• The order book at the end of March 31st stood at Rs. 62,368.4 million which provides visibility to the earnings. However, the tenure of its execution, which in certain cases is over a long time frame merits consideration and factoring while evaluating its FPO price. 
  
  
• Of the aforesaid Order-Book, the share of Consultancy and Engineering projects is about 47 per cent (Rs. 29,158.5 million) while that of the Lumpsum Turnkey project segment is 53 per cent (33,209.9 million).
  
  
  However, given the long term nature of the contracts and adopting percentage completion basis for revenue recognition, the revenues for a particular period can turn out to be  lumpy.
  
  
• Traditionally, the company has remained debt-free with sufficient operating cash flows  despite operating in a capital intensive business environment

Positives
 

• High operating margins : As compared to some of its peers in the consultancy services segments the company has been able to maintain its operating margins at about 30 – 35 per cent over the last four financial years. Thus a sound operational track record augurs well for the future prospects of the company.
  
  
• Healthy order book: The order book to sale of the company is almost 3 times FY10 sales thus giving visibility to the revenue earnings. As on 31st March 2010, the order book of the company stood at Rs. 62,368.4 million.
  
  
• De-risking through diversification : The company primarily caters to the volatile hydrocarbons sector. Thus, its plans to foray into the City Gas Distribution segment and power (nuclear and solar power) business verticals will lead to reduced dependence for revenues on the hydrocarbon sector.
  
  
• Technologically driven : The services offered by the company require highly skilled technicians which has helped the company to become a technologically driven organization. This has resulted in the company filing for 20 patents, approvals for which are pending while it has already has been granted about 10 patents for various process technologies and hardware solutions.

Concerns
 

• Vulnerablity to raw material costs : The ability of the company to pass on any rise in raw material costs to its customers is limited under its fixed price and lumpsum turnkey contracts. This could impact the profitability of the company in case of any hike in raw material cost.
  
  
• Client Concentration Risk: As the projects are high value assignments, the revenues of the company may appear to be skewed from a particular client (lumpsum turnkey projects). It is possible that the company also provides the same client with engineering and consultancy services. Thus, the loss of any client may adversely impact the revenue earnings of the company.
  
  
• Increased Regulatory Framework : The company’s business is largely focused on oil & gas exploration, development and production which are largely undertaken by the Government or other relevant Government organizations. Thus contracts with governmental agencies involve much of regulatory framework and scrutiny. This may also lead to delay in awarding contracts, thus impacting the topline of the company.
  
  
• Competitition : Beyond the PSU domain, the company operates in a highly competitive environment with international players too in the fray now. 
  

CONCLUDING NOTES

At the upper end of the price band the company is demanding a forward price to earnings multiple of 20 times its estimated FY 2011 earnings which puts its on par with its peers.  However, its Return on Networth (RoNW) of almost 40 per cent as of March 2010 is  higher than that of its comparable peers. 

However, given that this PSU is now going to have to operate in segments where margins are lower and competition will be more intense, it remains to be seen if its financial performances can continue to remain at the same level.

Further, as has been the case with earlier PSU FPOs, since the announcement of the FPO price band, the stock has corrected sharply, though it still trades above the upper band.

Yet, given the additional cushion of a 5 per cent discount over the FPO price for retail investors,  investors can consider applying in this FPO, though chances of any windfall gains on account thereof appear remote.

theIPOguru’s  Verdict  :

INVESTOR TYPE