SRM Contractors IPO Review: SRM Contractors is coming up with its IPO issue of Rs. 130.20 Cr which will open on 26th March 2024. The issue will close on 28th March and be listed on the exchange on 3rd April 2024. This article will analyze the GMP, Financials, strengths and weaknesses of the SRM Contractors IPO Review 2024. Keep reading to find out!

SRM Contractors IPO Review – Company Overview

SRM Contractors is an engineering, construction, and development Company engaged in constructing roads, tunnels, slope stabilization, and other miscellaneous civil construction works. It also undertakes sub-contracting assignments from other infrastructure developers.

All of SRM’s projects are located in the Union Territories of Jammu & Kashmir and Ladakh. As the result, the Company can execute projects in the hilly and challenging terrain of the region. It is registered as a Class A contractor with the Public Work Department of Jammu & Kashmir.

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It is pre-qualified to bid independently on projects tendered by the Government contract worth Rs. 300 Cr for EPC Contracts and up to Rs. 500 Cr for construction of tunnels. Since its inception, the Company has independently or through specific Joint ventures executed 37 infrastructure projects of an aggregate value of Rs. 771 Cr.

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These include 31 road projects, 3 tunnel projects, 1 slope stabilization project, and 2 miscellaneous civil activities. The current order book of the Company stands at Rs. 707 Cr as of September 15, 2023, which includes individual as well as subcontracting projects as well.

These comprise an aggregate of 21 projects, which includes 12 road construction projects, 5 tunnel construction 3 road stabilization, and 1 other civil activity.

Industry Overview

India has the second-largest road network in the world, spanning a total of 6.33 million km. FY20-21 market the highest road construction completed with about 13,327 Km length being laid out at the pace of 36.5 Km per day. Currently, in the last 9 months of FY24, 6216 Kms have been completed at the pace of 22.6 Kms.

In the Union Budget for FY25, the Government allocated Rs. 2.8 Lakh Cr for the Ministry of Road Transport & Highways, which was 1% higher than the revised estimates of FY24. The development of the infrastructure sector has been a priority area for the Government and has witnessed enhanced public investment over the years. 

Infrastructure development has remained a recurring theme in India’s economic development. As India aims to grow to a USD 5 trillion economy by 2027, the Construction sector will be critical for boosting economic growth as it is the key growth enabler for several other sectors. 

To push the infrastructure development, the government has also announced higher budgetary allocation, various arrangements for raising funds through a road asset monetization plan and converting NHAI’s existing InvIT into a public one is also planned. The launch of flagship policies like the National Infrastructure Pipeline (NIP), and the PM Gati Shakti plan have provided coordination & collaboration that was lacking earlier.

Both NIP and PM Gati Shakti are ambitious billion-dollar plans that aim to transform India’s infrastructure, elevating it to the next level. These projects are expected to improve freight movement, debottleneck the logistics sector, and improve the industrial production landscape, which would provide incremental growth in GDP. 

SRM Contractors IPO Review – Financials

SRM Contractors reported a revenue of Rs. 300 Cr, which grew by 14% from Rs. 264 Cr in FY22. Since FY21, revenue growth has been rather swift at a rate of 37% CAGR.

Although the revenue has been growing steadily, the cost of raw materials is growing faster than revenue. Since FY21, these costs have inflated by 40% CAGR, as compared to just 37% revenue growth. These expenses cost 72% of revenue in FY23. 

Due to an increase in these costs, the Net Profit of the Company grew by a rather slow rate of just 6.7%, from Rs. 17.6 Cr in FY22 to Rs. 18.74 Cr in FY23. Since FY21, Net Profits have increased by 51% CAGR. 

Due to the minimal expansion of margins from FY21-FY23, as a result of a decrease in total costs, the EBITDA margin of the Company has increased from 11.45% in FY22 to 12.87% in FY23. Net Profit Margins have also slightly increased from 5% in FY21 to 6.2% in FY23.

A drop in PAT growth has resulted in a return on Net Worth falling from 49% in FY22 to 35% in FY23. Long-term and Short-term borrowings of the Company have increased by 50%, causing the return on Capital Employed to drop from 42% in FY22 to 35% in FY23.

SRM Contractors IPO Review 2024 – Financials
Source: RHP of the Company

SRM Contractors IPO Review – Key Players 

In the EPC space, SRM Contractors has three Companies as its listed peers. Amongst them, it is the third-largest Company by revenue. With a return on Nerworth 30%, SRM has the highest RONW as compared to a median of 12.87% of its industry peers.

It is advised to take into consideration the RONW with a pinch of salt as SRM is a much smaller company and has a lower equity base as compared to its listed companies. In a few years, as SRM’s profits are retained back in the business, it will also see a drop in its RONW.

These listed peers of SRM have a median PE of 25.76x. SRM, with a basic EPS of Rs. 90.8 as of FY23 and a price of Rs. 210 on the higher end is valued at a Price-to-Earnings ratio of just 2.31x, making the Company practically a steal for IPO investors.

Source: RHP of the Company

Strengths of the Company 

  1. Proven Track Record: The Company has a proven track record of efficient execution of roads, tunnels, and slope stabilization projects that are undertaken in the challenging territory of Jammu & Kashmir.
  2. Increased efficiency due to clustering of contracts: The Company selects contracts of multiple projects that are in close proximity to each other. Thereby it helps reduce transportation costs and maximize profitability.
  3. Asset-heavy model: The Company believes in owning all construction equipment and not depending on any third-party equipment in its construction activities. These make sure that the Company can keep costs low in the long term & complete projects swiftly.
  4. In-house Integration: Over the years the Company has vertically integrated its business operations & acquired machinery & technology to construct everything in-house. Due to this, all the machinery including boomers, Shotcrete machines, excavators, hot mix plants, and compacters are all owned in-house.
  5. Strong Financial Performance: The Company’s performance can be judged by its consistent growth in revenue, and ability to control costs which maximizes its profitability. It is backed by an order book of the size of 2x its current revenue. This should give an idea about the sustained earnings over the next two years.

Weaknesses of Company

  1. Geographical Concentration Risk: The Company’s business is primarily concentrated in J&K and Ladakh. The region of operation is always prone to regional civil unrest, political instability, and adverse climate amongst many reasons. Any adverse event can significantly hinder the Company’s progress.
  2. Revenue Concentration Risk: SRM is predominantly into undertaking projects awarded by Government authorities or other entities funded by the GOI. This form of concentration might lead to the availability of very few projects in the market or lower margins as compared to privately funded projects.
  3. Competitive bidding process: The infrastructure projects are awarded to the Company upon satisfaction of the prescribed pre-qualified bidding process.Everything from track record of completion to quality of work & cost of the project matters. The competition in which is extremely high.
  4. High Working Capital Requirement: The construction business as usual is very capital intensive requiring Companies to shell out huge Capital expenditure for the purchase of machinery. At the same time, due to the long construction time, there is always a delay in recognizing revenue & Receiving its payment.

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SRM Contractors IPO Review – GMP

The shares of Mukka Proteins Ltd traded at an 11.9% premium in the grey market on 19th March 2024. The shares in Grey Market traded at Rs 235. This gives it a premium of Rs 25 per share over the cap price of Rs 210.

SRM Contractors IPO Review – Key IPO Information

ParticularsDetails
IPO SizeRs.130.20 Cr
Fresh IssueRs.130.20 Cr
Offer for Sale (OFS) -
Opening date26 March 2024
Closing date28 March 2024
Face ValueRs. 10
Price BandRs. 200 - 210
Lot Size70 Shares
Minimum Lot Size1 Lot (70 Shares)
Maximum Lot Size13 Lots (910 Shares)
Min. InvestmentRs. 14,700
Listing Date3 April 2024

Promoters: Sanjay Mehta, Ashley Mehta, and Puneet Pal Singh

Book Running Lead Manager: Interactive Financial Services

Registrar to the Offer: Bigshare Services Pvt Ltd

The Objective of the Issue

  1. Rs. 40 Cr will be utilized for funding the purchase of equipment & machines for the business.
  2. Rs. 10 Cr will be utilized for debt repayments
  3. Rs. 41.5 Cr will be used as working capital for the Company
  4. Rs. 12 Cr will be used for investment in a Joint Venture
  5. The remaining amount will be utilized for General Corporate Purposes

Conclusion

SRM Contractors is a construction company focused on projects in the hilly and challenging terrain of Jammu & Kashmir and Ladakh. With a solid track record of executing 37 infrastructure projects worth Rs. 771 crore and a current order book of Rs. 707 crore, the company has demonstrated its capabilities in the region.

While the company’s revenue growth has been steady, rising raw material costs have impacted its profitability, with net profit growth slowing down to 6.7% in FY23. However, SRM Contractors has maintained a healthy EBITDA margin of 12.87% and a net profit margin of 6.2% in FY23.

Compared to its listed peers, SRM Contractors stands out with the highest return on net worth of 30% and a remarkably low price-to-earnings ratio of 2.31x, making it an attractive investment opportunity for IPO investors seeking exposure to the construction and infrastructure sector.

So, would you be interested in applying for this upcoming IPO? Do you think the PE of SRM is a little too low? Let us know what you think in the comments below.

Written by Nasir Hussain

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