Afcons Infrastructure, a part of Shapoorji Pallonji group, is an infrastructure, engineering and construction company with a rich history spanning over six decades.

Afcons operates across five major infrastructure business verticals 1) Marine and Industrial, encompassing projects such as ports, harbours, dry docks, LNG tanks, and material handling systems; 2) Surface transport, including highways, interchanges, mining infrastructure, and railways; 3) Urban infrastructure, covering metro works, bridges, flyovers, and elevated corridors; 4) Hydro and Underground, comprising dams, tunnels, and water-related projects and 5) Oil and Gas, involving offshore and onshore projects in the oil and gas sector.

The company has a proven track record of successfully delivering a wide range of complex and challenging engineering, procurement, and construction (EPC) projects both domestically and internationally. The company has a strong international presence across various infrastructure sectors. The company delivered projects across 10 countries, and all these projects were completed on or ahead of schedule.

It generates a substantial portion of its total revenue from international markets, primarily Africa, the Middle East and South Asia (ex-India), including Bangladesh and the Maldives.

Exposure to international markets also expose the company to risks associated with geopolitical tensions, but the company has the cushion/comfort of force majeure clause under its construction contracts. The company have a risk-informed decision-making culture throughout its operations and its risk management processes span the entire project lifecycle.

Afcons ranks among the top international contractors globally in marine and port facilities, bridges, transportation, and transmission line segments. It is focused on pursuing large value and complex projects that fit it project selection process and risk management framework.

In the 2023 ENR (Engineering News-Record, US) Top International Contractors rankings, the company were the 10th largest international marine and port facilities contractor in the world and the only Indian company in the top 25, the 12th largest contractor in the bridges segment and the only Indian company in the top 25, the 42nd largest contractor in the transportation segment and the only Indian company in the top 50, and the 18th largest contractor in the transmission lines and aqueducts segment, in each case based on International Revenue for the Financial Year 2023.

The company as of June 30, 2024, is actively involved in 79 active projects across 17 countries. As of June 30, 2024, 9 of its ongoing projects were being undertaken through project-specific joint ventures and five were being undertaken through consortiums, respectively.

The order book of the company as of June 30, 2024, stood at Rs 31747.43 crore of which 36.99% is underground & elevated metro, 11.26% is elevated corridors & bridges, 27.78% is hydro & underground, 5.66% is oil & gas, 8.57% is marine & industrial and 9.74% is surface transport. Of the order book about 72.61% is India order book and 24.39% is overseas order book. Further about 69.8% of the order book is government, 20.07% is multilateral and 10.13% is private sector. Subsequently, on June 30, 2024, it has won projects worth Rs 5936.737 million until September 30, 2024, and additionally, as of 30^thSeptember 2024; the company is L1 bidder for projects worth Rs 10732.359 crore.

The company also own and maintain a large and strategic equipment base comprising a wide range of heavy machinery and specialized equipment. As of June 30, 2024, the equipment base included eleven (11) marine barges, 153 cranes, 16 tunnel boring machines, 8 large capacity jack ups, and 21 piling rigs. Four tunnel boring machines are also pending delivery. It also has two dedicated workshops in Delhi and Nagpur for the maintenance of its equipment base.

Afcons has a history of completing projects ahead of schedule, including notable ones like the Jammu Udhampur Highway Project, Nagpur Metro Reach 3, and Agra Lucknow Expressway.

As of the date of this Red Herring Prospectus, there were 11 arbitration and other legal proceedings relating to projects on which it has brought claims against customers, and Rs 6950.188 crore was the total amount involved in such proceedings. Total trade receivables (including interest on arbitration awards) as end of June 30, 2024, amounted to Rs 3974.610 crore. Amounts awarded to the company in arbitration proceedings net of bank guarantee is Rs 913.10 crore which is 25.43% of total trade receivables.

The Issue and Object of the Issue

The public issue comprises both offers for sales and a fresh issue. The OFS comprises sales of equity shares with a value aggregating Rs 5430 crore by Goswami Infratech, a promoter company. The fresh issue comprises an issueof shares aggregating upto Rs 1250 crore.

Of the net proceeds from fresh issue, Rs 80 crore will be used towardscapital expenditure for purchase of construction equipments, Rs 600 crore for prepayment or scheduled repayment of a portion of certain outstanding borrowings and acceptances availed by the company and Rs 320 crore will be used to fund working capital requirements. The balance is for general corporate expenses.

Total fund-based outstanding borrowings of the company as on Jun 30, 2024, stood at Rs 3361.098 crore.

Strength

Strong track record of timely execution of large-scale, complex and high-value projects.

A diversified order book that translates into 2.7 times of its TTM sales ended Jun 2024.

Benefit from the strong parentage of the Shapoorji Pallonji Group and strong experienced leadership team.

Strong specialized equipment base with ability to source other high-tech equipment and in-house capabilities in managing specialized equipments, has been instrumental in winning several complex projects.

Typically, large value and complex projects have fewer bidders and a better margin and the company is largely focused on large value and complex projects.

Weakness

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

Entering contracts primarily through a competitive bidding process. The business depends on the announcement of tenders, qualification to bid, and timely award of projects by project owners.

Projects awarded by government or government-owned customers contributed 69.80% of the order book as of June 30, 2024.

Equity Shares held by its promoters and certain members of the promoter group, which were encumbered in favor of certain lenders and Goswami Infratech’s Debenture Trustee, have been released from pledge for the purpose of facilitating the Offer subject to certain conditions being fulfilled. If any of such conditions are not met, the lenders and Goswami Infratech’s Debenture Trustee may require these encumbrances to be enforced which may dilute the shareholding of the Promoters and certain members of the Promoter Group.

Received an inspection letter bearing reference no. RD (WR)/Insp/AIL/1603 dated February 23, 2024, under Section 206(5) of the Companies Act from the office of the Regional Director (Western Region), Ministry of Corporate Affairs, wherein the RD ordered an inspection of the books of accounts and other books and papers of thecompany.

Currently sent notices to customers relating to 4 Bangladesh projects worth Rs 3405.597 crore regarding stoppage of work under force majeure clauses under its construction contracts due to agitations and protests in the country.

A significant portion of its order Book is attributable to certain large customers with top five and top ten customers account for 45.84% and 64.06% of the order book,respectively,as end of June 2024.

Depends significantly on contract labour and an inability to access contract labour at reasonable costs at project sites may adversely affect its business.

Shapoorji Pallonji and Company (SPCPL), one of the Promoters, is engaged in a similar line of business as that of the company and that may result in a potential conflict of interest.

The overseas order book attributable to fixed price contracts accounts for 24.02% of total order book or 98.5% of the overseas order book.

Have had negative cash flows in the past and may have negative cash flows in the future.

Valuation

Consolidated re-stated revenue stood higher by 5% to Rs 13267.50 crore in FY 2024. Further with OPM contract by marginal 10 bps to 10.3%, OP jumped up by 4% to Rs 1365.02 crore. Eventually, Pat after MI stood higher by 9% to Rs 449.74 crore.

For the three-month period ended June 30, 2024, the sales were lower by 1% to Rs 3154.36 crore. The OPM expanded by 160 bps to 11.2%, the operating profit was up 16% to Rs 353.47 crore. The net profit after MI was up 1% to Rs 91.59 crore.

At the upper price band, the PE works out to 38 times of its TTM period ended June 30, 2024, EPS. The P/BV works out to 3.5 times and EV/Sales works out to 1.5 times.

In comparison ITD Cementation, Kalpataru Projects (KPIL), KEC International, Dilip Buildcon, Larsen & Toubro and Ircon International quotes at a PE of 34.7 times, 39.7 times, 71.9 times, 130.4 times,37.5 times and 21 times, respectively, of their FY2024 EPS. Similarly,ITD Cementation, KPIL, KEC International, Dilip Buildcon, Larsen & Toubro and Ircon International, quotes at a P/BV of 6.3times, 4.0 times, 6.1 times, 1.6 times, 5.6 times and 3.2 times.