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Industry overview:

As per CRISIL Research, India‟s real GDP growth would rebound to 7.6% in FY19 from 6.5% as the transitory disruptions from GST implementation would wane and a low base would help. Growth would continue to be consumption led as interest rates are expected to remain soft and inflation under control. Growth would also be mildly supported by public spending (with a rural focus) in infrastructure, especially roads. Road projects augur well for construction players, as nearly all funds are channelized into construction. Moreover, over the years, private investments have grown close to public investments due to implementation of several models such as BOT-toll, BOT-Annuity, BOT-HAM etc. thereby contributing the highest share of construction spend at 38%.

During FY15-18, railways accounted for 11% of the construction sector at Rs1.6tn. Over the next 4 years, the construction opportunity in Railways is expected to double to Rs3.1tn driven by investments by public as well as private sector especially in Network decongestion, expansion and Safety which account for over half of the total investments in railways during this period. Investments in key segments such as new lines, gauge conversion, doubling, track renewals, and electrification will account for Rs2.3tn (73%) of the construction opportunity during FY19-22 with doubling accounting for the highest share at 31% during this period.

CRISIL Research expects investments in railway sector to increase by about 77% from Rs3.9tn in FY15-18 to Rs6.8tn in FY19-22.

SNAPSHOT

Issue Opens Monday, Sept 17, 2018

Issue Closes Wednesday, Sept 19, 2018

Price Band 470/475

Bid Lot 30 shares and multiples

thereafter

Face Value Rs10

Listing BSE & NSE

Type of Issue Offer for Sale

Offer Size (Rsmn)

Fresh Issue -

OFS 4,705

Total 4,705

*Implied Market Cap

(Rsmn)

44,674

*PE

(Based on FY18 earnings)

11

*Note : Implied Market Cap & PE are calculated at higher price band of Rs475

Issue allocation

Reservations % of Net Issue

QIB 50%

NIP 15%

Retail 35%

Total 100%

Object of the offer

To achieve the benefits of listing the equity shares on the

Stock Exchanges

To carry out disinvestment

Last 3 year Summarized Financials

Rs(mn) FY16 FY17 FY18

Sales 24,927 30,673 40,275

EBITDA 2,644 3,275 4,493

EBITDA % 10.6% 10.7% 11.2%

Profit After Tax 3,931 3,840 4,116

Profit Margin % 15.8% 12.5% 10.2%

Earning Per Share 39.7 38.8 42.1

RoNW(%) 10.8% 10.1% 10.9%

Details of Selling Shareholder & No of Shares

President of India 99,05,157

Total 99,05,157

IPO UPDATE

IRCON International Limited

Source: RHP

Source: RHP

Investment in Railways:

Source: RHP

Construction Spend across sectors:

IPO UPDATE

IRCON International Limited

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About the Company: IRCON International Limited (IRCON), 99.69% subsidiary of the government of India, is an integrated Indian engineering and construction company, specializing in major infrastructure projects, including, railways, highways, bridges, flyovers, tunnels, aircraft maintenance hangars, runways, EHV sub-stations, electrical and mechanical works, commercial and residential properties, development of industrial areas and other infrastructure activities. It also provides EPC services on a fixed-sum turnkey basis as well as on an item-rate basis for various infrastructure projects. It executes on build, operate and transfer mode in various projects in order to meet the requirements of the bids. Additionally, have 26 project offices in India and abroad (including in Sri Lanka, Bangladesh, South Africa and Algeria) and five regional offices to support and manage business operations. As of March 31, 2018, the order book stood at Rs224.068bn. Since it has commenced operations in 1976, IRCON has serviced a diverse range of infrastructure and construction projects, and while the primary focus and strength is still deeply rooted in the railway sector, it has diversified progressively into other transport and infrastructure segments, such as, highway and road construction and expanded geographical coverage to many countries around the world. The company stands the rich experience in executing major construction and infrastructure projects, both internationally and domestically. The scope of services for such projects primarily includes design and engineering of the project, procurement of equipment and packages, project management, and commissioning. While it executed majority of the projects independently, the company would also form project specific joint ventures and consortiums with other infrastructure and construction companies, in particular, when a project requires it or the partners to meet specific eligibility requirements in relation to certain large projects, including requirements of particular types of experience and financial resources. Business operations are categorized into: (i) Construction and (ii) Infrastructure development: (i) Construction Business: In the Railway construction business, IRCON is a turnkey construction company that specializes in new railway lines, rehabilitation/conversion of existing lines, station buildings and facilities, bridges, tunnels, signaling and telecommunication, and railway electrification. Projects are usually awarded to the company directly or where applicable, the Ministry of Railways awards projects indirectly through nomination. As of March 31, 2018, the company was undertaking a total of 33 railway projects in two countries internationally and in 13 states in India. (ii) Infrastructure Development: In the infrastructure development business, IRCON develops and maintains railways and roads on a BOT basis. As of March 31, 2018, it had one completed road project of 115km in India. The company operates this completed project on a toll basis where profit is realized largely by toll collection during the concession period. Key Investment Rationale:

a) Strong order book positioning: Order book is considered to be one of the key indicators of future performance as it represents a significant portion of anticipated future revenues. The total order book was Rs175.689bn, Rs188.784bn and Rs224.068bn, representing a y-o-y increase of 32.17%, 7.45% and 18.69% for FY16, FY17 and FY18, respectively. Segment wise, as of March 31, 2018, Rs194.258bn, or approximately 86.70% of the order book is related to projects in the railway sector, Rs12.78bn, or approximately 5.70% related to projects in the highway sector, Rs12.084bn, or approximately 5.39% related to projects in the electrical work sector and Rs4.946bn approximately 2.21% related to projects in the building sector. Approximately 99.58% of the order book as of March 31, 2018 is related to projects sponsored by government or governmental agencies, including the Government of India, states and municipalities, while less than 1% was attributable to private sector clients. b) Diversification through sectors and geographies: IRCON has actively focused on becoming a diversified infrastructure player, both in terms of sector and geographical coverage. It is gradually diversifying infrastructure work expertise into transportation engineering, civil and industrial construction and other infrastructure projects. While the company continues to focus efforts in the railways sector, through portfolio diversification, it hopes to hedge against risks in specific areas or projects and protect from market variations resulting from business concentration in particular industry sectors and/or limited geographical areas. With increasing experience and success, it expects steady growth in business with a rate of expansion comparable to or better than the number of new projects undertaken.

Source: RHP

Sector (Rscr) 2014-15 2015-16 2016-17

Foreign 868 506 339

Domestic 2,254 2,354 2,915

Geographical Breakup:

Sector (Rscr) 2014-15 2015-16 2016-17

Railways 2,688 1,914 2,074

Highways 228 237 589

Electrical 13 199 253

Buildings 19 67 78

Others 2 2 1

Sectoral Breakup:

Source: RHP

IPO UPDATE

IRCON International Limited

c) Opportunities across sectors ahead: (i) Railways– Some of the key areas of focus of the Railways include modernization and up-gradation of identified corridors, commissioning new railway lines (doubling of about 3500 km), re-development and refurnishing of ~400 railway stations, Solar power feeds for about 700 railway stations to mention a few. Developments are encouraging like the High-Speed Rail Corporation set up by Indian Railways for implementing Mumbai-Ahmedabad high-speed rail corridor under Japanese funding . These would open business opportunities in the railway sector as a whole. (ii) Roads– Some of the key projects in the road sector include, Development of National Highways under the NHDP, better road connectivity, Special Accelerated Road Development Programme for North-Eastern Region (SARDP-NE), National Highway Inter-connectivity Improvement Programme (NHIIP), improvement in the efficiency of National Corridors development of economic corridors/feeder routes, rural roads under PMGSY, Bharatmala Programme to develop road connectivity to Border areas, emphasis on the development of roads for coastal connectivity including road connectivity for non-major ports. All of these encourage strong opportunities going forward. (iii) Electrical Projects– Indian Railways has decided to electrify 24,400 km track by 2020-21 under „Mission Electrification‟. Ircon has also been awarded the electrification work of „MathuraKasganj -Kalyanpur‟ and „Katni-Singrauli‟ at an estimated cost of Rs3.06bn and Rs2.58bn respectively. (iv) On the International front, opportunities exist in countries like Malaysia, Bangladesh, Bhutan, Sri Lanka and Iran. d) Current project executions: (i) IRCON is executing construction of railway line in J&K, Sivok-Rangpo, Jayanagar (India) to Bijalpura (Nepal). Jogbani to Biratnagar, etc. (ii) It is setting new rail coach factory at Rae Bareli. (iii) Doubling projects for Katni Singrauli; Rampur Dumra Tal Rajendrapul, Kiul-Gaya, and Hajipur Bachwara; Akhaura-Agartala Rail Link projects. (iv) Setting up of three electric loco sheds at Bondamunda, Daund, and Mughalsarai; Road over Bridges in Jharkhand under Pradhan Mantri Gram Sadak Yojna (PMGSY). (v) Design and Construction of Civil, Building and Track Works of Vaitarna-Sachin section and JNPT Vaitrana Section of DFC project. (vi) Construction of Railway Siding at Nagarnar, in Chhattisgarh and for Darlipali Super Thermal Power project. (vii) Electrical works under RAPDRP-Part B Project in the State of Jammu & Kashmir and Uttar Pradesh. (viii) Design, Supply, Installation etc. of receiving-cum-traction and auxiliary main sub-station; Metro works for Delhi. Financials: The company was debt free all these years, but for FY18, in which it diversified into commercial development of a railway plot for which loan of Rs32bn has been secured from IRFC. While company revenues have not grown in the last 5 years, it has shown improvement though in the last 3 years. Its profits are on declining mode. The drop is attributable to declining share of higher margin foreign orders in Malaysia, Sri Lanka etc. However, from FY16 the topline has increased led by domestic order wins.

Risks and Concerns:

Railway sector projects contribute ~86.70% of the order book as of March 31, 2018. Any change in the sector causing decline in the numbers of project available may adversely affect revenues and profitability.

Projects may be delayed, extended, modified or cancelled for reasons beyond control which may affect the business, prospects, reputation, profitability, financial condition and results of operations.

Any change in govt. policies, restructuring of existing projects or delay in payments, may adversely affect the business.

Outlook and Recommendations: On FY18 consolidated EPS of Rs42.13 and on an upper price band of Rs475, the P/E works out to be 11.2x, while on the last 3 years average consolidated EPS of Rs40.62; P/E works out to be 11.7x. There are no listed peers hence we cannot comment on the fact whether the issue is underpriced or overpriced. However, such shares are available at attractive valuations. Also, IRCON is Government of India enterprise with a good order book. Comparing with the recent Govt. of India enterprises IPOs like RITES etc., have given decent returns. Considering all these positive factors, investors can invest in this IPO for 4-5 years time frame. Investors may or may not get listing gains.

Particulars (Rs. mn) FY15 FY16 FY17 FY18

Revenue from Operation 29,751 24,927 30,673 40,275

Sales Growth - -16% 23% 31%

EBITDA 6,358 2,644 3,275 4,493

EBITDA % 21.4% 10.6% 10.7% 11.2%

Profit After Tax 5,630 3,931 3,840 4,116

Profit Margin % 18.9% 15.8% 12.5% 10.2%

Source: RHP

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IPO UPDATE

IRCON International Limited

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