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Garuda Construction and Engineering

• Garuda Construction and Engineering is coming out with a 100% book building; initial public offering (IPO) of 2,78,00,000 shares of Rs 5 each in a price band Rs 92-95 per equity share.
• Not more than 50% of the issue will be allocated to Qualified Institutional Buyers (QIBs), including 5% to the mutual funds. Further, not less than 15% of the issue will be available for the non-institutional bidders and the remaining 35% for the retail investors.
• The issue will open for subscription on October 08, 2024 and will close on October 10, 2024.
• The shares will be listed on BSE as well as NSE.
• The face value of the share is Rs 5 and is priced 18.40 times of its face value on the lower side and 19 times on the higher side.
• Book running lead manager to the issue is Corpwis Advisors.
• Compliance Officer for the issue is Aaushi Batheja.

Profile of the company

Garuda Construction and Engineering is a growing civil construction company. It provides end-to-end civil construction for residential, commercial, residential cum commercial, infrastructure and industrial projects and additional services for infrastructure and also hospitality projects, Wherein, civil construction includes construction of residential, hospitality, industrial, infrastructural and commercial buildings, construction of concrete building structures and composite steel structures which are required for the civil construction. 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 is also involved in sector pertaining to civil construction cum services.

The construction of concrete building structures and composite steel structures are procured by the company from underlying sub-contractors as per specified designs which may be mandated by overlying developers or by its own engineering teams. 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, all-in-all it offers complete construction services under its banner.

Historically, it has been majorly an in-house construction company for its Promoter Group and group related entities, where in its group entities and corporate Promoters bid for third party civil contracts as developers (private sector as well as where Government entities have a requirement where the bidding is as per publicly available tender documents and the Governments tendering process in certain cases) and sub-contract the construction work to the company as a contractual service. Going forward, the company is directly venturing into contracts with unrelated third parties and it is taking on a role of a professionally managed construction company. With years of experience as a construction company and its promoter entities & group entities being the developer, its management has also got an exposure of the roles and responsibilities as a developer. In order to gain the advantage from its management experience, the company is looking towards to enter into the larger role of a developer. 

Proceed is being used for:

• Working capital requirements
• General corporate expenses and unidentified inorganic acquisitions

Industry overview

The construction sector is the country’s second-largest economic segment after Agriculture. The sector contributed 8.4% to the national GVA (at constant price) in FY23. The order book of construction companies is dependent upon the capital expenditure in the economy. Broadly, the investments can be classified into infrastructure, real estate and industrial construction. The largest segment of Indian Construction industry is Infrastructure segment which contributes 59.7% as of FY23. The major chunk of growth is attributable with increase in government spending in building infrastructure. The construction segment witnessed a drop in FY21 due to impact of COVID but has strongly recovered in FY22 and FY23. Overall the Indian Construction sector has grown at a CAGR of 10.6% from FY18 to FY23 from Rs 2,375 Billion to Rs. 3,922 Billion. The construction sector is further expected to grow from Rs 3,922 Billion in FY23 to Rs 6,494 Billion in FY30 at a CAGR of 7.5%.

The Construction sector was hit hard during the pandemic, because of the lockdown, labour migration leading to logistical challenges. However, the sector has witnessed a growth in FY22 and FY23, supported by unlock measures and significant infrastructure investments by the Government. The industry has experienced a similar growth trajectory in the FY24, supported by a sustained focus on infrastructure investments in roads, railways, and airports, in addition to the expansion in real estate activity. Early indications from the real estate sector reveal a robust 23.5% year-on-year growth in sales revenues for the quarter ending December 2023. While operating expenses related to sales increased at a comparatively slower rate of 19.4%, the industry's most significant operating expense, categorized as other operating expenses, witnessed a notable rise of 75.3%. Consequently, the industry's operating profit saw a faster growth rate of 32.1% compared to sales. The operating profit margin expanded by 224 basis points, reaching 34.3%.

Over the long term, the outlook for construction sector is favourable supported by continued government spending on infrastructure. The Government has expanded the National Infrastructure Policy (NIP) during the Budget to 7,400 projects from 6,835 projects and announced plans for the National Monetization Pipeline and Development Finance Institution (DFI) to improve the financing of infrastructure projects. The NIP covers various sectors and regions indicating that it is relying on an ‘infrastructure creation’ led revival of the country’s economy. The NIP covering rural and urban infrastructure entailed investments to the tune of Rs 11,10,000 thousand lakh will be undertaken by the central government, state governments and the private sector during FY20-25. Road construction in India is expected to grow with new funding mechanisms by NHAI, such as ToT (Toll Operate Transfer) and InvITs (Infrastructure Investment Trust) and interest from international funds (both for equity as well as debt). This has the potential for catapulting India to the third largest construction market globally. The sector is expected to contribute 15% to the Indian economy by 2030.

Pros and strengths

Exclusive and focused business approach: The primary focus of the company is civil construction of residential and commercial buildings and now it is venturing into industrial, infrastructural projects as well. This focused business approach has enabled it to build a team of people with the right knowledge of relevant domain, skill and experience. It has sought to establish systems and processes that are aligned with specific requirements of its business operations, which has led to development of its core competence and technical expertise in the industry. Its capabilities in the civil construction business augments its positioning in the industry as a Company focused on providing a full spectrum of construction services. It usually concentrates specifically on undertaking construction of buildings, without engaging in any other activities such as land development or infrastructure development.

Strong project management capacity and execution capabilities: The company’s goal is to use its project management and execution capabilities to accomplish its projects on schedule while keeping high construction quality. Over the years, it has procured a fleet of construction equipment to ensure high quality and timely execution of its projects. However, keeping in mind its objective of being an asset light company, for most of its construction equipment, the deployment of construction equipment is done vide third party vendors, which keeps its asset model light for project execution, thereby allowing it to maintain cost control and minimize disruptions due to non-availability or machinery breakdown.

Visible growth through increasing order book: In the construction industry, an order book is considered as one of the key indicators of future performance as it represents a portion of anticipated future revenue and provides a brief list of projects undertaken and to be undertaken by the company. Maintaining an order book helps the company to evaluate and improve on the quality of projects undertaken by it. It aims to undertake projects with potentially higher margins and/or select projects that help it to enhance its reputation, market penetration and perception. The quality of its construction and the established relationships with its clients, has enabled it to build its order book.

Established and proven track record: The company has established a track record of successfully executing a diverse mix of construction projects i.e., residential, hospitality and commercial projects. For instance, it constructed the Golden Chariot Vasai Hotel & Spa, also, renovation and refurbishment of Golden Chariot, the Boutique Hotel at Mumbai in the hospitality sector in the year 2015. In the year 2017, it started undertaking civil construction works contracts of residential buildings in the MMR and have successfully executed 2 such projects. From 2010 to 2017, its projects comprised mainly of civil construction and work in additional services sector in the geographical areas of MMR, Karnataka and Tamil Nadu.

Risks and concerns

Total revenue comes from its top 10 clients: For the period ended on April 30, 2024, and for the fiscal 2024, 2023, and 2022, its top ten largest clients accounted for around 100% of its revenues from operations, respectively. The loss of a significant client or clients would have a material adverse effect on its financial results. It cannot assure that it can maintain the historical levels of business from these clients or that it will be able to replace these clients in case it loses any of them. Furthermore, major events affecting its clients, such as bankruptcy, change of management, mergers and acquisitions could adversely impact its business. If any of its major clients becomes bankrupt or insolvent, it may lose some or all of its business from that client and its receivable from that client would increase and may have to be written off, adversely impacting its income and financial condition.

Construction industry is cyclical and sensitive to changes in the economy: The company is subject to significant fluctuations in the market value of land and inventories as they can change significantly as a result of changing economic and market conditions. There is a time gap between its acquisition of land or development rights to the land and the development and sale of its projects, during which, deviations if any, could have a material adverse effect due to, among other things, changes to the national, state and local business climate and regulatory environment, local real estate market conditions, perceptions of prospective customers with respect to the convenience and attractiveness of its properties, and changes with respect to competition from other property developments. It could be adversely affected if the market conditions deteriorate or if it does its purchases at higher prices during stronger economic periods and when the value subsequently declines during weaker economic periods.

Huge working capital requirement: Significant amount of working capital is required to finance the purchase of materials, mobilization of resources and other work on projects before consideration is received from its clients. It meets its working capital requirements through internal accruals and also through project specific indebtedness which it tries and extinguish from the proceeds and revenues from the relevant project itself. The working capital requirement for FY25 and FY26 are estimated at Rs 16,743.74 lakh and for FY26 are estimated Rs 21,735.82 lakh. An amount of Rs 8000 lakh and Rs 2000 lakh will be funded out of the Net Proceeds in FY25 and FY26, respectively towards working capital requirements, whereas the balance would be arranged from its internal accruals. Any failure to obtain additional financing on terms commercially acceptable to it may adversely affect its ability to grow and its future profitability.

Business is subject to seasonal fluctuations: The company’s business operations may be affected by seasonal factors which may restrict its ability to carry on activities related to its construction projects and fully utilize its resources. Heavy or sustained rainfalls or other extreme weather conditions such as cyclones could result in delays or disruptions to its operations during the critical periods of its projects and cause severe damages to its premises and equipments. In particular, the monsoon season may restrict its ability to carry on activities related to its projects and fully utilize its resources and may slow its activities on construction projects, which shifts its revenue and accordingly profit recognition to subsequent quarters. Adverse seasonal developments may also require the evacuation of personnel, suspension or curtailment of operations, resulting in damage to construction sites or delays in the delivery of materials. Such fluctuations may adversely affect its revenues, cash flows, results of operations and financial conditions.

Outlook

Garuda Construction and Engineering is a construction company which provides comprehensive construction services for residential, commercial, residential/commercial, infrastructure, and industrial projects, as well as additional services for infrastructure and hospitality projects. The company has a strong track record in various construction projects, including Golden Chariot Vasai Hotel & Spa and Golden Chariot Boutique Hotel in 2015. Since 2017, the company has undertaken residential projects in MMR and completed two. From 2010 to 2017, the company focused on civil engineering in MMR, Karnataka and Tamil Nadu. On the concern side, the company’s total revenue comes from its top 10 clients, mainly its promoter related entities and group companies. The loss of any of its significant clients may have an adverse effect on its business, financial condition, results of operations, and prospect. Moreover, the company’s revenue heavily relies on construction projects related to its Group Companies and promoters being 100%, 44.82%, 94.62% and 86.65% in stub period ended April 30, 2024, March 31, 2024, March 31, 2023 and March 31, 2022 respectively.

The company is coming out with a maiden IPO of 2,78,00,000 equity shares of Rs 5 each. The issue has been offered in a price band of Rs 95-95 per equity share. The aggregate size of the offer is around Rs 255.76 crore to Rs 264.10 crore based on lower and upper price band respectively. On performance front, the company’s total income for FY24 has decreased by 4.07% from Rs 16,102.41 lakh for FY23 to Rs 15,446.88 lakh for FY24. Moreover, profit after tax has decreased by 10.69% from Rs 4,079.53 lakh for FY23 to Rs 3,643.53 lakh for FY24. This is in proportion to the decrease in profit before taxes.

The company is in the process of expanding its presence in the civil construction sector by expanding into development aspects as well. It can use the expertise and knowledge gained in the construction industry in its proposed thrust into the development aspects of the same. Further, its reputation would aid it in the development and marketing of residential and commercial projects. Further, its promoters are already procuring projects as developers and contracting the construction activities. It has been working on various projects with its promoters which has given it exposure to the roles and responsibilities of a developer and hence, utilising the same, it is keen to grow itself as the developer.