SRM Contractors is an engineering construction and development company undertaking construction of roads (including bridges), tunnels, slope stabilisation works and other miscellaneous civil construction activities in hilly, challenging and difficult terrains and geography such as the Union Territories of Jammu & Kashmir and Ladakh. It executes construction both as an EPC contractor and on an item rate basis for infrastructure projects. The promoters of the company are Sanjay Mehta, Ashley Mehta, and Puneet Pal Singh.

The company undertakes contracts independently or whenever required, through project-specific joint ventures (JVs) with other infrastructure and construction entities when a project requires meeting specific eligibility requirements of certain large projects, including requirements relating to specific experiences. It undertakes sub-contracting assignments from third-party major infrastructure and construction entities. The company actively pursues opportunities to expand its portfolio of projects by bidding for hybrid annuity model (Ham) projects with strategic JV partners.

Currently, the company is pre-qualified to bid independently on projects, tendered by departments of governmental authorities and other entities funded by the GoI, of contract value up to Rs 300 crore and for EPC contracts pertaining to construction of roads (including bridges) and for construction of tunnel, respectively, up to Rs 500 crore.

Since its incorporation in September 2008, the company has completed 38 infrastructure construction projects having an aggregate contract value of Rs 1411.6562 crore independently and through project-specific JVs. These 38 projects include 32 roads projects, three tunnel projects, one slope stabilization work, and two other miscellaneous civil construction activities. Out of the 38 projects executed, 30 infrastructure construction projects, including sub-contracting assignments, have been executed independently by it and eight projects have been executed through project specific JVs.

The order book as on January 31, 2024, stood at Rs 1199.3133 crore [up from Rs 834.6937 crore as of end of March 31, 2023] spread over 21 infrastructure construction projects. Of the current order book under execution, Rs 720.56 crore (in 11 projects) relates to road construction, Rs 258.215 crore (in five projects) relates to tunnel construction, Rs 2023.888 crore (in four projects) relates to slope stabilization works, and Rs 166.564 crore relates to other construction activity. Out of the 21 ongoing infrastructure construction projects, 15 infrastructure construction projects, including sub-contracting assignments, are being executed independently by the company and six infrastructure construction projects are being executed through project-specific JVs.

As on December 31, 2023, the entire operational revenue (100%) came from the Union Territory of Jammu & Kashmir and Ladakh. However, in January 2024 and February 2024, the company was awarded two contracts for slope stabilization work in Uttarakhand, one contract for slope rehabilitation works in Arunachal Pradesh,and one contract for slope protection works in Himachal Pradesh. Moreover,it currently derivesmost of its revenue from contracts with a limited number of government entities, including NHIDCL, KRCL, ERA Jammu, BRO, and PWD J&K Northern Railway, Irrigation & Flood Control Department, J&K, JKRRDA and from sub-contract assignmentswith third party major infrastructure and construction entities executing government-funded infrastructure projects.

As on January 31, 2024, the company owned and maintained 228 equipment and machineries consisting of seven hot mix plant, six stone crushers, 23 excavators, 18 backhoe loaders, 42 tippers and dumpers, three boomers, three shotcrete machines, seven hot bitumen pressure distributors, three wet mix macadam plants, seven tandem roller compactors, five road rollers, seven pavers, and four graders.

The Issue and object of the issue

The issue comprises fresh Issue of 6200000 equity shares. Of the net proceeds from the issue, about Rs 31.50 crore will be used to fund capital expenditure requirements for the purchase of equipment and machinery, Rs 10 crore will be used for full and part-payment of certain outstanding secured borrowings, Rs 46 crore to fund incremental working capital requirements, Rs 12 crore to fund investment in project specific JV projects, and the balance towards general corporate purposes.

As on December 31, 2023, an aggregate of Rs 32.7437 crore was outstanding towards loans availed from banks.

Strength

The order book as of end of January 2024 stood at Rs 1199.31 crore, translating into four times of the FY2023 revenue.

Has a proven track record of efficient execution of roads, tunnels and slope stabilisation works in the hilly and difficult terrains.

Weakness

The entire operational revenue (100%) as on December 31, 2023,was from projects undertaken or awarded in the Union Territory of Jammu & Kashmir and Ladakh. The concentration of business in UT of J&K and Ladakh exposes the company to the risks of regional militancy and terrorism, regional civil unrest, political instability, regional slowdown in construction activity or reduction in infra projects due to change in laws, policies and regulations of the political and economic environment, and interruptions on account of adverse climatic conditions.

A significant portion of the revenue is derived from a limited number of clients. The Top 5 and 10 clients accounted for 80.77 and 97.74% of the revenue in the period ended December 2023 and 71.66 and 92% in FY2023.

Time and cost over-run are inherent in the construction and EPC business. For instance, five of its projects such as (i) upgradation of Tutan Di Khui to Khada-Madana Road awarded by PWD J&K; (ii) work for improvement and upgradation of the Hasti Sarthal Devi Ji Road; (iii) providing and laying of wet mix macadam and berms filing on the internal road of Marh area in block Marh; and (iv) EPC of ANS Irrigation Canal Rajouri, J&K, could not be completed, were struck, under arbitration, or inordinately delayed in the past three financial years.

The company has not yet placed orders for purchases of equipment and machinery.

Infra order inflow depends on competitive financial bids and satisfaction of prescribed technical and financial pre-qualification criteria as infrastructure projects are typically awarded following a competitive bidding process.

The construction industry is highly competitive with low entry barriers.

SRM Realties Pvt Ltd, a promoter group entity, is authorized to undertake business activities similar to the business conducted by the company.

Foray into Ham projects requires equity investment and borrowings to meet project costs.

Valuation

Sales for the fiscal ended March 2023(FY 2023) were down 14% to Rs 300.29 crore. With the OPM expanding140 bps to 12.8%, OP was up 27% to Rs 38.30 crore.The growth ofPBT was restricted at 8% to Rs 25.05 crore. Pat was finally up by 7% to Rs 18.75 crore.

In thenine monthsended December 2023, net profit was Rs 21.07 crore on an operating revenue of Rs 234.55 crore.

The EPS for FY2023 based on the post-issue expanded equity stood at Rs 8.2. The PE on upper price band of the asking price works out to about 25.6 times.

In comparison, relatively infra construction companies of similar size (interms of STO) such as ARSS Infra, RKEC Projects, Likhitha Infra and Udhayshivakumar Infra are quoting atPE of 7.6 times, 14.2 times, 16.4 times and 17.8 times. Relatively bigger player such as ITD Cementation and Man Infra quote at PE of 44.3 times and 30.1 times.

The EV/order book was about 0.4 times. In comparison the EV/OB of ITD Cementation, RKEC Projects and Likhitha Infrastood at 0.3 times, 0.3 times and 0.6 times, respectively.