Garuda Construction and Engineering (GCEL) is a construction company offering end to end civil construction service for residential, commercial, residential cum commercial, infrastructure and industrial projects and additional services for infrastructure and hospitality projects.

Its end-to-end civil construction starts with detailed route survey, designing, detailed engineering, mobilization of resources, micro scheduling of construction activities, obtaining construction permissions and conducting soil/water testing, hiring of contractor / manpower, procurement of material, lab testing, carrying out construction activities as per approved plan and finally handing over the project are per the agreed terms.

Further, it also provides services such as operations and maintenance services (O&M) and Mechanical, Electrical and Plumbing (MEP) services and finishing works as a part of its construction services. Hence, it offers complete construction services under its banner.

Contracts are for EPC. As per the scope of services the company provides lock and key services as required, MEP and other finishing works as well. It also provides certain O&M services for its completed construction contracts. Its development agreements have certain specific provisions for consideration and terms of payment factoring in sale of completed units. However, the construction aspect is covered in an EPC contractual format. For instance, in case of the Delhi Police Headquarters building (one of its marquee projects), the company has entered into an agreement with the concessionaire to maintain the building and will receive Rs 7.20 crore per year for 13 years for maintenance of it. Revenue from EPC contracts accounted for 90.46% of revenue in FY24.

Ongoing order book of the company as on the date of RHP was Rs 1408.2744 crore. The order book is made up of 12 ongoing civil construction projects of which six residential projects, two commercial projects, one industrial project and one infrastructure.

Though began its journey as an in-house construction company, off late it started to undertake third party contracts. Its ongoing order book with unrelated parties is about 64.61% with balance 35.39% from related parties. Of the completed orders, the share of related parties was 88.12% with third parties share stood at mere 11.88%.

Of the ongoing order book, the share residential construction is 46%, residential cum commercial is 9%, commercial 18%, civil construction cum services 9%, industrial 9% and infrastructure 9%.

It is in the process of expanding its presence in the civil construction sector by expanding into development aspects as well. The promoters of the company are already procuring projects as developers and contracting the construction activities. The company has been working on various projects with its promoters which have given it exposure to the roles and responsibilities of a developer. And hence, utilizing the same, the company is keen to grow itself as the developer. Its current order book contains two projects for construction and development which includes one residential project and one commercial project where it has entered as the developers / joint developers. The company has assumed the role of joint developer for a residential property at Thane, Maharasthra. The work on the project has not commenced as of now.

The company, along with its promoter company PKH Ventures and group company Artemis Electricals and Projects Limited, on January 20, 2024, had bid for the tender for the construction of Rapti Nagar Ext. Township & Sports-city, Gorakhpur on Land/FSI monetization model floated by the Gorakhpur Development Authority, Gorakhpur, Uttar Pradesh. On February 08, 2024, the company received a Letter of Intent from the Gorakhpur Development Authority, Gorakhpur, and Uttar Pradesh as a successful bidder. Gorakhpur Development Authority intends to develop Approximately 207.47 acres (83.96 hectares) land at Raptinagar Ext, area. Out of 207.77 acres a green field state of the art township will be developed in 177.47 acre (71.85 ha) and on the remaining approximately 30 acres (12.14 Ha) one of its own kind greenfield sports-city will be developed to give new dimension to the development of city.

The Issue and Object of the Issue

The public issue of up to 27800000equity shares of face value of Rs 5 per equity share comprises fresh issue of up to 18300000 equity shares and an Offer for Sale (OFS) up to 9500000equity shares by PKH Ventures, its Promoter.

Of the net proceeds from fresh issue, Rs 100 crore will be used to fund the long-term working capital requirements. The balance is for general corporate expenses and unidentified inorganic acquisitions.

Given recent regulatory changes, small-sized construction companies facing compliance challenges are seeking exits, presenting a favorable acquisition opportunity. The company plans to acquire such entities over the next 12-24 months. The target of acquisitions should meet criteria such as offer expertise in the domain it operates in or wish to expand into or enhance its geographical reach etc. To finance this acquisition, the company will not allocate more than 25% of the net offer size and the remaining requirement shall be sourced from internal accruals.

Strength

Established track record of successfully executing a diverse mix of construction projects i.e., residential, hospitality and commercial projects in the geographical areas of MMR, Delhi NCR, Karnataka and Tamil Nadu.

Strong project management capacity and execution capabilities

Healthy order book of Rs 1408 crore that translate into 9 times of its FY24 revenue, provide growth visibility.

Its construction activities now span across regions such as New Delhi, Rajasthan, Karnataka, Tamil Nadu, Amritsar, and Arunachal Pradesh.

It will get annual maintenance fee of Rs 7.20 crore per year from Delhi Police Headquarters for next 11 years.

Weakness

Top ten (10) largest clients accounted for approximately 96.47% and 100% of its FY24 and FY23 revenues from operations. Of FY24 revenue from operations about 43.47% is from contracts from related parties. Of the present order book, orders from group companies and promoter Related entities form 35.39% of the total ongoing projects.

The business and profitability are significantly dependent on the performance of the real estate market generally in India and particularly in the Mumbai Metropolitan Region. Moreover, the construction and realty industry is cyclical in nature.

Had negative cash flow from operations in FY2024.

Trade receivables as end of April 30, 2024, and March 31, 2024, stood at Rs 182.56 crore and Rs 176.24 crore against FY24 sales of Rs 154.18 crore.

The previous IPO filed by its promoter group PKH Venture was not subscribed leading to withdrawal of the IPO.

Delays in obtaining a requisite approvals or statutory clearances may lead to challenges and could adversely impact profitability and future projects.

The company and its holding company have certain pending statutory dues as of April 30, 2024.

PKH Venture, a promoter, and some of its promoters group entities, subsidiary and group companies have objects which would allow them to engage in the line of business same as the company. There are nonon–compete agreements between the company and such Promoter/Promoter Group and Group Companies.

Relies on various sub-contractors for their services and factors affecting the performance of their obligations could adversely affect reputation and business and revenues of its operations.

Presently does not own the trademark or logo under which it currently operates.

Pravin Kumar Brijendra Kumar Agarwal, a promoter of the company is involved in a criminal proceeding (charged under sections 143, 147, 149 and 325 of the Indian Penal Code, 1860) initiated by Airport Police Station which is currently pending before the Hon’ble Metropolitan Magistrate at Andheri, Mumbai. Similarly, PKH Ventures, one of the promoters of the company is involved in a criminal proceeding initiated by Prakash Soma Trilotkar one of its employees, which is currently pending before the Labor Court, and Writ Petition filed by Asset Reconstruction Company (India) as against Punjab National Bank to which PKH Ventures is a party.

Non-availability of documents pertaining to business advances.

The current order book includes one order from a project (that of Trinity Oasis valued Rs 108 crore) that is stuck for the last 2 years as the client yet to procure requisite commencement certificate. The company has no prior or little experience in construction of Hydro power project (i.e. 4X4MW Halaipani Hydro Power Project) and Agro Cluster Development projects that are from group companies.

Valuation

Consolidated re-stated revenue stood lower by 4% to Rs 154.18 crore in FY 2024.Further with OPM contracting 230 bps to 32.3%, OP was down by 11% to Rs 49.80crore. Eventually, Pat after MI stood lower by 11% to Rs 36.44 crore.

For the one-month period ended April 30, 2024, the net profit after MI was Rs 3.50 crore on a sale of Rs 11.88 crore.

At the upper price band, the PE works out to 24.4 times of its FY24 EPS, the P/BV works out to 3.0 times and EV/Sales works out to 5.7 times.

In comparison, construction players focused largely in Buildings such as BL Kashyap, PSP Projects, Capacite Infra, VAscon Engineering and Ahluwalia Contractors quote at a PE of 39.4 times, 20.9 times, 26.3 times, 20.9 times and 32.2 times, respectively, of their FY24 EPS. Similarly, BL Kashyap, PSP Projects, Capacite Infra, Vascon Engineering and Ahluwalia Contractors quote at a P/BV of 4.2 times, 2.8 times, 2.1 times, 1.4 times and 4.7 times.