Capacit'e Infraprojects

[chets]

Capacit’e Infraprojects is a Mumbai-based construction company and is coming up with Rs 400-crore initial public offering on September 13, with a price band of Rs 245 to Rs 250 per share.

Objects of the Issue:

The objects of the Issue are:

1. Funding working capital requirements;
2. Funding purchase of capital assets (system formwork); and
3. General corporate purposes

Company Information:

Company Strengths:

1. Exclusive focus on construction of buildings in major cities

2. Large Order Book with marquee client base and repeat orders: As of January 31, 2017, we have an Order Book aggregating to ₹ 40,490.74 million, with projects spread across major regions in India, including the MMR, NCR, Pune, Hyderabad, Bengaluru, Chennai and Kochi. Our Order Book, as at January 31, 2017, is 4.75 times the consolidated revenue from operations for the financial year ended March 31, 2016 and consisted of orders for construction of 11 Super High Rise Buildings, 19 High Rise Buildings, six Other Buildings, 14 Gated Communities and one Villament.

3. Experienced Promoters, Directors and management team:

4. Ownership of modern system formworks and other Core Assets: We have the capabilities to undertake building construction projects using modern technologies including temperature-controlled concrete for mass pours, self-compacting free flow concrete for heavily reinforced pours and special concrete for vertical pumping in Super High Rise Buildings and High Rise Buildings. We use different types of system formwork owned by us including, automatic climbing system formwork, aluminium formwork, table formwork, composite panel formwork (consisting of vertical panel and horizontal panel formwork systems) to meet the varying construction needs of different types of buildings. Each kind of building requires a high degree of skill, scale and speed to complete. We believe that implementing a variety of technology options available to us in construction of buildings allows us to reduce construction times.
   As at December 31, 2016, we had a consolidated net block of fixed assets (excluding capital work in progress) amounting to ₹ 2,506.69 million, including ₹ 2,136.83 million of Core Assets constituting 85.24% of our net block of fixed assets.

5. Access to skilled workforce: As of January 31, 2017, we had 1,688 employees and 10,678 contract laborers across all our projects.

6. Debt to Equity is at 0.51.

7. Promoters hold more than 50% stake.

8. We have received an ISO 9001:2008 certification for our quality management system. Further, we have also received an ISO 14001:2004 certification for our environmental management system and an OHSAS 18001:2007 certification in respect of our occupational health and safety management systems.

Financial Performance:

EBIDTA:

Cash flow:

Management Salaries:

1. Mr. Rahul R. Katyal: 8.53 Million PA
2. Mr. Subir Malhotra: 8.53 Million PA
3. Mr. Rohit R. Katyal: 8.83 Million PA

Company Strategy:

1. Continue to remain focused on building construction
2. Expand in the mass housing segment
3. Expand our presence in cities with high growth potential
4. Undertake projects on a design – build basis
5. Increase our focus on and execute greater number of projects on a lock-and-key basis
6. Bid for, and undertake, projects in the public sector
7. Capitalise on changes in the construction industry that will arise on account of the implementation of the RERD Act

Risks:

1. Manpower:Our business is manpower intensive and we are dependent on the supply and availability of a sufficient pool of contract labourers from sub-contractors at our project locations. Unavailability or shortage of such a pool of contract labour or any strikes, work stoppages, increased wage demands by workmen or changes in regulations governing contractual labour may have an adverse impact on our cash flows and results of operations.
2. Delay in delivery: We may be subject to liability claims or claims for damages or termination of contracts with our clients for failure to meet project milestones or defective work, which may adversely impact our profitability, cash flows, results of operations and reputation.
3. Dependence on sub contractors: We face certain risks relating to our reliance on sub-contractors and third parties for supply of raw materials, non-Core Assets and for providing certain services in the construction of our projects that may adversely affect our reputation, business and financial condition. Failure by our sub- contractors and third parties to adhere to regulatory requirements may subject us to penalties.
4. Price fluctuation of raw materials: We are dependent on the availability of and prices of steel and ready-mix concrete. Any lack of availability of or upward fluctuations in the price of steel and ready-mix concrete or our ability to pass on any increased costs of raw materials to our clients may have a material adverse effect on our business, cash flows, results of operations and financial conditi
5. Client concentration: Projects awarded from certain clients contribute a significant portion of our Order Book. As at January 31, 2017, projects awarded by our top five clients, based on our Order Book represented 36.80% of our Order Book. Further, as at January 31, 2017, our top 10 clients contributed 58.29% of our Order Book.
6. Geographical concentration: Our operations and revenues are geographically concentrated in the MMR. Our Company’s projects in MMR accounted for 73.50% of the Order Book as at January 31, 2017. We also have projects in NCR and Bengaluru, which accounted for 9.58% and 5.89% of the Order Book as at January 31, 2017, respectively. Consequently, we are exposed to risks emanating from economic, regulatory and other changes in these locations which we may not be able to successfully manage and which in turn may have an adverse effect on our revenues, cash flows, profits and financial condition.
7. Government regulations: Our clients operate in a highly regulated environment, and existing and new laws, regulations and government policies affecting the sector in which they operate could adversely affect our business, financial condition and results of operations. Any failure to obtain licenses and approvals by our clients, could adversely affect our business, financial condition and results of operations.
8. There is outstanding litigation involving our Company, our Directors and our Promoters, which if determined adversely, could affect our business and results of operations. Amount involved in roughly 300 million spread across 2 cases.
9. We have substantial working capital requirements and may require additional financing to meet working capital requirements in the future. A failure in obtaining such additional financing at all or on terms favourable to us could have an adverse effect on our results of operations and financial condition.
10. Our business is capital intensive and we may require additional financing to meet capital expenditure requirements in the future, which may be unavailable, which could have an adverse effect on our results of operations and financial condition.
11. If the Indian real estate market weakens leading to a slowdown in construction activities, our business, financial condition and results of operations may be adversely affected.

Source of the Information: SEBI | Capacit'e Infraprojects Limited

The IPO is reasonably priced at 24 PE and the company looks like a good long term bet.

Disc: Planning to invest in IPO.

[Gaurav_Agarwal]

@chets

IPO is reasonably priced at 24 PE

Why do you think that Price to Earnings ratio of 24 is reasonable? I think PE ratio of 24 is very high for company as new as this is.

[praveenballa]

Is Mr. Rohit Katyal the same person leading Prathibha Industries?

http://www.capacite.in/ourteam/rohit-katyal/

Fully booked

[chets]

Rohit Katyal was on Pratibha board of directors till 2012.

[Tolaha]

Pratibha Industries numbers seem to be going down after 2012, the exact time when Rohit Katyal is supposed to have left that company. Can we automatically relate it to one another though?

[Gaurav_Agarwal]

The photograph from the website of Capacite matches with the one in the article. Whats with Prathibha Industries?

[praveenks74]

FY17 EPS is Rs 17.2 .So at 250, PE is around 14 . Average Industry P/E is around 20.

[chets]

@praveenks74
The PE post dilution will be 24.5 as per http://economictimes.indiatimes.com/markets/ipos/fpos/capacite-infraprojects-ipo-subscribed-26-on-day-2-heres-what-5-brokerages-say/articleshow/60493292.cms

@Gaurav_Agarwal the same link talks about why the PE is justified.

[Maunil1]

This is an excerpt from the 2007-08 AR. Seems Katyal brothers are relatives of Mrs. Usha Kulkuarni, promoter of Pratibha and both were appointed as COO & CFO respectively. However, they left in 2012 to start Capacite & also i believe they bought Pratibha Pipes ( as it is shown as Subsidiary of Capacite group)

_ ‘’_
_ To consider and, if thought fit, to pass with or without modification(s), the following resolution as a Special_
Resolution
RESOLVED THAT pursuant to the provisions of Sections 314 (1), 314 (1B) and other applicable provisions,
if any, of the Companies Act, 1956, and subject to the approval of the Central Government, consent of the
Company be and is hereby accorded to Mr. Rohit Katyal, a relative of Mrs. Usha B. Kulkarni, Chairperson
of the Company, to hold an office or place of profit as the Chief Operating Officer of the Company for a
period of five years commencing from 01st April, 2008 or from such date as the Central Government may
approve, on the following terms and conditions:
1. Salary : Not exceeding Rs. 4,00,000 per month, with a provision for increase in salary of not more
than 30% per annum over the previous year
2. Annual Bonus : Not exceeding Rs.5,00,000/-
3. Perquisites and Allowances as per the policy of the company, including:
(i) Leave Travel Allowance;
(ii) Medical and Accident Insurance premium as per Company rules;
(iii) Provision for chauffer driven car;
(iv) Leaves in accordance with the leave rules of the Company from time to time;
(v) Other benefits as per the policy of the Company applicable from time to time.
7. To consider and, if thought fit, to pass with or without modification(s), the following resolution as a Special
Resolution
RESOLVED THAT pursuant to the provisions of Sections 314 (1), 314 (1B) and other applicable provisions,
if any, of the Companies Act, 1956, and subject to the approval of the Central Government, consent of the
Company be and is hereby accorded to Mr. Rahul Katyal, a relative of Mrs. Usha B. Kulkarni, Chairperson
of the Company, to hold an office or place of profit as the Chief Marketing Officer of the Company for a
period of five years commencing from 01st April, 2008 or from such date as the Central Government may
approve, on the following terms and conditions:""

[reachvk]

The company does seem like a high growth business with large order book and strong balance sheet. The Co has over 56 projects with half of the projects in Mumbai. However, the IPO is expensively priced, given the company’s limited history. The PE of 24x is quite high. I would avoid subscribing to the IPO.

[Yogesh_s]

Here are my notes on the company. Some of the points are already covered.

Story

Business

Capacit’e Infra is a construction company focused on Residential, Commercial and Institutional buildings. It provides end-to-end construction services for residential buildings, multi level car parks, corporate office buildings, buildings for commercial purposes and buildings for educational, hospitality and healthcare purposes. Company’s capabilities include constructing concrete building structures as well as composite steel structures. Company also provides mechanical, electrical and plumbing (“MEP”) and finishing works. Company predominantly operate in the Mumbai metropolitan region which accounts for 63% of its revenues. Rest of the revenue comes from Chennai, NCR and Bengluru. Company works for some of the reputed real estate developers like Kalpataru, Oberoi Constructions Limited, The Wadhwa Group, Saifee Burhani Upliftment Trust, Lodha Group, Rustomjee, Godrej Properties Limited, Brigade Enterprises Limited and Prestige Estates Projects Limited.

Clients

History
Company was founded by Rahul Katyal along with Subir Malhotra in 2012. Rohit Katyal joined in 2014. Katyal Brothers previously worked for Pratibha Industries. PE funds Paragon Partners promoted by Siddharth Parekh (son of HDFC chairman Deepak Parekh) and Hong Kong based NewQuest Asia invested in the company in 2015. Along with Paragon Partners, Infina Finance jointly owned by Kotak Mahindra Bank and Kotak Family has invested in the company. PE funds invested through compulsorily convertible preference shares, which were converted to common shares on June 30 2017. PE funds have invested at an average price of Rs 132 / share. Promoters currently own 57% while PE funds own 43% of the company. Post IPO, promoter holdings will drop to 47%.

Key Strengths

• **1. Exclusive focus on construction of buildings in major cities -** Company has growth rapidly since its incorporation in 2012 by focusing only on construction of residential, commercial and institutional buildings without engaging in any other activities such as land development or infrastructure development. Such a focus has enabled the company to acquire specialized construction technology, which allows it gain competitive advantage over smaller construction companies in a highly competitive and fragmented industry.
• **2. Large Order Book with marquee client base and repeat orders –** Current order book is about 4,600 Cr, which is 4 times FY 17 revenue across 50 different projects. Company has secured repeat orders from some of the clients, namely the Lodha Group, The Wadhwa Group, Godrej Properties Limited, Transcon Developers Private Limited, Ahuja Constructions and Puravankara Projects Limited, since the date of first contract with each of them. Ongoing execution of certain redevelopment projects, such as the Saifee Burhani Upliftment Project – Sub cluster 03 and Rustomjee Seasons, will allow company to qualify for and to bid for mass housing projects in the future.
• **3. Ownership of modern system formworks and other Core Assets -** Company has the capabilities to undertake building construction projects using modern technologies including temperature-controlled concrete for mass pours, self-compacting free flow concrete for heavily reinforced pours and special concrete for vertical pumping in Super High Rise Buildings and High Rise Buildings. Investment in Core Assets has helped the company expand execution capabilities, along with a corresponding growth of Order Book.

Strategies for future growth

• **1. Continue to remain focused on building construction. –** Company’s plan to stay focused on construction of buildings will allow it to increase productivity and maximize asset utilization.
• **2. Expand in mass housing project –** Mss housing is a growth area. Company’s experience with Saifee Burhani Upliftment Project – Sub cluster 03 and Rustomjee Seasons, as well as the projects in Gated Communities such as Kalpataru Immensa and Godrej Central will provide appropriate qualification credentials for undertaking redevelopment and mass housing projects.
• **3. Expand in cities with high growth potential –** Company has ongoing projects in MMR, NCR, Bengaluru, Chennai, Hyderabad and Pune. Company intend to increase presence in these locations by bidding for and securing new projects, including securing repeat orders from existing clients.
• **4. Undertake projects on a design-build basis –** Company plans to take projects on a design-build basis, wherein scope of work includes designing elements of the project in addition to construction and finishing services. This will increase revenue potential by increasing the scope of services and will relatively limited competition.
• **5. Undertake projects on a lock and key basis –** Company plans to bid for MEP (mechanical, electrical and plumbing) work, finishing and interiors in addition to construction activities. This will be cost effective for the company as indirect costs will be spread over a larger revenue base.
• **6. Bid for projects in public sector. –** As the size of the company grow, it will be eligible to bid for bigger projects in public sector boosting its revenue but it may create a cashflow problems.

##Financial Ratio Analysis

Profitability Analysis
Company’s gross margin has steadily improved over the last 4 years indicating increasing value addition. Ebitda margins have increased along with gross margins. Net margins have not improved along with EDITDA margins because of increasing interest costs. However, interest costs should peak out as debt to equity ratio is dropping. Other income, which includes interest income, is also dropping as company is putting surplus cash raised from funding to use.

Dupont Analysis
Company has generated a high ROE over the last 4 years despite raising additional capital in last 2 years and dropping leverage. This is because of rising return on assets which in-turn is driven by rising asset turnover and net margins. Company can be expected to generate about 25% ROE over next few years.

Asset Utilization
Construction business is working capital intensive. This can be seen by higher inventory days and receivable days. Company has been able to partially fund this with credit from vendors and advances from customers and remaining working capital is funded with short term borrowing from banks. After funding working capital, company has money left to buy fixed assets (which are mainly formwork) that allow company to raise productivity, gain competitive advantage and increase its order book. Fixed asset turnover is increasing indicating that company is able to generate sales faster than growth in fixed assets. Working capital turnover is steady at 4.

Risk Analysis
Debt to equity ratio has been dropping over last 4 years mainly because of additional equity capital raising. Post IPO, this ratio will drop further. Company however, will need to regularly borrow money to fund working capital. Interest Cover is trending down inspite of lower debt to equity ratio. At 3.5, it also at a low value. Value higher than 5 is safe. This indicates that company’s cost of borrowing is rising and that may be the reason company is raising additional equity from PE funds and IPO route.

Cashflow Analysis

Company has generated negative cashflow from operations in FY 16 mainly due to build up of receivables and inventory.
I normally reclassify interest expense as operating activity instead of financing activity. Cashflow looks even worse when interest expense is subtracted from CFO especially when compared to net profits.

However, earnings quality of construction businesses cannot be judged by comparing CFO with net profits. This is because construction businesses are working capital heavy and working capital investment is treated as operating cashflow (as per GAAP) instead of investing cashflow. As long as a construction company is able to fund working capital and still able to generate positive CFO, it will not get into a debt trap. To that extent Capacit’e has done well given its high growth rate. However, it has been able to raise easy money from PE funds and now IPO so it hasn’t faced a credit crunch since its existence. Equity funding has been used for buying fixed assets. Company will be tested when credit dries out.

Corporate Governance
I consider following factors as corporate governance indicators:

• 1. Executive compensation – MD and other executive directors are drawing a salary of close to 1 Cr per year, which is fair given the size of the company.
• 2. Debt Repayments – Company is a net borrower in every year except 2017 as it is a growing company. In 2017 company used equity funding to retire some debt.
• 3. Dividend Payments – Company has paid dividends only in 2016 since incorporation.
• 4. Related Party Transactions – No significant RTP red flags.
• 5. Tax Payments – Tax rate of the company is 33% over last 3 years so it is paying taxes. However, actual taxes paid is lower than tax expenses and deferred tax liability is growing.

##IPO & Valuation

Company is raising 400 Cr of fresh capital by issuing 1.6 Cr shares at 250 rs/share at top end of range. This will take outstanding shares to 6.8 Cr post issue and IPO accounts for 24% of post issue capital. IPO proceeds are used for buying formwork (50 Cr), working capital (250 Cr) and general corporate purposes (100 Cr). IPO is valuing the company at Rs 1700 Cr on a post issue basis. Company generated PAT of 69 Cr in FY 2017. Shares are issued at a PE ratio 24, which is high given the fundamentals of the company.
IPO prospectus states that company generated EPS of 17 for FY17 but that was before CCPS were converted into common shares and on a pre IPO share count of 4 Cr shares. That gives a wrong impression that shares are offered at PE of 14 (250/17).

##Risk Factors

• 1. Business is manpower intensive. Company is mainly a labor contractor. It has 1700 employees and over 10,000 contract labor.
• 2. Company is subject to liability claims for any defect in construction work. Company has to make good any defects for upto 72 months past the construction completion date.
• 3. Company relies on sub-contractors for raw materials and some non-core assets and relies on timely delivery of quality materials.
• 4. Company depends on third party providers for MEP services.
• 5. Top 5 clients account for 39% of order book and top 10 clients account for 60% of order book.
• 6. Mumbai region account for 62% of total order book.
• 7. Business is working capital intensive. Company in the past has raised additional capital by issuing equity to fund working capital needs. However, in this business, working capital is the major capital needed as fixed capital is small part of total assets.
• 8. Industry is highly competitive and fragmented. Lowest bidder generally get the contracts. Outside Mumbai area, company may not have adequate information about the projects and customers and local contractors may have an edge.
• 9. Company has generated negative cashflow from operations and its adjusted cashflow from operations (after subtracting interest expense from reported CFO) has consistently lagged reported profits.
• 10. Low entry barriers in this industry keep competition high and make the industry fragmented.
• 11. Possibility of payment delays heighten working capital intensity
• 12. Promoter is diluting stake to below 50% to fund growth of the company.
• 13. Company has not paid a dividend in the past and given the cashflow situation, company may not pay dividends in future.
• 14. Shares are offered at a high PE of 25 when peers are selling at 18-22 times earnings.
• 15. As per the IPO prospectus, MD Rahul Katyal holds only a higher secondary certificate from the Maharashtra State Board of Secondary and Higher Secondary Education Divisional Board.

  Disc: Applying for IPO.

[vivek423]

This company carries a key market risk. Mumbai real estate market has been struggling and is, in my opinion, the most overvalued micromarket in India. If the slowdown continues, they will have to look at other markets for growth.

[sandeep17]

For such a young company, I was very surprised to see their Client list. I would have thought for some of these premium projects, far more experienced contractors would have been sought. Was it the case that Pratibha Industries worked with most of these companies and they have leveraged that for client acquisition? Any political links?

[NandhakumarB]

Hi,
Number of lots will not change your probability of allocation, as the probability of allocation is same across lot sizes.

Cochin was subscribed ~5x for retail category, so the probability of getting is ~20%.

PFB the actual allocation and the corresponding probability.

Source: Basis of allotment-CSY

[bheeshma]

Some projects in Mumbai where Capacit’e Infra is a contractor.

https://maharerait.mahaonline.gov.in/PrintPreview/PrintPreview/UHJvamVjdElEPTI0OTEmRGl2aXNpb249NiZVc2VySUQ9MTA3MDAmUm9sZUlEPTEmQXBwSUQ9MjQ1MjkmQWN0aW9uPVNFQVJDSA%3D%3D

https://maharerait.mahaonline.gov.in/PrintPreview/PrintPreview/UHJvamVjdElEPTM1MDUmRGl2aXNpb249NiZVc2VySUQ9MjQwOTQmUm9sZUlEPTEmQXBwSUQ9NDcwNTEmQWN0aW9uPVNFQVJDSA==

https://maharerait.mahaonline.gov.in/PrintPreview/PrintPreview/UHJvamVjdElEPTQzMzAmRGl2aXNpb249NiZVc2VySUQ9MzA2MDEmUm9sZUlEPTEmQXBwSUQ9NDc3NDkmQWN0aW9uPVNFQVJDSA%3D%3D

https://maharerait.mahaonline.gov.in/PrintPreview/PrintPreview/UHJvamVjdElEPTU4MzMmRGl2aXNpb249NiZVc2VySUQ9Mzg4NDkmUm9sZUlEPTEmQXBwSUQ9NzMyMjUmQWN0aW9uPVNFQVJDSA%3D%3D

https://maharerait.mahaonline.gov.in/PrintPreview/PrintPreview/UHJvamVjdElEPTI0NTUmRGl2aXNpb249NiZVc2VySUQ9MTA3MDAmUm9sZUlEPTEmQXBwSUQ9MjIxMjkmQWN0aW9uPVNFQVJDSA%3D%3D

https://maharerait.mahaonline.gov.in/PrintPreview/PrintPreview/UHJvamVjdElEPTQ0MzgmRGl2aXNpb249NiZVc2VySUQ9MTEyMzkmUm9sZUlEPTEmQXBwSUQ9Mjk5OTgmQWN0aW9uPVNFQVJDSA==

Mumbai being its preferred operating geography is good news as the margins for real estate developers are much higher than other any other geography in India. In the contracting business, the margins of contractors are greatly influenced by the height of the building. The higher the building the higher the margins. Mumbai has Indias tallest buildings and they are get taller every year as FSI rules are revised.

Best
Bheeshma

[chets]

@vivek423

Regarding geographical concentration in Mumbai: Company has mentioned this as a risk already. They are trying to expand their footprint in other cities as well.

How well the company will do in the future can be imagined based on:

1. How well they have done in the past
2. How healthy is current pipeline and do they get repeat orders
3. What are they doing to offset the risks
4. Sectoral tailwinds.
5. RERA and what it means to firms that can deliver on time.

[mukeshamar]

fwd as received. LIQUIDITY ji jai ho!

[Amit009]

Such comments and language is not in line with this forum guidelines. You have a right to disagree, however you should present your analysis on why you think this company is not a suitable investment,

[Vivek_6954]

cud you give rationale for this impression of Capacite Infra ?

[tejas75]

I am sorry abt this language. I have dealt with this company. Total finance mismanagement and mere on cheaper PE basis one should not start such thread. They’re are having projects of all major realtors and currently realty buissness is in bad shape. There is NO Infra story. Pls do yr Investments with proper research. I am writing this as myself is a largest distributors of building products in Mumbai dealing with all major players