Deepak Builders & Engineers India is an integrated engineering and construction company, specializing in execution and construction of administrative & institutional buildings, hospitals and medical colleges, industrial building, historical memorial complex, stadium and sports complex, residential complex and various developmental and other construction activities (“Construction Projects”). It also undertakes specialized structural work such as flyovers, rail under bridge, rail over bridges, approach roads and development and redevelopment of railway stations (“Infrastructure Projects”).

It undertakes both Construction & Infrastructure Projects, as EPC services on a fixed sum turnkey basis as well as on an item-rate basis/percentage basis.

As an engineering and construction company, it have a proven track record of executing turnkey projects comprising of architectural & structural work, civil works, HVAC, Mechanical Electrical & Plumbing (“MEP”) works, firefighting & fire alarm systems, public health services, information technology system, modular operation theatre, medical gas pipeline systems and external development work, including landscaping work.

It has completed seventeen projects including some prestigious projects, such as construction of Jang-E-Azadi Memorial at Kartarpur (Punjab), development of Karuna Sagar Maharishi Valmiki Tirath Asthaan at Amritsar (Punjab) and construction of Geriatrics Block in AIIMS Campus, New Delhi since its incorporation in 2017 to acquire the partnership construction firm of the promoter.

Currently, it has twelve (12) ongoing projects, including seven (7) EPC projects and five (5) item-rate/percentage rate contracts. Of the total ongoing project six are construction projects (4 hospital & medical colleges, 1 administrative building, and 1 industrial building) and six infrastructure projects (4 upgradation/development/redevelopment of Railway Station projects and 2 road &bridges projects relating to rail over bridges).

Of the order book (as on Jun 2024 end) of Rs 1380.389 crore, about 66.03% are railway orders, 25.05% are industrial buildings, 4.38% are hospital and medical colleges, 0.96% road projects, 3.58% is administrative/institutional buildings.

Further, it also undertakes operation and maintenance (“O&M”) activities in accordance with its contractual obligations under the projects.

The Issue and Object of the Issue

The public issue of up to 12810000 equity shares of face value of Rs 10 per equity share comprises fresh issue of up to 10700000 equity shares and an Offer for Sale (OFS) up to 2110000 equity shares by its Promoter [1920000 shares by Deepak K Singal & 190000 shares by Sunita Singal].

Of the net proceeds from fresh issue, Rs 30 crore will be used to repay/prepay (in full/part) of certain borrowings availed by the company and Rs 111.956 crore will be used to fund working capital requirements. The balance is for general corporate expenses.

Strength

Established EPC player with proven expertise in various construction and infrastructure development projects including specialized structures across four states of India, i.e. Punjab, Haryana, Rajasthan, Uttarakhand and Union Territories of Chandigarh and National Capital Territory of Delhi.

Healthy order book of Rs 1380.389 crore, which translates into 2.7 times of its FY24 revenue, provides growth visibility.

Weakness

Construction projects are exposed to various implementation risks and uncertainties and may be delayed, modified or cancelled for reasons beyond company’s control, which may adversely affect its business, financial condition and results of operation.

Three ongoing projects (i.e. Redevelop of Ludhiana Junction Railway station, IOCL Plant building, Delhi Cant railway station project) accounts for about 76-77% of the order book as end of Jun 2024. Any delay in continued execution of this project will hit the operations of the company severely. Moreover entire 100% of its order book as on Jun 30, 2024, consisted of projects awarded by government, semi-government and government-controlled entities.

Its project portfolio has historically been concentrated in the states of Punjab & Haryana. Projects from both these states accounted for about 80% of revenue in FY24.

Deepak Kumar Singal, promoter of the company in the past has been subject to penalty for contravention of Foreign Exchange Management Act, 1999.

In the past, certain search operations were carried out by the Income Tax Department under section 132(1) of the Income-tax Act against the company and the promoters. Any adverse action by the tax authorities could increase its tax liability.

Sudden jump in the operating margin from around 11.6%/11.7% in FY22/FY23 to 21.9% in FY24 and then to 28.7% in Q1FY25.

In past entered into related party transactions and may continue to do so in the future.

Have sustained negative cash flows from operating activities in the past and may experience earnings declines or operating losses or negative cash flows from operating activities in the future.

About 11.89% of post issue promoter stake is pledged and such pledge may be enforced in the event of any default by the company.

Promoter holds interest in the Promoter Group entities some of which is authorized to undertake business activities which are similar to the business conducted by the company. But it has entered into non-compete agreement with Deepak Singal Engineers and Builders, Deepak Buildcon Infrastructure (Proprietorship) and Deepak Builders (Partnership).

Rely 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.

Valuation

Consolidated re-stated revenue stood higher by 18% to Rs 511.40 crore in FY 2024. Further with OPM leap by 1020 bps to 21.9%, OP jumped up by 120% to Rs 112.20 crore. Eventually, Pat after MI stood higher by 182% to Rs 60.41 crore.

For the three month period ended June 30, 2024, the net profit after MI was Rs 14.21 crore on a sale of Rs 105.11 crore.

At upper price band, the PE works out to 15.6 times of its FY24 EPS, the P/BV works out to 2.4 times and EV/Sales works out to 2.1 times.

In comparison the construction players focused largely in Buildings or building and infraprojects especially railways and roads such as BL Kashyap, PSP Projects, Capacite Infra, Vascon Engineering, Ahluwalia Contractors, Ircon International, ITD Cementation and GPT Infra quotes at a PE of 36.8 times, 21 times, 25.2 times, 19.7 times, 34 times, 23 times, 37.2 times and 31.3 times respectively of their FY24 EPS. Similarly BL Kashyap, PSP Projects, Capacite Infra, Vascon Engineering, Ahluwalia Contractors, Ircon International, ITD Cementation and GPT Infra, quotes at a P/BV of 3.9 times, 2.8 times, 2.0 times, 1.3 times, 4.9 times, 3.6 times, 6.7 times and 4.9 times.