Deepak Builders & Engineers India coming with IPO to raise Rs 260 crore

Deepak Builders & Engineers India

• Deepak Builders & Engineers India is coming out with a 100% book building; initial public offering (IPO) of 1,28,10,000 shares of Rs 10 each in a price band of Rs 192 - Rs 203 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 October 21, 2024 and will close on October 23, 2024.
• The shares will be listed on BSE as well as NSE.
• The face value of the share is Rs 10 and is priced 19.20 times of its face value on the lower side and 20.30 times on the higher side.
• Book running lead manager to the issue is Fedex Securities.
• Compliance Officer for the issue is Anil Kumar.

Profile of the company

Deepak Builders & Engineers India an integrated engineering and construction company, specializing in execution and construction of administrative & institutional buildings, hospitals and medical colleges, industrial building, historical memorial complex, stadium and sports complex, residential complex and various developmental and other construction activity (Construction Projects). While its primary focus and strength are deeply rooted in Construction Projects, it has diversified in undertaking specialized structural work such as flyovers, rail under bridge, rail over bridges, approach roads and development and redevelopment of railway stations (Infrastructure Projects). It undertakes Construction & Infrastructure Projects both, as EPC services on a fixedsum turnkey basis as well as on an item-rate basis/percentage basis. 

As an engineering and construction company, it has a proven track record of executing turnkey projects comprising of architectural & structural work, civil works, HVAC, Mechanical Electrical & Plumbing (MEP) works, firefighting & fire alarm systems, public health services, information technology system, modular operation theatre, medical gas pipeline systems and external development work, including landscaping work. Since incorporation, it has transitioned into an established EPC player, demonstrating its expertise in various construction and infrastructure development projects including specialized structures across 4 states of India, i.e. Punjab, Haryana, Rajasthan, Uttarakhand and 2 Union Territories i.e. Chandigarh and National Capital Territory of Delhi.

Currently, the company has 12 ongoing projects, including 7 EPC projects and 5 item-rate/percentage rate contracts. Of its total ongoing projects, its Construction Projects comprises of 4 hospital and medical college projects, 1 administrative & institutional building; 1 industrial building; and its Infrastructure Projects comprises of 4 projects relating to upgradation/development/redevelopment of Railway Station and related work, and 2 roads & bridges projects relating to rail over bridges. Further, it also undertakes operation and maintenance (O&M) activities in accordance with its contractual obligations under the projects. 

Proceed is being used for:

• Repayment/prepayment, in full or part, of certain borrowings availed by the company
• Funding of working capital requirements of the company
• General corporate purposes

Industry overview

India's construction industry is on a phenomenal growth trajectory, projected to reach a staggering $1.4 trillion by 2025, accounting for 8%-10% of India’s GDP. This represents a significant leap from its current size of approximately $820 billion, showcasing the dynamism and potential of this sector. The Indian government's ambitious Gati Shakti National Master Plan plays a pivotal role in propelling the construction industry forward. This comprehensive roadmap aims to seamlessly integrate infrastructure development across various sectors, creating a national logistics network that will boost efficiency and reduce costs. The Bharatmala Pariyojana initiative complements Gati Shakti by focusing specifically on developing a world-class highway network spanning over 83,000 kilometers. This ambitious project comprises several expressways, ring roads, and economic corridors, aiming to improve connectivity, boost regional development, and facilitate trade. The booming construction industry is a significant job creator, directly employing millions of workers across various disciplines like engineering, construction, architecture, and skilled labor. Additionally, the sector indirectly supports numerous job opportunities in associated industries like manufacturing, transportation, and logistics.

Residential Construction is the largest Segment, representing approximately 60% of the industry, residential construction plays a dominant role. Rapid urbanization driven by a burgeoning middle class and economic growth fuels demand for new housing units, particularly in Tier 1 and Tier 2 cities. Moreover, Commercial Construction segment is fueled by Economic Growth i.e., Increasing business activity and foreign direct investment drive demand for office space in major cities. Growth of e-commerce and changing consumer preferences necessitate modern retail centers and logistics infrastructure. Meanwhile, Government’s push for domestic manufacturing boosts demand for industrial infrastructure, including factories, warehouses, and power plants. Development of Special Economic Zones (SEZs) with dedicated infrastructure attracts foreign investment and manufacturing units. Dedicated industrial corridors like Delhi-Mumbai Industrial Corridor are facilitating industrial development and creating new construction opportunities. Focus on Automation and Technology such as Integration of automation and advanced technologies like robotics in manufacturing facilities requires upgrades and new construction.

With its robust growth trajectory, fueled by government initiatives and private sector participation, the Indian construction industry is poised for an exciting future. Continued focus on technological advancements, sustainability practices, and skilled workforce development will be crucial to unlocking the sector's full potential and contributing to India's overall economic prosperity. The industry is expected to double in size within the next six years. Projections indicate the construction sector's contribution to India's GDP could rise to 15% by 2030, further solidifying its role as a critical economic driver.

Pros and strengths

Decent order book with a government client base: The company has created a marquee client base consisting of government, semi-government and government-controlled entities, with its focus on executing high quality construction projects with the use of technology and processes along with a dedicated and efficient workforce. It has developed an effective business model of careful selection of projects in its area of operations, which is one of the important reasons for the growth and development of its business. Timely execution capacities financial strength as well as the price competitiveness of the company’s bid provides it a competitive edge and enables it to secure contracts from departments of governmental authorities and public sector bodies.

Continuous focus on equipment ownership: Equipment asset management is a critical element of timely delivery of quality infrastructure development and construction projects. This also provides it with a competitive advantage over other infrastructure development and construction companies that outsource their construction related activities to external contractors. It has consistently invested in fleets of modern construction equipment. It strives to acquire equipment of the same class and same brand to facilitate the training of operators and help reduce equipment down time and maintenance cost. With multiple projects in progress at any given time, ready access to such equipment is essential to its ability to execute existing projects on time and bid for additional projects. Easy access to its equipment fleet has enabled it to undertake complex and challenging projects and complete its projects efficiently and profitably.

Strong financial performance: The significant growth of the company’s business in the last three Fiscals has contributed significantly to its financial strength. The company had achieved revenue from operations of Rs 1,051.08 million in three months period ended June 30, 2024, 5,114.02 million in Fiscal 2024, Rs 4,334.55 million in Fiscal 2023 and Rs 3,630.52 million in Fiscal 2022, representing 17.98%, year-on-year growth and 19.39% year-on-year growth in Fiscal 2024 and Fiscal 2023, respectively. The company has been able to maintain its financial growth, due to efficient business model and its bidding strategy. It strives to maintain a robust financial position with emphasis on having a strong balance sheet. Its balance sheet enables it to fund its strategic initiatives, pursue opportunities for growth and better manage unanticipated cash flow variations. Its financial strength also enables it to access bank guarantees at reasonable terms.

Experienced promoters: The experience and leadership of the company’s Promoters and Chairman cum Managing Director, Deepak Kumar Singal is a key factor in its growth and development. Deepak Kumar Singal has extensive experience, significant knowledge and understanding of the business segments in which it operates. Deepak Kumar Singal has been in the construction business for over 30 years and has been instrumental in completion of 60 Construction & Infrastructure Projects. It also provides strategic guidance to the company, while also being involved in its day-to-day functioning of the business. He in the capacity of Chairman cum Managing Director, oversees its overall business and is responsible for supervision, development and expansion of business and has been instrumental in its growth.

Risks and concerns

Maximum revenue comes from projects awarded by government: The company’s business is primarily dependent on projects awarded by government, semi-government and government-controlled entities which comprises of construction and development of, administrative & institutional buildings, hospitals and medical colleges, industrial buildings, historical memorial complex, stadium and sports complex, residential complex, railway stations, flyovers, approach roads, road under bridge, bridges, railway over bridges and other construction activities. It derives majority of its revenues from contracts with a limited number of government and government-controlled entities. As the company relies on undertaking and executing government awarded projects, it may face various issues such as delay in payments due to various reasons including but not limited to issues relating to change in government policies or priorities, change in budgetary allocations for construction and infrastructure development or a downturn in available work in the construction and infrastructure sector, insufficiency of funds for allocated or proposed projects, reassessment of existing awarded and/or other adverse political consideration.

Portfolio of projects is concentrated in certain large-scale projects: The company has 12 ongoing Construction & Infrastructure Projects comprising of construction and development/ redevelopment of 4 hospitals & medical college building, 4 railway station, 2 road projects, 1 administrative & institutional building and 1 industrial building. Its order book, as on June 30, 2024, and Fiscal 2024, Fiscal 2023 and Fiscal 2022, amounts to Rs13,803.89 million, Rs 11,126.88 million, Rs 16,578.79 million and Rs 7,196.32 million, respectively. The order book as on June 30, 2024, its top two projects is of Rs 7,142.58 million which constitute 51.74% of its total order book. Such large concentration of its portfolio increases the potential volatility of its results of operations. If the company does not achieve its expected margins or suffer losses in one or more of these large contracts, its results of operations may be adversely affected.

Project portfolio has historically been concentrated in Punjab: The company started its business operations primarily in Punjab and have gradually expanded to other States such as Haryana, Rajasthan and Uttarakhand and the Union Territory of Chandigarh and the National Capital Territory of Delhi. As on June 30, 2024, its ongoing projects amounts to Rs 13,803.89 million out of which Rs 4,261.91 million representing 30.87% of its ongoing projects is concentrated in the state of Punjab. While the company has and it further strives to diversify across states and reduce its concentration risk, there can be no assurance that the above factors associated with Punjab will not have an adverse impact on its business. If the company is unable to mitigate such concentration risk, it may not be able to develop its business effectively and its business operations, financial condition and results of operation could be adversely affected.

Business is subject to seasonal variations: The company’s construction work is subject to seasonal variations: For example, it typically experiences, slower work progress in monsoon season as compared to rest of the year. Due to these factors, comparisons of revenue and operating results between the same periods within a single year, or between different periods in different fiscals, are not necessarily meaningful and should not be relied on as indicators of its performance. It accounts for this seasonality in work progress and cash flow projections. However, it cannot assure, that in future, it will always be able to accurately forecast its project schedule. If its estimates materially differ from actual work progress, it may experience either delay or halt in project completion, which in turn could adversely affect its business, results of operations, financial condition and prospects.

Outlook

Deepak Builders & Engineers India is a construction company specializing in administrative, institutional, and industrial buildings, hospitals, stadiums, residential complexes, and other construction activities. The company has completed turnkey projects encompassing architectural, structural, civil, MEP, firefighting systems, public health services, IT systems, operation theaters, medical gas pipelines, and landscaping. On the concern side, the company’s portfolio of projects is concentrated in certain large-scale projects. Any delay or impediment to such projects may have adverse impact on its financial position. Moreover, the company’s project portfolio has historically been concentrated in Punjab, India and any changes affecting the policies, laws and regulations or the political and economic environment in the region may adversely impact its business, financial condition and results of operations.

The company is coming out with a maiden IPO of 1,28,10,000 equity shares of Rs 10 each. The issue has been offered in a price band of Rs 192-203 per equity share. The aggregate size of the offer is around Rs 245.59 crore to Rs 260.04 crore based on lower and upper price band respectively. On performance front, the company’s revenue from operations increased by Rs 779.47 million or by 17.98% from Rs 4,334.55 million in the Fiscal 2023 to Rs 5,114.02 million in the Fiscal 2024. This increase was primarily driven by Rs 1,246.60 million increase in revenue from construction contracts which is further offset by decrease of Rs 467.13 million in revenue from sale of goods and materials. The company’s profit for the year by Rs 390.15 million or by 182.36% from Rs 213.95 million in the Fiscal 2023 to Rs 604.10 million in the Fiscal 2024.

The company intends to continue to focus on undertaking government projects in Northern India, where it has reputation associated with quality and a track record of successful execution. Economic growth in Northern India is expected to result in an increased demand for government projects. Thus, it intends to continue to leverage its growth and increased execution capacities to consolidate its position in Northern India market. It also intends to expand its geographical footprint and grow its business by bidding for and undertaking Construction & Infrastructure Projects outside the Northern region of the country. To control diversification risks, it may at first, strengthen its position in the areas where its core competencies lie before it undertakes expansion to other geographies. Through an increasingly diversified portfolio, it hopes to broaden its revenue base and also hedge against risks in specific areas or projects and protect itself from fluctuations resulting from business concentration in limited geographical areas.