SRM Contractors coming with IPO to raise upto Rs 130.20 crore

SRM Contractors 

• SRM Contractors is coming out with a 100% book building; initial public offering (IPO) of 62,00,000 shares of Rs 10 each in a price band Rs 200-210 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 March 26, 2024 and will close on March 28, 2024.
• The shares will be listed on BSE as well as NSE.
• The face value of the share is Rs 10 and is priced 20.00 times of its face value on the lower side and 21.00 times on the higher side.
• Book running lead manager to the issue is Interactive Financial Services.
• Compliance Officer for the issue is Arun Mathur.

Profile of the company

The company is an engineering construction and development company engaged primarily in the construction of roads (including bridges), tunnels, slope stabilisation works and other miscellaneous civil construction activities in the Union Territories of Jammu & Kashmir and Ladakh. It undertakes construction works both as an EPC contractor and on an item rate basis for infrastructure projects. The company also undertakes sub-contracting assignments of infrastructure construction projects. It has a track record of successful execution of road, tunnel and slope stabilization projects in the difficult terrain of union territories of Jammu & Kashmir and Ladakh. It has developed the expertise and know-how to undertake infrastructure construction projects in difficult terrains. The company has emerged as a key player in infrastructure construction industry in the Union Territories of Jammu & Kashmir and Ladakh and has developed technical capabilities to execute projects in hilly/ challenging terrain in the region.

The company is an ISO 9001:2015 certified company and it also registered as class A contractor with Public Work (R&B) Department, Jammu & Kashmir. It is pre-qualified to bid independently on projects, tendered by departments of governmental authorities and other entities funded by the GoI, of contract value up to Rs 30,000 lakh and Rs 50,000 lakh for EPC contracts pertaining to construction of roads (including bridges) and for construction of tunnel respectively As a result of the growth of the company’s road and tunnel construction business as well as the recent government initiatives and support to develop the infrastructure of union territories of Jammu & Kashmir and Ladakh, it hs further forayed into executing other infrastructure projects such as standalone bridges, larger slope stabilisation works and other miscellaneous civil construction activities in order to capitalise on such rising opportunities. Recently, the company has also been awarded with a contract for slope stabilization work in the state of Uttrakhand.

As an EPC contractor, the scope of the company’s services includes detailed engineering of the project, procurement of construction materials, plant and machinery, construction and execution of the project and its operation and maintenance in accordance with the contractual provisions. Its manpower, resources and fleet of machinery and equipment, together with its engineering capabilities, enables it to execute a large number of projects simultaneously. Its resources, quality of work and project execution skills have enabled it to enhance its relationships with existing clients and helps it to further secure projects from new clients. It undertakes contracts independently or whenever required, through its project-specific joint ventures with other infrastructure and construction entities when a project requires it to meet specific eligibility requirements in relation to certain large projects, including requirements relating to particular types of experience. The company also undertakes sub-contracting assignments from third party major infrastructure and construction entities.

Proceed is being used for:

• Funding capital expenditure requirements for the purchase of equipment/machineries.
• Full or part repayment and/or prepayment of certain outstanding secured borrowings availed by the company.
• Funding the working capital requirements of the company.
• Investment in Project Specific Joint Venture Projects.
• General Corporate Purpose.

Industry overview

India has a road network spanning approximately 6.4 million kms, making it the second largest in the world. This network – which comprises of national highways, state highways, district roads, and rural road – carries approximately 65% of country’s freight traffic and nearly 90% of passenger traffic. India also has the second largest highway network in the world, after the United States, spanning approximately 145,000 kms. The national highways however accounts for less than 2.5% of the total road network in India. Despite this, national highways account for 40% of the total traffic volume. Implementation of favourable policy measures / programs, and aggressive push by the Government to increase the road network has accelerated the pace of road construction in the country. The switch to a corridor-based highway development strategy adopted by the Government, beginning 2014 – 15, has improved the pace of construction. The annual addition in road network reached its fastest during FY 2021, when the pandemic induced a lockdown in the country. Between FY 2015 and FY 2023, nearly 54,000 kms of road was added to the national highway network in the country, thereby taking it from approximately 91,000 kms to its present stretch of approximately 145,000 kms.

Average daily construction rate reached its highest level of nearly 36.5 kms/day in FY 2021, as the industry was benefitted by the lockdown measures imposed after the spread of Covid-19 pandemic. Since then, the average daily rate has dipped, to nearly 24 kms in FY 2023. Over the years, the national highway network has undergone remarkable growth, evolving from a modest collection of roads to a vast expanse of well-connected highways. The pattern of growth in the network is characterized by distinct phases, where each phase has contributed to the network's growth and transformation. Among these, the Golden Quadrilateral and the North-South and East-West Corridors stand out as iconic examples that have played a pivotal role in shaping the expansion and connectivity of the network. State Highways, the next major strategically important segment of Indian road infrastructure, accounted for nearly 3% of total network. Towards the end of FY 2023, the total network of state highways in India stood at approximately 167,000 kms. The total size of state highway network has seen a slight dip in the last couple of years as some of those state roads were reclassified and brought under the national highway segment – due to its strategic importance.

Pros and strengths

Proven track record of efficient execution of roads, tunnels and slope stabilisation works in difficult terrain of union territory of Jammu and Kashmir: The company is an engineering construction and development company engaged in construction of road (including bridges), tunnels, slope stabilization works and other civil construction activities in the difficult terrain of Union Territories of Jammu & Kashmir and Ladakh. Recently, it has also been awarded with a contract for slope stabilization work in the state of Uttrakhand. Its primary focus on the roads, tunnel projects and slope stabilisation works has helped it in gaining technical expertise of undertaking such projects of different sizes involving varying degree of complexity while simultaneously helping it to also develop quality control systems, acquire a fleet of modern construction equipment and employ manpower to supplement the growth of its construction business. It has a proven track record of successful execution of road, tunnel projects and slope stabilization work in the difficult terrain of Jammu and Kashmir and Ladakh. It has developed the expertise and know-how to undertake infrastructure construction projects in the difficult terrain of the Union Territory of Jammu and Kashmir and Ladakh. Recently, it has also been awarded with a contract for slope stabilization work in the state of Uttrakhand.

Business model of selecting and clustering of the company’s projects in union territories of Jammu & Kashmir and Ladakh: The company’s growth is largely attributable to its business model of focusing, selecting and clustering of its projects in the Union Territory of Jammu and Kashmir and Ladakh. This model has facilitated it with maximum efficiency and profitability as it leverages its expertise and know-how to undertake infrastructure construction projects in the difficult terrain of the Union Territory of Jammu and Kashmir and the same provide it with the competitive advantage. It carefully selects its contracts, usually with a focus on EPC projects, by taking into consideration key factors such as the potential for project clustering. It strives to cluster its projects geographically in the Union Territory of Jammu and Kashmir and Ladakh to improve efficiency and profitability. By leveraging the manpower, equipment and materials which are set-up at nearby work sites, it attempts to save transportation costs and investment in new equipment, thus achieving economies of scale. It applies this principle even to projects that it undertakes on sub-contract basis.

Continuous focus on equipment ownership: Equipment asset management is a critical element of timely delivery of quality infrastructure development and construction projects. The company owns a large fleet of sophisticated construction equipment which enables it to be less dependent on third party equipment providers and to efficiently manage its project execution schedules. This also provides it with a competitive advantage over other infrastructure development and construction companies that outsource their construction activities to external contractors. It has consistently invested in fleets of modern construction equipment. It often acquires 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 and high availability of its modern equipment fleet has enabled it to undertake complex and challenging projects and complete its projects efficiently and profitably. 

In-house integrated model: The company’s in-house integration has been instrumental in its growth over the years. Its in-house integrated model, helps reduce its dependency on third parties for designing and engineering, procurement of key materials such as stone aggregates, and availability of machineries required to execute its projects, such as, boomers, shotcrete machines, batching plants, excavators, hot mix plants, compacters, among others, in a cost-effective manner. It also facilitates timely transportation of these materials to project. As on January 31, 2024, its owned equipment fleet comprised 228 construction equipment and machinery. Further, as on December 31, 2023, the aggregate gross block value of the company’s property, plant and equipment was Rs 7305.21 lakh. The company’s in-house integrated model ensures that products and services required for development and construction of a project meet quality standards and are delivered in a timely manner, thereby reducing contractual risks associated with third party suppliers. This has contributed to its ability to successfully complete projects on time, without compromising on quality. 

Risks and concerns

Revenue concentrated from projects undertaken or awarded by government authorities in Union Territory of Jammu & Kashmir and Ladakh: The company’s business is primarily dependent on road, tunnels, slop stabilisation projects and other construction activity in Union Territory of Jammu & Kashmir and Ladakh undertaken or awarded by governmental authorities and other entities funded by the GoI. It currently derives majority of its revenues from contracts with a limited number of government entities, including NHIDCL, KRCL, ERA Jammu, BRO, and PWD J&K Northern Railway, Irrigation & Flood Control Department, J&K, JKRRDA and under sub contract assignment from third party major infrastructure and construction entities executing government funded infrastructure projects. Larger contracts from few customers may represent a larger part of the company’s Order Book, increasing the potential volatility of its results and exposure to individual contract risks. As the company undertakes and executes Government awarded projects, it may face delay in payments due to various reasons such government or external budgetary allocation, insufficiency of funds and or political pressure. Such concentration of the company’s business on a few projects or clients may have an adverse effect on its results of operations and result in a significant reduction in the award of contracts which could also adversely affect its business if it does not achieve its expected margins or suffer losses on one or more of these large contracts, from such clients. 

Business subject to seasonal and other fluctuations: The company’s business is not seasonal, however it operates in the difficult terrain of Union Territory of Jammu & Kashmir which is characterised by cold to extreme cold whether conditions, its business and operations may be affected by seasonal factors which may restrict its ability to carry on activities related to its projects and fully utilize its resources. Heavy or sustained snowfall, extreme cold weather or other extreme weather conditions such as floods and landslides could result in delays or disruptions to its operations during the critical periods of its projects and cause severe damages to its premises and equipment. This may result in delays in execution of projects and also reduce its productivity. During periods of curtailed activity due to adverse weather conditions, it may continue to incur operating expenses and its project related activities may be delayed or reduced. 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 total income, cash flows, results of operations and financial conditions. 

Business is working capital intensive: Typically, projects in the infrastructure sector which the company undertakes are working capital intensive in nature and involve long implementation periods. Majority of the working capital funds of the company are blocked due to providing margin money for Bank Guarantee, Earnest Money Deposit, Performance Deposit and Security deposit (for Projects) on which the banks are not providing finance. The company meets its working capital requirements in the ordinary course of its business from capital, internal accruals, unsecured loans, working capital loans, from the Banks etc. This requires it to obtain financing through various means. The company may incur additional indebtedness in the future. Additional debt financing could increase its interest costs and require it to comply with additional restrictive covenants in its financing agreements. Additional equity financing could dilute its earnings per Equity Share and investors interest in the company and could adversely impact its Equity Share price.

Depends on sub-contractors to perform various portions of the contracts awarded to the company: The company undertake its construction business in an integrated manner as it has the key competencies and in-house resources to deliver a project from its conceptualization to completion. The scope of its services includes detailed engineering of the project, procurement of key materials, and project execution at the sites with overall project management up to the commissioning of these projects. In addition, it also undertakes operation and maintenance of projects in accordance with its contractual arrangements. While it executes majority of the projects ourselves, it also forms project-specific joint ventures with other infrastructure and construction entities. Depending on the nature and complexity of the work involved, it also engages sub-contractors to perform various portions of the contracts awarded to it. The company’s sub-contract agreements are essentially in the nature of works contract, where it engage subcontractors to perform specific portions of the contracts. Its sub-contracting expenses comprise of; (i) composite work contracts which include materials and labour employed by its subcontractors; and (ii) engaging sub-contractors to perform the work without materials i.e. materials are entirely procured by the company and transferred at respective sites. 

Outlook

SRM Contractors is an engineering construction and development company engaged primarily in the construction of roads (including bridges), tunnels, slope stabilization works and other miscellaneous civil construction activities in the union territories of Jammu & Kashmir and Ladakh. It undertakes construction works both as an EPC contractor and on an item rate basis for infrastructure projects. The company also undertakes sub-contracting assignments of infrastructure projects. It has a track record of successful execution of road, tunnel and slope stabilization projects in the difficult terrain of union territories of Jammu & Kashmir and Ladakh and it has developed the expertise and know-how to undertake infrastructure construction projects in difficult terrains. As a result of the growth of its road and tunnel construction business as well as the recent government initiatives and support to develop the infrastructure of union territories of Jammu & Kashmir and Ladakh it has further forayed into executing infrastructure projects such as stand alone bridges, slope stabilization works and other miscellaneous civil construction activities in order to capitalise on rising opportunities. On the concern side, the timely and cost-effective execution of the company’s projects is dependent on the adequate and timely supply of key materials such as cement, steel, pipes and bitumen. It cannot assure that it will be able to procure the required and adequate supplies of materials in the future, on commercially acceptable terms.

The company is coming out with an IPO of 62,00,000 equity shares of face value of Rs 10 each. The issue has been offered in a price band of Rs 200-210 per equity share. The aggregate size of the offer is around Rs 124.00 crore to Rs 130.20 crore based on lower and upper price band respectively. On performance front, the company’s total revenue for FY23 was Rs 30,065.09 lakh, which is increased by 13.23% in comparison of Rs 26,550.88 lakh in FY22. Profit after Tax (PAT) is Rs 1874.62 lakh for FY23 as compared to Rs 1,756.77 lakh in FY22. Meanwhile, the company’s strategy is to continue to acquire the core equipment that it typically requires for its projects. Ownership of modern machinery and equipment ensures its continuous and timely availability, thereby increasing its efficiency and cost-effectiveness, which is critical to the operations of its business. The company intends to increase the efficiency and competitiveness of its operations by continuously investing in state-of-the-art construction machinery and equipment in order to reduce its costs to execute its projects and have better operating margins.