While Vascon Engineers’ EPC capabilities provide comfort, success in the real estate business will depend on the company’s ability to scale it up.
Vascon Engineers is coming out with an IPO to raise Rs 178-200 crore to fund its EPC contracts and real estate development projects, which are the two primary sources of its revenue. In the real estate segment, the company follows a joint development model. It has acquired land along with other partners to develop commercial and residential projects primarily in Maharashtra. Of this, most of it is in and around its home-town of Pune itself.
EPC: Robust track-record
Over many years, Vascon has successfully developed strong in-house design and construction capabilities to execute large EPC (engineering, procurement and construction) projects for third parties. The company has about 24 years of experience in providing EPC services for building factories, hospitals, hospitality properties, office and residential complexes, shopping malls, IT parks and other buildings. Considering its experience and strong capabilities for quality construction on time, the company has been able to bag projects from some of the well-known names like Cipla, Kirloskar Brothers, Suzlon and Symbiosis among others. Among its ongoing projects include the Rs 207.3 crore Ruby Mills’ commercial complex in Dadar (in Mumbai), a Rs 179 crore HDIL project in Mumbai and the Rs 248 crore commercial building for Delhi International Airport in Delhi. The company’s strengths lie in its ability to deliver quality construction with time.
The EPC business is currently having an order book of Rs 3,200 crore, which is equivalent to 6-7 times its 2008-09 revenues. However, the scope of EPC business is not limited to just third-party projects—the business has been growing on the back of both, in-house as well as third party projects. Of the total order book, Rs 1,200 crore is currently on account of third parties, with the balance from in-house real estate projects.
Real estate: In-house advantage
Leveraging its strengths of its EPC business, Vascon has forayed into the real estate business. Here, the company buys land under different entities, develops it into residential or commercial projects and sells them in the market to generate revenues. However, it follows a joint development model which helps lower the risks while simultaneously providing revenues to its EPC business.
Currently, the company has got about 600 acres of land. The company along with other development entities is in the process of developing 51 real estate projects, with an aggregate saleable area of over 55.36 million square feet. Out of this, the company’s share stands at 29 million square feet of saleable area. Over the next five years, the company will be developing about 18-19 million square feet of area, while rest will be developed in a phased manner in long run. The benefits could be large even if the real estate prices crash given that the company has historically acquired this land bank at a cost of about Rs 140 per square feet. If one adds Rs 1,800-2,000 per square feet of construction cost, the margins will still be better as prices (of its properties) in its markets are estimated to be in the range of about Rs 3,000-3,500 per square feet. Besides, since these properties are developed jointly working capital requirement would not be a hurdle for the projects.
Meanwhile, the advantage will initially be on account of higher EPC revenues coming in the form of construction work to be carried out for these projects. For 18-19 million square fit, about Rs 2,000 crore worth of construction work will flow to the parent company.
Thanks to its EPC business, the company could get through last year’s downturn witnessed in the real estate market. For instance, in 2007-08, both the segments contributed equally to the revenues. But in 2008-09, about 90 per cent of the revenues came from the EPC business. This fiscal year as well, a large part of its revenue will come from the EPC business as some of its real estate projects have been delayed and are only expected to reflect in 2010-11 revenue.
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Overall, despite many positives, the concerns remain on its regional presence, high dependence on the Pune real estate market and the company’s ability to scale up the real estate business, where it has to deal with many different entities. Also, the company’s diversification into the hospitality business, which contributed about one per cent of the revenues, is seen as a diversification in non-core activities. The company, however, believes that it can dispose of these assets once they find suitable buyers.
To sum up, considering its healthy order book, the EPC business can provide about 30-35 per cent growth in the next two years. However, the revenues from the real estate business will only start from 2010-11. Given the project pipeline, the real estate business is estimated to be worth about Rs 1,300 crore. If the Rs 500 crore valuation of the EPC business is included, which is based on 2010-11 EV/EBIDTA estimates, the per share value works to about Rs 200 leaving limited room for appreciation considering the offer price of Rs 165-185 per share. While analysts believe the IPO pricing is a tad expensive, investors may apply at the lower price-band.