SRM Contractors IPO Analysis: Should You Subscribe?

Get a detailed overview of SRM Contractors Ltd IPO, including GMP, verdict, issue details, subscription status, and the company's strengths and risks.

The initial public offer (IPO) of SRM Contractors Ltd, which kicked off on March 26, will close for subscription on Thursday, March 28. The construction and development company seeks to raise Rs 130.20 crore through its IPO. The firm has announced a price band of Rs 200 to Rs 210 per share for its IPO. Prospective investors can bid in lots, with each lot consisting of 70 shares. To apply for the IPO, the minimum investment is set at Rs 14,700 (calculated as 70 x 210). 

According to market observers, shares of SRM Contractors Ltd are currently trading in the grey market at a premium of Rs 68, i.e. a grey market premium (GMP) of 32% above its issue price of Rs 210. The public offer is anticipated to debut on BSE and NSE on the 3^rd of April, 2024.

SRM Contractors Anchor Round

Prior to issue opening, on March 22, SRM Contractors Ltd successfully raised Rs 39 crore by allocating 18,59,900 equity shares at Rs 210 per equity share to three anchor investors. These include Neomile Growth Fund - Series 1, Saint Capital Fund and Astorne Capital VCC-Arven.

SRM Contractors Subscription Status

Shortly after the subscription window opened, the IPO attracted positive feedback from both retail investors and non-institutional investors (NIIs), with their allocations quickly being fully subscribed. As a result, the entire issue was fully subscribed on its opening day. 

According to BSE data, the SRM Contractors IPO subscription status reached over 3.56 times on Day 1. The subscription for the retail segment was 3.55 times, while the NII segment saw a subscription rate of 6.26 times. The portion allocated for qualified institutional buyers (QIBs) was subscribed 1.57 times.

About SRM Contractors Ltd

Founded in 2008, SRM Contractors Ltd (SRM) specializes in engineering construction and development, primarily focusing on building roads (inclusive of bridges), tunnels, slope stabilization efforts, and various other civil construction projects within the Union Territories of Jammu & Kashmir and Ladakh.

Engaging in construction projects either as an Engineering, Procurement, and Construction (EPC) contractor or on an item-rate contract basis for infrastructure developments, SRM has carved out a niche for itself by adeptly handling projects in challenging terrains and demonstrating successful completion under difficult conditions.

Strengths

• Impressive Financial Growth: SRM has shown a strong and consistent financial growth, with a Compound Annual Growth Rate (CAGR) of 37% in operational revenue from FY21 to FY23. This period also saw a significant uptick in EBITDA by 45% and a remarkable increase in net profit by 51%.

• Impressive Return Ratios: SRM is distinguished by its excellent return metrics, showcasing a Return on Net Worth (RoNW) of 34.85% and a Return on Capital Employed (RoCE) of 35.04% for FY23.
• Rising Profit Margins: SRM has seen a steady increase in its profit margins, with EBITDA margins rising from 11.45% in FY21 to 12.87% in FY23, and further climbing to 15.88% by December 2023. The Net Profit margin also saw growth from 5.17% in FY21 to 6.24% in FY23, and then to 8.98% by December 2023.
• Impressive Project Portfolio: SRM boasts a record of 38 successfully completed infrastructure projects worth Rs 1,411.66 crore since inception. This includes 31 road projects, 3 tunnel projects, 1 slope stabilization project, and 2 other miscellaneous civil construction efforts.
• Robust Order Book: With an order book valued at Rs 1,199.31 crore as of 31 January 2024, SRM demonstrates a solid lineup of future projects. Given the FY23 revenue of Rs 300 crore, this order book provides nearly 4 years of revenue visibility.

Key Concerns 

• Client Dependence: SRM's financial performance is highly dependent on a limited number of clients. In FY23, its top five and top ten clients constituted 71.66% and 92% of its operational income, respectively. The loss of any key client could severely impact its operations and financial stability.
• Geographical Concentration: SRM’s operations are predominantly located in Jammu & Kashmir and Ladakh, making it vulnerable to local economic, regulatory, and other changes in these territories.
• Potential Financial Liabilities: SRM faces potential financial liabilities, with contingent liabilities recorded at Rs 61.85 crore for FY23 and Rs 65.95 crore for the nine months ending December 31, 2023. These liabilities, if realized, could negatively impact its financial health and profit margins.
• Legal Risks: The firm, including its directors, promoters, and joint ventures, is engaged in various legal proceedings. Unfavourable outcomes in these legal matters could negatively affect the company's operations.

Final Verdict: Subscribe

SRM has demonstrated consistent growth in both revenue and profits over the last three years, supported by impressive return metrics. Its robust order book also ensures a clear outlook on future revenues. Moreover, the firm is increasing its fleet machinery and equipment, which should drive its operational efficiency in the coming quarters.

In terms of valuation, the IPO appears to be attractively priced with a Price-to-Earnings (P/E) ratio of 17x based on annualized FY24 earnings against the post-IPO fully diluted paid-up equity capital.  This valuation is comparatively lower than that of its industry counterparts. Moreover, the grey market premium (GMP) for the issue indicates a potential premium debut on the stock exchanges.

Given these aspects, investors may consider subscribing to the IPO from a long-term perspective.

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