Afcons Infrastructure Ltd IPO Analysis 2024: Should You Subscribe?

The IPO (initial public offering) of Afcons Infrastructure Ltd (Afcons) commences on October 25 and concludes on October 29, 2024. The offering, carrying a Grey Market Premium (GMP) of 7%, saw muted response on its first day of bidding.  

Investors need a clear understanding of both potential rewards and risks before subscribing. This IPO analysis provides a comprehensive review to help make an informed decision.

Afcons Infrastructure IPO Details

• Issue Size: Rs 5,430 crore
• Fresh Issue: Rs 1,250 crore
• OFS: Rs 4,180 crore
• Price Band: Rs 440 – Rs 463
• Lot Size: 32 shares
• Listing Date: November 4, 2024

Afcons Infrastructure IPO Subscription Status

As of 5 p.m. on the opening day, the IPO of Afcons Infrastructure Ltd was subscribed 0.14 times overall. Non-institutional investors subscribed 0.12 times their allocation, while retail investors subscribed 0.15 times. Meanwhile, qualified institutional buyers subscribed 0.11 times to their reserved portion.

Overview of Afcons Infrastructure Ltd

Afcons is the flagship infrastructure engineering and construction company of the Shapoorji Pallonji Group, a leading conglomerate with over 150 years of expertise in the construction sector. Established as a partnership firm in 1959, Afcons boasts over six decades of experience in the infrastructure EPC sector. It has successfully completed numerous complex and extensive projects in India and internationally. Currently, it is managing multiple prestigious and large-scale projects, positioning it as one of the top global infrastructure enterprises from India.

Afcons Infrastructure Key Strengths 

• Consistent Financial Growth: Afcons has shown impressive growth, with its operational revenue, EBITDA, and net profit witnessing compound annual growth rates (CAGRs) of 10%, 22%, and 12% respectively, from FY22 to FY24.

• Healthy Return Ratios: Afcons’ financial performance is marked by healthy return metrics, with a Return on Equity (RoE) of 13.28% and a Return on Capital Employed (RoCE) of 20.18% in FY24, placing it among the industry leaders.
• Increasing Profitability: Over recent years, Afcons has consistently improved its EBITDA and Net Profit margins, which stood at 11.60% and 3.30%, respectively, as of March 31, 2024.
• Solid Order Book: As of June 30, 2024, Afcons boasted a substantial order book totaling Rs 31,747 crore, approximately 2.4 times its FY24 revenues, offering significant growth visibility for the medium term.
• Project Execution Excellence: In FY24, Afcons successfully completed 7 projects valued at Rs 8,843.11 crore, all on or ahead of schedule. Additionally, it was ranked as the 10th largest international marine and port facilities contractor in the 2023 ENR Top International Contractors rankings, marking it as the only Indian firm in the top 25.

Afcons Infrastructure Risk Factors

• Cash Flow Concerns: Afcons reported negative cash flows from operations during the quarter ending June 30, 2024. If this trend continues, it could undermine the firm’s operational efficiency and financial health.
• Project Dependence: A significant portion of Afcons' revenue is tied to government or government-owned projects, accounting for 69.80% of its total order book as of June 30, 2024. This dependency exposes the company to various project-related risks.
• Working Capital Needs: Afcons operates in a capital-intensive industry, requiring substantial working capital. As of June 30, 2024, its working capital needs stood at Rs 3,190 crore. Inadequate cash flows or inability to secure necessary financing could adversely impact its operations and financial health.
• High Trade Receivables: As of June 30, 2024, Afcons had trade receivables totalling Rs 3,975 crore. The delay or failure in collecting these receivables could negatively affect its business operations, financial condition, and cash flows.
• Pledge of Promoter Shares: Approximately 32.67 crore shares, almost the entire promoter holding and about 96% of the total outstanding equity shares pre-IPO, were pledged to lenders. For the IPO, these shares have been temporarily released from the pledge but will need to be re-pledged post-offer, after the SEBI-mandated lock-in period expires.
• Legal Risks: Afcons is involved in ongoing legal disputes related to its promoters, directors and subsidiaries. Unfavourable outcomes in these cases could harm the company's reputation and financial stability.

Afcons Infrastructure Valuation & Recommendation

Afcons Infrastructure Ltd (Afcons) has demonstrated sustained growth in both revenue and profits over recent years. With a strong parentage and over 60 years of experience, Afcons has a proven track record in successfully managing large, complex projects. 

Further, the recent fundraising of Rs 1,250 crore is expected to bolster project execution capabilities through debt repayment and investments in working capital.

Regarding its IPO valuation, Afcons is priced at a price-to-earnings (P/E) ratio of 36x based on FY24 earnings, similar to L&T’s valuation—a significantly larger and more diverse entity. But unlike L&T, which operates in various sectors, Afcons is distinct as one of the few publicly listed pure EPC players.

With the IPO appearing fully priced, substantial listing gains are unlikely. Additionally, the substantial debt and pledge of promoter shares (explained below) raise concerns. It would be prudent for long-term investors to keep this stock on their radar and buy after listing, once its share price stabilizes.

For a deep dive into other IPOs, explore: IPO Corner on Liquide