Ceigall India coming with IPO to raise Rs 1290.71 crore

Ceigall India 

• Ceigall India is coming out with a 100% book building; initial public offering (IPO) of 3,21,87,319 shares of Rs 5 each in a price band Rs 380- 401 per equity share.    
• Not more than 50% of the issue will be allocated to Qualified Institutional Buyers (QIBs), including 5% to the mutual funds. Further, not less than 15% of the issue will be available for the non-institutional bidders and the remaining 35% for the retail investors. 
• The issue will open for subscription on August 1, 2024 and will close on August 5, 2024.
• The shares will be listed on BSE as well as NSE.
• The face value of the share is Rs 5 and is priced 76.00 times of its face value on the lower side and 80.20 times on the higher side.
• Book running lead managers to the issue are ICICI Securities, IIFL Securities and JM Financial.
• Compliance Officer for the issue is Utkarsh Gupta. 

Profile of the company

The company is an infrastructure construction company with experience in undertaking specialized structural work such as elevated roads, flyovers, bridges, railway over bridges, tunnels, highways, expressways and runways. It is one of the fastest growing engineering, procurement and construction (EPC) company in terms of three-year revenue CAGR as of Fiscal 2024, among the companies with a turnover of over Rs 10,000 million in Fiscal 2024 with over 20 years of experience in the industry. It has achieved one of the highest year-on-year revenue growth of approximately 43.10% in Fiscal 2024 among the peers. It has grown at a CAGR of 50.13% between Fiscals 2021 to 2024. Over the last two decades, the company has transitioned from a small construction company to an established EPC player, demonstrating expertise in the design and construction of various road and highway projects including specialised structures across 10 states in India. 

The company was incorporated in July 2002 and since then, it has gradually increased its execution capabilities in terms of size of the projects. One of its initial road projects that it executed for the Punjab Public Works Department, Ludhiana division, was awarded in 2006 with an aggregate project cost of Rs 62.94 million for 20.42 lane km. In 2014, it was awarded the first four lane highway EPC project from NHAI for 24.08 lane km with a project cost of Rs 378.10 million and the most recent four lane elevated corridor EPC project, which consists of one of the longest four lane elevated corridor portion of 14.26 kms in India, was awarded by NHAI with a project cost of Rs 19,693.90 million and total length of 100.32 lane km. The company is eligible to bid for single NHAI EPC projects up to a value of Rs 57,000.00 million and for single NHAI HAM projects up to a value of Rs 55,000.00 million. It has been empanelled to participate with the Delhi Metro Rail Corporation in its upcoming tenders involving inter alia construction of railways, mega bridges and tunnels in India and abroad and also with a public sector undertaking for highways, bridges and tunnel construction work in north-eastern states of India, and such empanelment is mutually extendable.

Proceed is being used for:

• Purchase of equipment.
• Repayment/ prepayment, in full or in part, of certain borrowings availed by the company and its Subsidiary, Ceigall Infra Projects.
• General corporate purposes.

Industry overview

The Indian infrastructure to play major role with around 3% contribution to GDP as on FY23. India’s economic growth is fueled by a diverse range of sectors, of which infrastructure is a vital sector. In recent years, the government has taken several steps to accelerate infrastructure development, wherein, the key focus areas are transportation, energy, smart cities, water, social infrastructure, and digital infrastructure. There have also been efforts to attract foreign investors in the infrastructure sector through policy reforms. Infrastructure projects are often expensive and have a long gestation period. To address this issue, fundraising and generating returns, the government is continuously striving to create a favorable operating environment for its players. Accordingly, national and state-level agencies like the National Highways Authority of India (NHAI), state-level bodies, and private sector companies (both domestic and international), are actively participating in infrastructure development. With the growing population, the long-term need for robust infrastructure is necessary for economic development. This generates the need for massive investments in the development and modernization of infrastructure facilities which will not only cater to the growing demand but will also ensure competitiveness in the global market.

One of the key drivers for economic growth is the increased infrastructure investment thrust by the government. In the Union Budget 2024-25, the government continued its focus on infrastructure development with budget estimates of capital expenditure toward the infrastructure sector of Rs. 11,111 billion. Furthermore, continuous efforts by the Government of India to make the business environment convenient to operate and streamline the regulatory process will support the growth of investments in the infrastructure segment. The Government of India had unveiled the National Infrastructure Policy (NIP) covering various sectors and regions indicating that it is relying on an ‘infrastructure creation-’ led revival of the country’s economy. The NIP, which covered rural and urban infrastructure, entailed investments to the tune of Rs 111 trillion to be undertaken by the central government, state governments, and the private sector during FY20-25. The government has from time-to-time announced schemes with regards to infrastructure development. The central government continues to focus on increasing capex outlay to spur growth in light of the 2024 general elections. The infrastructure capex for FY2023-24 (Budget Estimate) at Rs. 10 trillion is almost three times of the capital expenditure in FY2019-20. The government also increased outlay on railways and included plans for 50 new airports in the Union Budget 2023-24.

Pros and strengths

One of the fastest growing EPC company with experience in executing specialised structures: The company is one of the fastest growing engineering, procurement and construction (EPC) company in terms of 3 years revenue CAGR as of Fiscal 2024, among the companies with a turnover of over Rs 10,000 million in Fiscal 2024. It has achieved one of the highest year-on-year revenue growth of approximately 43.10% in Fiscal 2024. It has over 20 years of experience and expertise including construction, development and execution of major road and highway projects including expressways, specialized structures such as elevated roads and tunnels in various states of India, including Punjab, Haryana, Uttar Pradesh, Himachal Pradesh, Jammu and Kashmir and Bihar. Its primary focus is on undertaking roads and highways projects and projects which involve specialised structures, and it has helped it in gaining technical expertise in undertaking projects of different sizes and involving varying degree of complexity. Its credentials and pre-qualifications in terms of executing a range of construction projects that involve varying degrees of complexity, including undertaking specialized structures, have allowed it to increase its target market size and Order Book. It has developed a long-standing relationship with NHAI with nine completed projects and 12 ongoing projects, including two projects where appointed date is yet to be declared. The consistent growth in its Order Book has resulted from its continued focus on road projects and specialized structures along with its ability to successfully bid and win new projects. Its experience in execution of road projects including specialized structures, technical capabilities, timely performance, reputation for quality as well as financial strength of its bids have enabled it to successfully bid for and win projects.

Demonstrated project development, execution and operational capabilities: The company has developed experience of executing projects across diverse geographic locations in India with varying degrees of complexities such as construction in high-traffic and high-density areas, construction of specialized structures such as tunnels in hilly terrain. For instance, its ongoing project for construction of twin tube tunnels and viaducts in Jammu and Kashmir involves high degree of complexities such as construction in hilly terrain along with slope protection and rock fall protection due to high rainfall. Its focus is to leverage its strong project management and execution capabilities, including its experience in completing projects involving specialized structures, in order to complete its projects in a timely manner while maintaining high quality construction. The company has an in-house engineering and design team, which has the necessary skills and expertise in the areas of construction activity such as civil construction and help in preparing detailed architectural and/or structural designs. The company is also focused on ensuring that each project is executed in conformity with the work description provided in the contracts and adheres to the quality and standard of construction associated with the company. 

Efficient business model: The company’s growth is largely attributable to its efficient business model which involves careful identification of its projects and cost optimisation, which is a result of executing its projects with optimum planning and strategy. This model has facilitated it in maximising its efficiency and increasing its profit margins. The company follows a strategic approach during the pre-bidding stage, which involves undertaking technical surveys and feasibility studies and analysing the technical and design parameters and the cost involved in undertaking the project. Its strategic approach during the pre-bidding stage enables it to bid at competitive prices and helps it to successfully win projects. Once it wins a bid, its focus is to ensure high quality of construction during the execution stage of the project, as a result of which, it is able to reduce maintenance and repair costs and therefore realize higher margins during the operation and maintenance stage of the project.  It has an integrated inventory management system, which enables it to manage its inventory efficiently and monitor equipment supply and mobilisation of its resources in a cost effective and timely manner. It carries out pre-bid surveys, study of the project sites to gauge the local conditions in order fine tune its estimations, budgets and mobilisation plans as befits each project site. 

Experienced management team: The company has seen robust business growth under the vision, leadership and guidance of its individual Promoter and Managing Director, Ramneek Sehgal, who has more than 20 years of experience in the construction industry. Its individual Promoter has played a key role in the development of its business and it benefit from his industry knowledge and expertise, vision and leadership as well as strong operational knowledge, good relationships with its clients and a successful track record of executing infrastructure projects. In addition to its individual Promoter, its Board of Directors and senior management team includes qualified, experienced and skilled professionals who have experience across various sectors. The stability of its management team and the industry experience brought on by its individual Promoter will enable it to continue to take advantage of future market opportunities and expand into newer markets. Its senior management team is able to leverage its market position with their collective experience and knowledge in the infrastructure construction industry, to execute its business strategies and drive its future growth. Its department heads have an average experience of over two decades in the infrastructure construction industry. 

Risks and concerns

High working capital requirements: The company’s business requires a high amount of working capital. In many cases, significant amounts of working capital are required to finance the purchase of materials and the performance of engineering, construction and other work on projects before payments are received from customers. In certain cases, it is contractually obligated to its customers to fund the working capital requirements of its projects. Its working capital requirements may increase if, under certain contracts, payment terms do not include advance payments or such contracts have payment schedules that shift payments toward the end of a project or otherwise increase its working capital burdens. In addition, its working capital requirements have increased in recent years because it has undertaken a growing number of projects within a similar timeframe and due to the general growth of its business.

Operate in very competitive industry: The company operates in a competitive environment and compete against various domestic and foreign engineering, construction and infrastructure companies. Its competition varies depending on the size, nature and complexity of the project and on the geographical region in which the project is to be executed. It may be unable to compete with larger infrastructure companies for high-value contracts, as many of them may have greater financial resources, economies of scale and operating efficiencies. If it is unable to bid for and win projects, whether large or small, or compete with larger competitors, it may be unable to sustain or increase, its volume of order intake and its results of operations may be materially adversely affected. While many factors affect its ability to win the projects that it bid for, pricing is a key deciding factor in most of the tender awards. While it has, in the past, been awarded a number of contracts in this segment, it cannot assure that it will continue to be awarded such contracts. Further, in the event that its competitors follow a policy of severely under-bidding in the projects that it bid for, its revenues may be adversely affected. 

Business is manpower intensive: The company’s business is manpower intensive and it is dependent on the availability of its permanent employees and the supply of a sufficient pool of contract labourers at its project locations. Unavailability or shortage of such a pool of workmen or any strikes, work stoppages, increased wage demands by workmen or changes in regulations governing contractual labour may have an adverse impact on its cash flows and results of operations. The number of contract labourers employed by it varies from time to time based on the nature and extent of work contracted to it and the availability of contract labour. It may not be able to secure the required number of contractual labourers required for the timely execution of its projects for a variety of reasons including, but not limited to, possibility of disputes with sub-contractors, strikes, less competitive rates to its sub-contractors as compared to its competitors or changes in labour regulations that may limit availability of contractual labour. 

Business concentrated in north, west and central region of India: While the company carry on business in various states of India, its project portfolio has historically been concentrated in the north, west and central States of India. It started its business operations in Punjab and gradually expanded to undertake road and highway projects in other states in India. This concentration of business subjects it to various risks in these states, including but not limited to: (i) regional slowdown in construction activities or reduction in infrastructure projects; (ii) interruptions on account of adverse climatic conditions; (iii) vulnerability to change in laws, policies and regulations of the political and economic environment; (iv) perception by its potential customers that it is a regional construction company which hampers it from competing for large and complex projects at the national level (v) its lack of brand recognition and reputation in such regions; (vi) its lack of familiarity with the social and cultural conditions of these new regions; and (vii) limitation on its ability to implement the strategy to cluster projects in the states where it intends to conduct business. While it strives to geographically diversify its project portfolio and reduce its concentration risk, it cannot assure that adverse developments associated with the region will not impact on its business. If it is unable to mitigate the concentration risk, it may not be able to develop its business as planned and its business, financial condition and results of operation could be adversely affected. 

Outlook

Ceigall India is an infrastructure construction company with experience in undertaking specialized structural works such as elevated roads, flyovers, bridges, Railway over bridges (ROB), tunnels, highways, expressways and runways. It has diversified its geographical presence in construction, development and execution of major multi-lane highway projects with specialised structures in various states of India, including Punjab, Haryana, Rajasthan, Uttar Pradesh, Himachal Pradesh, Jammu and Kashmir, Jharkhand, Delhi, Maharashtra and Bihar. Its projects were spread across six states in Fiscal 2022, whereas now it has expanded to ten states by Fiscal 2024. It is led by its individual Promoter and Managing Director, Ramneek Sehgal, who has more than 20 years of experience in the construction industry. It has an efficient management team and an operation team with the total staff strength exceeding 2256 numbers. On the concern side, the construction and operations of its projects may face oppositions from the local communities where these projects are located and from special interest groups. In particular, the public, the forest authorities, mining department and other authorities may oppose its operations due to the perceived negative impact it may have on the environment, which may cause suspension or delay to its construction or operations until the disputes are resolved. 

The company is coming out with a maiden IPO of 3,21,87,319 equity shares of Rs 5 each. The issue has been offered in a price band of Rs 380-401 per equity share. The aggregate size of the offer is around Rs 1223.11 crore to Rs 1290.71 crore based on lower and upper price band respectively. On performance front, the company’s total income increased by Rs 9,791.47 million or by 46.92% from Rs 20,870.41 million in the Fiscal 2023 to Rs 30,661.88 million in the Fiscal 2024. It recorded a significant increase in its profit for the year by Rs 1,672.72 million in the Fiscal 2023 to Rs 3,043.07 million in the Fiscal 2024. Meanwhile, the company intends to draw on its experience in the road and highway sector, effectively use its assets, market position and its ability to execute and manage multiple projects across geographies to grow its portfolio in other sectors. Further, it would also explore more opportunities in undertaking independent O&M projects in order to realize higher margins during the operation and maintenance stage of the project. The scale and complexity of its projects have increased in recent years and it intends to continue to focus on projects with higher contract values as well as projects involving construction of specialized structures.