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IRCON IPO: Listing to Delisting and to Listing again

IRCON International is Mini-Ratna public sector company which is set to hit Indian stock exchanges with an initial listing of its 10.53% equity shares, by Ministry of Railways acting in behalf of President of India. While the company is primarily into engineering and construction businesses specializing in infrastructure projects, railways, highways, bridges etc.
Tushar Gupta 

– In 1992, pursuant to disinvestment policy of Government of India, IRCON was listed on the BSE Limited and the Delhi Stock Exchange Limited with 13,400 Equity Shares of INR 10 each.

– In 2011, IRCON got delisted by giving an exit option at INR. 1450/- per share to public shareholders.

– In 2018, IRCON is set to list again on Indian Bourses at INR. 475/- per share.

Background

IRCON International is Mini-Ratna public sector company which is set to hit Indian stock exchanges with an initial listing of its 10.53% equity shares, by Ministry of Railways acting in behalf of President of India. While the company is primarily into engineering and construction businesses specializing in infrastructure projects, railways, highways, bridges etc. As per the DRHP, the total order book of the company as on March 31, 2018 stood at Rs 22,406.79 crore.

Financials

Numbers in INR Crore’s

Particulars FY 18 FY 17 FY 16 FY 15 FY 14
Total Assets 12,707.937 9,167.627 8,136.777 6,528.703 6,171.84
Total Revenue 4,027.5 3,067.3 2,492.6 2,975.07 3,897.3
% Change 31.3% 23.1% (16.2%) (23.7%)
PAT 411.5 383.9 393.1 563.03 746.9
% Change 7.2% (2.3%) (30.2%) (24.6%)
EPS 42.13 38.79 39.72 284.42 377.34

A steady growth can be seen from FY16 onwards in Revenue and PAT. Currently, the company’s order book is stronger than ever, which is approximately 5.5X the revenue for FY18 which indeed shall reflect in the next few years.

Asset base is increasing averagely 20% YoY whereas the Turnover on Fixed Assets is 6.78 Times as on 31st March 2018.

IRCON boast a strong balance sheet as on 31st March 2018 with:

– Debt – Equity ratio of 0.85

– Current Ratio of 1.69

– Quick Ratio of 1.66

– Interest Coverage Ratio of 9.64

An important point here is with a little fixed capital, IRCON is making an annual turnover of 15 times.

Also, by taking the upper price band of Rs 475 and EPS of Rs 42.13 as of FY18, the P/E works out to 11.27x. The RoNW for FY18 was 10.9%.

Model

A stable investor always looks to earn some potential dividend from stock and just gain from market capital. This approach of Dividend Discount Model is more suitable for investors with long term investment mind in order to earn dividend. So, the value of stock is determined by the expected dividends in future.

Where;

DPSt = Expected dividends per share

ke = Cost of equity

The basis for the model lies again in the thumb rule of time value of money where the value of asset is the present value of expected cash flows discounted at a rate appropriate to the riskiness of cash flows. The basic inputs to the model are

– Expected Dividends; and

– The Cost on Equity.

In order to get hold of expected dividends, investor determines and assumes projected future growth rates in earnings and pay-out ratios. While the cost of equity in DDM is determined by CAPM model taking into consideration asset’s riskiness, peers and money market conditions.

Valuation

A)  Two-Stage Dividend Discount Model

The Two-Stage Dividend Discount Model uses two growth rate – an initial growth over a length of period and a subsequent long-term growth rate in perpetuity using the Gordon Growth Model. The growth rate during the initial phase is higher than the stable growth rate, this model can be adapted to value companies that are expected to post low or even negative growth rates for a few years and then revert back to stable growth. So, as noticed in case of IRCON International, Negative PAT Growth can be seen in FY17, FY16, FY15 and FY14. The value of stock in such cases can be determined as;

Value of the Stock = PV of Dividends during extraordinary phase + PV of terminal price

Sensitivity Analysis with Growth Rate in Extraordinary and Stable period

B) Dividend Discount Model and P/E Ratio

A variation of the Two Stage Dividend Discount Model, Dividend Discount Model and P/E Ratio uses P/E Ratio to evaluate the terminal value at perpetuity. Why P/E Ratio? The P/E Ratio measures the current share price relative to target asset’s per-share earnings. An investor expects to invest in a company in order to gain a rupee of that company’s earnings. This is why the P/E is also referred to as the price multiple because it shows how much investors are willing to pay per rupee of earnings. So, the value of stock is;

Value of the Stock = PV of Dividends during extraordinary phase + PV of terminal price

Where;

Terminal Value = P/E Ratio X EPS, while remaining factors are same as above.

Practical problems while applying the dividend discount model are;

1. Length of extraordinary growth cannot be justified taking historical data of the target firm. Also, qualitative data cannot be converted to adjust in the time frame.

2. Growth rate in extraordinary period is higher than in stable period which again raises the question on transformation phase.

3. The focus on dividend can skew the estimates of target firm.

This model is Best Suited for firms that maintain a policy of paying out most of residual cash flows – i.e, cash flows left over after debt payments and reinvestment needs have been met – as dividends. This means assets paying more dividend in terms of wealth creation to investors, DDM works best.

The target firm, here IRCON International, has a history of paying regular dividends to its shareholders. The company has been paying consistent dividends over the years. It paid dividend at 919%, 186% and 204% in FY16, FY17 and FY18, respectively.

An important factor to consider in DDM and its variation models, if the market increase due to increase in market fundamentals, such as higher expected growth rate in economy or lower interest rates, the stock value should increase accordingly and vice versa.

Take Away

This model proves vital for investor with long term vision to earn dividend and also the value from the model shows value creation in range of INR 542 – INR 551. And last but not the least, Government should decide whether to list IRCON International or not.

About Author:

Tushar Gupta is blogger on Valuation Analog (www.valuationanalog.com). He is a student and practitioner of valuation techniques. His passion for business and numbers has pushed him out of his shell towards writing and sharing his experience. So, he happens to be at the crossing of financial industry, education and publishing. He love putting his efforts in teaching fundamentals and value drivers of a business. He welcome queries and debates on valuation approaches and drivers. Please feel free to get in touch with him over the same at tushkigupta@live.com .

Disclaimer-

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