Afcons Infrastructure coming with IPO to raise Rs 5717 crore

Afcons Infrastructure

• Afcons Infrastructure is coming out with a 100% book building; initial public offering (IPO) of 12,34,72,222 shares of Rs 10 each in a price band Rs 440-463 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 25, 2024 and will close on October 29, 2024.
• The shares will be listed on BSE as well as NSE.
• The face value of the share is Rs 10 and is priced 44.00 times of its face value on the lower side and 46.30 times on the higher side.
• Book running lead managers to the issue are ICICI Securities, DAM Capital Advisors, Jefferies India, Nomura Financial Advisory and Securities (India), Nuvama Wealth Management and SBI Capital Markets.
• Compliance Officer for the issue is Gaurang Maheshchandra Parekh.

Profile of the company

Afcons Infrastructure is the flagship infrastructure, engineering and construction company of the Shapoorji Pallonji group (i.e., the group’s leading engineering and construction company), a diversified Indian conglomerate, and have a legacy of over six decades. It has a strong track record of executing numerous complex, challenging and unique engineering, procurement and construction (EPC) projects both within India and internationally. It is one of India’s largest international infrastructure companies, as per the 2023 ENR (Engineering News-Record, US) Top International Contractors rankings, based on International Revenue for the Financial Year 2023. Over the years, it has expanded its presence globally and in particular across Asia, Africa and the Middle East. It has undertaken many complex, challenging, unique and ‘first of its kind’ infrastructure projects in India and the rest of the world.

Through its extensive and diversified experience and systematic knowledge management practices, it has developed a project management system that enables efficient planning, monitoring, control and timely delivery of the infrastructure projects that it undertakes. its continuous pursuit of excellence in knowledge management is reflected in the recognition accorded to it through the MIKE (Most Innovative Knowledge Enterprise) award at Global and India levels. This award is given by the International Global MIKE Study Group, comprising world experts in effective knowledge management and innovative practices. The company has won the MIKE award from 2018 to 2023 at India and Global levels (there is no Asia-level MIKE award). It also won the Outstanding Global MIKE Award in 2023. It was also accorded the status of Five Star Export House in accordance with the provisions of the Foreign Trade Policy 2023 by the Indian government in 2023.

Further, the company maintains a strategic equipment base comprising a wide range of heavy machinery and specialized equipment. This equipment base, along with the ability to source other high-tech equipment and its in-house capabilities in managing specialized equipment, has been instrumental in winning several complex projects, such as the Atal tunnel, the High Speed Railway Project, the Delhi - Meerut regional rapid transit system, Delhi Metro Phase IV projects, and the second liquid cargo berth at Dahej, Gujarat for Gujarat Chemical Port Limited. It also benefits from the strong parentage of the Shapoorji Pallonji Group. The Shapoorji Pallonji Group has a legacy of over 150 years, and its strong reputation, global presence and extensive industry experience assists it in the growth of its business and operations. Additionally, it gains access to the Shapoorji Pallonji Group’s network enabling strategic collaborations, business development opportunities and knowledge sharing. 

Proceed is being used for:

• Capital expenditure towards purchase of construction equipments 
• Funding long term working capital requirements 
• Prepayment or scheduled repayment of a portion of certain outstanding borrowings and acceptances availed by the company
• General corporate purposes

Industry overview

The Indian Construction industry value stood at Rs 23,978.0 billion as of FY2023, having grown at a CAGR of 12.1% from Rs 13,521.2 billion as of FY2018. Growth in India’s construction industry will be supported by high levels of urbanization, an expanding middle class, rising infrastructure investments, surging power demand and strong industrial growth. As of FY2023, Infrastructure industry forms 37.4% of the total construction industry, residential building industry forms 15.2% of the total construction industry and non-residential building industry forms 47.4% of the total construction industry in India. Further, the Government of India has been placing strong emphasis on India’s Infrastructure sector as it is crucial to India’s overall growth. The Indian Infrastructure Industry has grown at a CAGR of 12.2% from Rs 5,041.1 billion in FY2018 to Rs 8,973.0 billion in FY2023. Sustained investment in infrastructure will help India gradually bridge its sizeable infrastructure deficit, which ranges from rural road and power access to strained urban transport systems. Ongoing regulatory reforms made as part of the Government’s Make in India initiative are also opening up infrastructure sectors to greater foreign and private involvement, which will unlock greater pools of financing and improve operational efficiencies in the industry.

Infrastructure spending has a multiplier effect on the economy. Hence, over the last decade, the government has been increasing the outlay for infrastructure. The Central Government sharply raised capex in the last three budgets. Capital outlay increased from Rs 4.1 trillion in FY2021 to Rs 11.1 trillion in FY2025. A capex thrust in the last three budgets of the Government of India was not an isolated initiative meant only to address the infrastructure gaps in the country. The government's thrust on Capital expenditure, particularly in the infrastructure-intensive sectors like roads and highways, railways, and housing and urban affairs, has longer-term implications for growth. While on the one hand, capital expenditure strengthens aggregate demand and crowds in private spending in times of risk aversion; it also enhances the longer-term supply-side productive capacity. With early signs of a rebound in private sector investments in recent months, capital expenditure has played its role. To push for enhancing Capex from all directions, the Centre announced several incentives to boost states’ capital expenditure in the form of long-term interest-free loans and capex-linked additional borrowing provisions.

With the National Infrastructure Pipeline (NIP) in FY2019 and the National Monetization Pipeline (NMP) in FY2021, a strong baseline for infrastructure creation and development has been put in place, providing a multitude of opportunities for foreign investment and engagement. The NIP was launched with 6,835 infrastructure projects with a projected infrastructure investment of Rs 111 trillion for FY2020-25 for developing a comprehensive view of infrastructure development in the country, monitoring its progress at the highest levels in the government for timely completion, and enabling a pipeline view for investors for them to plan infrastructure investments. NIP has expanded to over 9,830 projects across 59 sub-sectors with project value of Rs 171.4 trillion as on August 22, 2024. NIP covers economic and social infrastructure projects jointly funded by the Central Government, State Governments, and the private sector. With its strong forward and backward linkages, physical infrastructure will enhance the economy’s productivity in the medium term.

Pros and strengths

Strong track record of timely execution: The company is one of the leading infrastructure construction companies involved in the execution of large and complex projects both in India and overseas. It focuses on large, complex, and high-value projects and have a strong track record in efficient project management, execution and on-time delivery of projects across verticals and geographies, with a substantial majority of its projects being executed ahead of or on schedule. It has undertaken many complex, challenging, unique and ‘first of its kind’ infrastructure projects in India and the rest of the world. Its track record showcases its ability to capitalize on its design and extreme engineering capabilities, management expertise, and robust internal systems. Its skilled workforce, complemented by an execution-driven culture, contributes to its success. Further, its ability to leverage its experience in executing projects in diverse geographies provides it with a significant advantage in project execution and timely delivery in India and overseas.

Collaboration among Internal teams: Collaboration among its internal teams, including those relating to operations, design, human resources, and construction plant and equipment (CPE), is instrumental in facilitating strong execution capabilities. Further, to drive innovation and ensure efficient construction methodologies, it has established the Core Methods and Engineering Group (CMEG). Led by two senior management executives and comprising other senior-level personnel, the CMEG plays a pivotal role in assisting business units (BUs) with the planning and development of innovative, construction-friendly, and cost-efficient construction methodologies. This collaboration extends to both ongoing projects and those under bidding. 

Knowledge management and innovation practices: The company places significant importance on procuring and harnessing knowledge from its prior projects in its ongoing and future projects. It has implemented an operational excellence model, which encompasses the pillars of people, process, technology, and relationships, on all its projects. It has established a dedicated department called the Knowledge Services Group which is responsible for driving knowledge management processes across the organization. It follows a “Learn Before”, “Learn During” and “Learn After” framework which acts a pivot around which its knowledge processes are embedded into the project lifecycle. This model ensures that it constantly strives for improvement and fosters a culture of continuous learning. In 2023, it launched the Afcons Talent Management Academy which aims to enhance the knowledge and capabilities of its engineers.

Strong risk management: The company recognizes the inherent risks prevalent in the infrastructure sector in India and globally and operate a systematic risk management system that assists in identifying, measuring and monitoring the various risks that may arise in its operations. Furthermore, it has a risk-informed decision-making culture throughout its operations. To facilitate this approach, it has established a team of experienced senior management personnel within the company that is responsible for analysing and evaluating all proposed new bids and investments. Their assessment includes a review of various aspects, including credit risk, market risk, and operational risk associated with such bids or capital expenditures. This evaluation ensures that its decision-making processes are well-informed and consider the potential risks involved.

Risks and concerns

Significantly dependent on projects awarded by government: The company’s business significantly depends on projects awarded by government and government-owned customers both in India and in other countries, including central or state governments, governmental organizations and public sector undertakings. The company has received 65.98%, 62.19% and 62.98% of orders from Government in FY24, FY23 and FY22 respectively. It cannot assure that government policies (especially those of the Government of India) will continue to place emphasis on infrastructure. In the event of any adverse change in budgetary allocations for infrastructure development or a downturn in available work in the infrastructure sector resulting from any change in government policies or priorities, including on account of changes in government pursuant to elections, its business, prospects, financial condition and results of operations may be adversely affected.

Significant portion of order book is attributable to certain large customers: A significant portion of its order book has been attributable to, and will continue to be attributable to, certain large customers. The order book value attributable to its ten largest customers was 65.52%, 63.77% and 68.28% in FY24, FY23 and FY22. There are a number of factors outside of its control that may result in a customer’s decision to discontinue awarding projects to it or prematurely terminate existing projects, including changes in strategic priorities, a demand for price reductions, market dynamics and financial pressures. If its customers do not award additional projects to it or if it fails to expand the size of its business with them, or expand to additional customers, its business, profits and results of operations could be adversely affected.

Depend significantly on contract labour: The company is dependent significantly on access to a large pool of contract labour for its construction work and the execution of its projects. The number of contract labourers employed by it varies from time to time based on the nature and extent of work it is involved in. As of June 30, 2024 and 2023, and March 31, 2024, 2023 and 2022, it had engaged 26,920, 26,214, 27,177, 23,834, and 24,631 contract labourers, respectively. It cannot assure that it will have adequate access to skilled workmen at reasonable rates and in the areas in which it executes its projects. As a result, it may be required to incur additional costs to ensure timely execution of its projects or may not be able to complete its projects on schedule or at all. While there have not been any such instances during the three months ended June 30, 2024 and the Financial Years 2024, 2023 and 2022, any future instances where were face such challenges may adversely affect its business and profitability. 

Business is subject to fluctuations due to seasonal, climatic and other factors: Its business and operations may be subject to fluctuations due to seasonal, climatic and other factors which may restrict its ability to carry on activities related to its projects and fully utilize its resources. Heavy, sustained or unseasonal rainfall or other extreme weather conditions such as cyclones could result in delays or disruptions to its operations during critical periods and cause severe damages to its premises and equipment. This may result in delays in execution of projects and reduce its productivity. During periods of curtailed activity due to adverse weather conditions, it may continue to incur operating expenses. Adverse seasonal developments may also require the evacuation of personnel, suspension or curtailment of operations, resulting in damage to construction sites or delays in the delivery of materials. Any such fluctuations may adversely affect its business, financial condition, results of operations and cash flows.

Outlook

Afcons Infrastructure is an infrastructure engineering and construction company of the Shapoorji Pallonji group, with a legacy of over six decades. As of September 30 2023, the company has completed 76 projects across 15 countries with a total historic executed contract value of Rs 522.20 billion. The company has diversified order book across geographies, clients, and business verticals, longstanding relationships with clients globally, and strong financial performance. On the concern side, the company’s business significantly depends on projects awarded by government or government-owned customers, which subjects it to a variety of risks. Such projects contributed to 69.80% of its order book as of June 30, 2024. Moreover, a significant portion of its order book is attributable to certain large customers and to projects located in India, and its business and profitability is dependent on its ability to win projects from such customers.

The company is coming out with a maiden IPO of 12,34,72,222 equity shares of Rs 10 each. The issue has been offered in a price band of Rs 440-463 per equity share. The aggregate size of the offer is around Rs 5432.78 crore to Rs 5716.76 crore based on lower and upper price band respectively. On performance front, total income decreased by 0.25% to Rs 32,134.70 million for the three-month period ended June 30, 2024 from Rs 32,215.01 million for the three-month period ended June 30, 2023, primarily due to a decrease in revenue from operations, which was partially offset by an increase in other income. Moreover, the company’s restated profit increased by 0.69% to Rs 915.86 million for the three-month period ended June 30, 2024 from Rs 909.62 million for the three-month period ended June 30, 2023.

The company aims to grow its business in a sustainable and profitable manner by maintaining an order book that matches its execution capacity, rationalizing costs, improving execution efficiencies, and consistently developing its capabilities and capacity for project delivery. It is focused on pursuing large value and complex projects that fit its project selection process and risk management framework. It typically does not pursue projects in which it anticipates a significant number of competing bids; since bidders tend to compete primarily based on their pricing for such projects. Further, it targets technically complex projects in specialized areas since these projects offer better profit margins compared to less complex endeavors as there are fewer competitors.