SRM Contractors IPO Review 2024

adminMarch 21, 2024

SRM Contractor IPO Review: SRM Contractors is gearing up for an IPO issue of Rs. 130.20 Cr opens on March 26, 2024. The issue closes on March 28 and will be listed on the exchange on April 3, 2024. In this article, we analyze GMP, financials, strengths and weaknesses of SRM Contractors IPO Review 2024. Read on. to find out!

SRM Contractors IPO Review – Company Overview

SRM Contractor is an engineering, construction and development company engaged in the construction of roads, tunnels, slope stabilization and other civil engineering works. We also perform subcontract work from other infrastructure developers.

All of SRM’s projects are located in the Union Territories of Jammu & Kashmir and Ladakh. As a result, the company can execute projects even in the region’s hilly and challenging terrain. Registered as Class A Contractor with Public Works Department, Jammu & Kashmir.

We are pre-qualified to bid independently on projects awarded under government contracts worth Rs. 300 Cr for EPC contracts, up to Rs. 500 Cr for tunnel construction. Since its inception, the company has executed 37 infrastructure projects, either independently or through certain joint ventures, with a total value of Rs. 771Cr.

These include 31 road projects, three tunnel projects, one slope stabilization project, and two other civic activities. The company’s current order amount is 5,000 won. 707 Cr as of September 15, 2023. This includes personal and subcontracted projects.

It consists of a total of 21 projects, including 12 road construction projects, 5 tunnel construction projects, 3 road stabilization projects, and 1 other civic activity.

Industry Overview

India has the second largest road network in the world, totaling 6.33 million km. The FY20-21 market saw the highest road construction with approximately 13,327 km of road construction completed at a rate of 36.5 km per day. Currently, 6216 km have been completed in the last nine months of FY24 at a rate of 22.6 km.

In the Union Budget for FY25, the government has allocated Rs. 2.8 Lakh Cr for Ministry of Road Transport and Highways is 1% higher than revised estimate for FY24. The development of the infrastructure sector has been a priority area for the government and has witnessed increased public investment over the years.

Infrastructure development remains a recurring theme in India’s economic development. India is targeting $5 trillion economic growth by 2027, and the construction sector will be critical in driving economic growth as it is a key growth driver for many other sectors.

To drive infrastructure development, the government has announced higher budgetary allocations and is also planning various measures to raise funds through road asset monetization scheme and convert NHAI’s existing InvITs into public services. The rollout of key policies such as the National Infrastructure Pipeline (NIP) and the PM Gati Shakti Plan provided coordination and cooperation that was previously lacking.

Both NIP and PM Gati Shakti are ambitious multi-billion dollar plans aimed at transforming India’s infrastructure and taking it to the next level. These projects are expected to lead to gradual growth in GDP by improving cargo movement, relieving bottlenecks in the logistics sector and improving the industrial production environment.

SRM Contractors IPO Review – Finance

SRM Contractor reported a revenue of Rs. 300 Cr, up 14% from Rs. 264 Cr in FY 2022. Since FY21, revenue growth has been quite rapid at a CAGR of 37%.

Sales are steadily increasing, but raw material prices are increasing faster than sales. Since fiscal 2021, these costs have grown at a CAGR of 40%, while revenue growth has been only 37%. These costs account for 72% of FY23 revenue.

Due to these cost increases, the company’s net profit grew at a rather slow pace of 6.7% at Rs. 17.6 Cr in FY22 to Rs. 18.74 Cr in 2023. Net profit has grown at a CAGR of 51% since FY21.

Due to minimal margin expansion in FY21-FY23 and lower total costs, the company’s EBITDA margin increased from 11.45% in FY22 to 12.87% in FY23. Net profit margin also increased slightly from 5% in FY21 to 6.2% in FY23.

Due to lower PAT growth, return on net assets declined from 49% in FY22 to 35% in FY23. The company’s long-term and short-term borrowings increased by 50%, reducing its return on capital employed from 42% in FY22 to 35% in FY23.

SRM Contractors IPO Review 2024 – Finance — **Source: Company RHP**

SRM Contractors IPO Review – Key Players

In the EPC space, SRM Contractors has three publicly traded peer companies. Among them, it is the third largest company by revenue. With Nerworth’s return of 30%, SRM has the highest RONW compared to its industry peers’ average of 12.87%.

Since SRM is a much smaller company and has a lower equity base compared to publicly traded companies, it may be worth considering some RONW. In a few years, RONW will also decline as SRM’s profits are retained back in the business.

The average PE of the listed SRM peers is 25.76x. SRM’s underlying EPS is Rs. 90.8 as of FY23, priced at Rs. A higher level of 210 would give the company a price-to-earnings ratio of just 2.31x, making the company a virtual steal for IPO investors.

Company Strengths

Proven track record: The company has a proven track record of efficiently executing road, tunnel and slope stabilization projects in challenging areas of Jammu and Kashmir.
Increased efficiency due to contract clustering: The company selects contracts for several projects that are close to each other. This helps reduce shipping costs and maximize profitability.
Asset-rich model: The Company believes in owning all construction equipment in its construction activities and not relying on third party equipment. This allows the company to keep costs low over the long term and complete projects quickly.
In-house integration: Over the years, the company vertically integrated its business operations, acquiring machinery and technology, building everything in-house. This results in all machinery including boomers, Shotcrete machines, excavators, hot mix plants and compressors being all owned in-house.
Strong financial performance: A company’s performance can be judged by its continued sales growth and its ability to control costs to maximize profitability. It is backed by an order book that is twice its current revenue. This will give you an idea of your ongoing profits over the next two years.

company’s weaknesses

Geographically concentrated risk: The company’s business is mainly concentrated in J&K and Ladakh. Areas of operation are always vulnerable to local civil unrest, political instability and adverse climate for a variety of reasons. Any adverse event can significantly hinder the company’s progress.
Profit Concentration Risk: SRM primarily carries out projects awarded by government authorities or other entities funded by GOI. This form of concentration can result in very little project availability in the market or lower margins compared to privately funded projects.
Competitive Bidding Process: Infrastructure projects are awarded to companies upon satisfying the prescribed pre-qualified bidding process. Everything from completion performance to quality of work and project cost is important. This is where competition is very high.
High working capital requirements: As usual, the construction business is very capital intensive with companies having to spend huge capital expenditures to purchase machinery. At the same time, revenue recognition and payment receipt are always delayed due to long construction periods.