54 crore based on lower and upper price band respectively. On performance front, the company’s total revenue has increased by 103% from Rs 3,685.20 lakh in the fiscal year ended March 31, 2022 to Rs 7,490.08 lakh in the fiscal year ended March 31, 2023. Profit After Tax was at Rs 1,132.32 lakh in FY23 as against loss of Rs311.26 lakh in FY22. Meanwhile, the company continues to maintain and strengthen its market position of its EPC business in. It intends to consolidate its experience, market position and ability to execute and manage multiple projects, to further grow its portfolio of road and other EPC projects. Further, to fuel its growth strategy, it intends to invest in latest equipment and technology to support its expanding operations. It also seeks to purchase equipment and continue its strategy of minimal reliance on hired or leased equipment.