Railway's IRCON International IPO opens; Is it worth investing?

Government-owned IRCON International Ltd (IRCON) has opened its initial public offering (IPO) today for subscription in primary market. IRCON operates under the Ministry of Railways, providing engineering and construction services to the infrastructure sector. Within just a few hours of opening, the IPO has received bid of 9,11,730 equity shares subscribing by 9% compared to total issue size of 99,05,157 equity shares at around 1257 hours, as per NSE data. 

The IPO is offered at a lower price band of Rs 470 per piece and upper band of Rs 475 per piece. Overall, the Railway ministry plans to raise nearly Rs 470 crore. 

Currently, the ministry holds about 99.7% of IRCON and through this IPO they plan to divest about 10.5% of their holding taking it down to 89.2%. 

50% of the issue is kept for qualified institutional buyers (QIB), while 15% to non-institutional individuals (NII) and remaining 35% to retail investors. 

Interestingly, the issue is being offered at a discount of Rs 10 per share to retail investors. 

Objective of the issue is to to divest shareholding by the promoter and to achieve the benefits of listing.

IRCON has delivered 27% revenue CAGR over FY16-18 with operating margin of 11% in FY18. Net profit remained stagnant at Rs 4 billion over FY16-18, mainly impacted by decline in other income. By end of FY18, the company's strong order book of Rs 224 billion provides revenue visibility for the next few years. 

At upper price band, IRCON is valued nearly 11xFY18 P/E.

Should you invest? 

Mrinalini Chetty, Research Analyst at Centrum said, "At the higher end of the price band of Rs 475, the issue is priced at P/E of 10.9x (post dilution) on FY18 basis, which we believe is attractive. The company has no listed peers."

Mrinalini explains that, historically debt free, in FY18 IRCON has acquired debt of ₹3,203 crore from the Indian Railway Finance Corporation (IRFC) @ interest rate of 8.77% (repayable in 5 equal instalments commencing from 15 Apr’19) to pay upfront lease premium to Rail Land Development Authority (RLDA) for the acquisition of a project site. 

"Given the government focus on infrastructure spends (initiatives like Metro, Bharatmala, Economic corridors), healthy order book and attractive valuations, we suggest that investors can Subscribe to the issue," says Mrinalini. 

Meanwhile, Vrinda Aditya, analysts at Sharekhan said, "IRCON International Limited is a construction and infrastructure company with forte in railway infrastructure. Over the time company has diversified into different projects across railways, civil construction, infrastructure development and building which has provided a splendid growth to its order book which stands at Rs 224068 million as on 31st March,2018."

Similarly, Vrinda adds, " We recommend to SUBSCRIBE the issue for listing gains and also from a long term perspective."

Post IPO issue, IRCON's market capitalization on stock exchanges is seen between Rs 4,420 crore to Rs 4,467 crore.