IRCON International Ltd – IPO NOTE

The Government of India is pacing up its plan of disinvestment with IRCON IPO in the current fiscal after the success of RITES IPO, which was subscribed 67 times.

IRCON is a Specialized Construction Organization covering the entire spectrum of construction activities and services in the infrastructure sector. Railway and Highway Construction, EHP sub-station (engineering and construction) , and MRTs are the core competence area of IRCON.


Issue Size: Offer for Sale of 9,905,157 Equity Shares of Rs.10 aggregating up to Rs. 470 Cr.

  • Sale of up to 9,905,157 equity shares by the President of India, acting through the Ministry of Railways, Government of India.

Opening Issue Date:  September 17, 2018

Closing Issue Date:   September 19, 2018

Issue Price Range: Rs 470- Rs. 475 Per Equity Share

Retail Discount: Rs 10/per share

Lot Size:  30 Equity shares

Face Value: Rs.10 per share

Listing Date:   28th September 2018

Merchant Banker: IDBI Capital, Axis Capital Limited and SBI Capital.

Objects of the Offer

1)To carry out the disinvestment of upto 9,905,157 Equity Shares, including Employee Reservation Portion, by the Selling Shareholder constituting 10.53% of the Company’s pre-Offer paid up Equity Share capital the Company; and

2) To achieve the benefits of listing the Equity Shares on the Stock Exchanges.

Note: The Company will not receive any proceeds from the Offer and all proceeds shall go to the Selling Shareholder.

Industry Overview

The construction sector in India is at Rs 14.4 trillion during FY 15-18 which is about 40% higher than construction spends during FY11-14, driven by increased investments in Roads followed by Railways and Urban Infrastructure. In FY16, the construction spend for India as a % of GDP (current prices) accounted for about 6.9% (FY17) compared to other developing countries such as Sri Lanka at 7.4% (provisional) and Malaysia at 4.7% in 2015.

Over FY19-22, the construction sector is expected to increase 54% to Rs 22.2 trillion. Of this about 93% is contributed by infrastructure investments while the rest is from Industrial.

Share of Railways in Construction

During FY 15-18, railways accounted for 11% of the construction sector at Rs 1.6 trillion. Over the next 4 years, the construction opportunity in Railways is expected to double to Rs 3.1 trillion driven by investments by public as well as private sector especially in Network decongestion, expansion and Safety which account for over half of the total investments in railways during this period.

The investments in railway sector is expected to increase by about 77% from Rs 3.9 trillion in fiscals 2015-2018 to Rs 6.8 trillion in FY 19-22.

Split of Investments among Railway Segments

Budgetary Spending in Roads Doubles from Fiscal 2015 to 2017

During FY17, the central budgetary allocation (National Highways and PMGSY) almost doubled to Rs 702 billion compared to Rs 350 billion in 2014-15. The growth in budgetary allocation has reflected in the awarding and execution in the road projects as most of the projects are allocated under Engineering Procurement and Construction (EPC) and Hybrid Annuity Model (HAM).

Network Decongestion and Expansion is a Rs 1.4 Trillion Opportunity

Network decongestion incorporates investments in, Gauge Conversion, Doubling and Electrification. Rs 1.4 trillion is the estimated outlay (21% of the actual capex) for this segment between FY19-22 – about 102% jump in allocation compared to the previous four years.

Investments in doubling to double over the next four years

Doubling projects, which involve laying additional line/s along an existing line to ease traffic constraints and increase chartered capacity, are seeing sharper focus on commissioning.

The pace of completion of doubling projects is likely to increase to 1,500 km by FY22 from 882 km in fiscal 2017. Albeit, the pace of execution has been pulled up significantly compared to the period during fiscal 2012-2015. As a result, it is spending on doubling projects to almost triple by fiscal 2022 from Rs 91 billion in fiscal 2017.

Share of electrification on broad gauge to rise; offers potential for EPC players

As per union budget fiscal 2019, 1646 km of track has been electrified during fiscal 2017, taking the total electrified track length to 29,645 rkm. Till FY16, electrification has been extended to 27,999 rkm constituting 42% of the total rail network and 46.3% of the broad gauge (BG) line.

Investments in Track Renewals to rise with Thrust on Safety

The investments on track renewals is expected to increase from estimated Rs 238 billion over FY15-18E to Rs 475 billion over FY19-22, aided by higher availability of funds for safety through newly introduced Safety fund “Rashtriya Rai Suraksha Kosh” during FY18 budget.

The Metropolitan Projects are carried out on a PPP model which is an excellent opportunity for the company to increase the order book.

About Company

IRCON International Ltd. an integrated Indian engineering and construction company, specializing in major infrastructure projects, including, railways, highways, bridges, flyovers, tunnels, aircraft maintenance hangars, runways, EHV sub-stations, electrical and mechanical works, commercial and residential properties, development of industrial areas, and other infrastructure activities.

Over the years, Company has extended their operations to other geographies including countries like Algeria, Bangladesh, Indonesia, Iran Iraq, Jordan, Malaysia, Nepal, Saudi Arabia, Tanzania, UK and Zambia. Presently, IRCON has projects in Malaysia, Sri Lanka, Algeria and Bangladesh.

The company has a rich experience in executing major construction and infrastructure projects, both internationally and domestically. The scope of their services for such projects primarily includes design and engineering of the project, procurement of equipment and packages, project management, and commissioning. While majority of the projects are executed independently, they also form project specific JV and consortiums with other infrastructure and construction companies.

The total order book was Rs 17,569 cr, Rs 18,878 cr and Rs 22,407 cr as of FY16, FY17 and FY18, respectively, representing a YoY increase of 32.17%, 7.45% and 18.69% for FY16, FY17 and FY18, respectively.

The core operations of the company are:

  1. A) Construction Business

In the railway construction business, IRCON International Ltd.  is a turnkey construction company that specializes in new railway lines, rehabilitation/conversion of existing lines, station buildings and facilities, bridges, tunnels, signaling and telecommunication, and railway electrification. Projects are usually awarded to the company directly or where applicable, the Ministry of Railways awards projects to them indirectly through nomination.

For over 20 years the company is engaged in construction of highways and roads and with the GoI proposing to increase spending in this sector, including its focus on connectivity of secondary cities, ports and various regions the company has a lot of new business opportunities.

In the electrical business, the company carries out railway electrification and railway siding as turnkey projects. The company leverages its in-house design capacity to carry out projects on EPC basis. As part of the Government’s effort to modernize train stations and improve connectivity throughout the country, our capability in this sector has presented new business opportunities.

The table below provides a breakdown of the numbers of projects that the construction business has completed from April 1, 2015 to March 31, 2018 and the value of these completed projects.


  1. B) Infrastructure Development Business

In this business the company develops and maintains railways and roads on a BOT basis. As of FY18, the company had one completed road project of 115 km in India. The project is operated on a toll basis where profit is realized largely by toll collection during the concession period. The company expects to complete two more BOT (toll) projects in FY18 where they will start realizing toll revenues. To drive development in less connected areas, the GoI has adopted “hybrid annuity” mode, where the GoI shares a portion of the total project costs, thereby freeing up developers’ capital tied-up in one project for investment elsewhere.

The company has one project under implementation on a hybrid annuity basis where a fixed amount of the project will be paid after the project starts commercial operations. For hybrid annuity projects, income is assured to the extent of the annuities collected during a year under the relevant concessions, apart from receiving construction support during the construction period, which reduces the risk of income fluctuations resulting from traffic pattern changes. However, in some road segments with less than adequate toll paying traffic, the GoI may provide partial support in the form of viability gap funding. The company has currently placed strategic focus on executing projects under the EPC, DBFOT and hybrid annuity modes, as there has been an increase in high value projects being bid using these modes of project execution.

Risk Factors

1) The revenues of the company are substantially dependent on construction and infrastructure projects undertaken or awarded by government authorities and other entities funded by the government. Any change in government policies, the restructuring of existing projects or delay in payments to company may adversely affect the business.

2) If the company faces adverse publicity and incur costs associated with warranty claims or from defects during construction, our business could be adversely affected.

3) Projects included in the order book and future projects may be delayed, extended, modified or cancelled for reasons beyond the control which may materially and adversely affect the business, prospects, reputation, profitability, financial condition and results of operations.

4) Railway sector projects contribute approximately 86.70% of the Order Book as of FY18. Any change in the sector causing decline in the numbers of project available may adversely affect the revenues and profitability.

5) Projects sub-contracted or undertaken through a JV may be delayed on account of the performance of the joint venture partner, principal or sub-contractor, resulting in delayed payments or non -enforcement of performance guarantee issued by the company, could lead to material adverse effect on financial condition.

Competitive Strength

1) The construction business operates in diverse sectors covering many countries

2) Excellent execution track record through strong operating systems and controls

3) Visible growth through robust order book and steady execution

Business Strategy

1) Continue expanding the geographical footprint within and beyond India

2) Paradigm shift in revenue generation

3) Focus on high value projects in the construction business to benefit from economies of scale

4) Actively bid for new projects

5) Explore different models of project execution to optimize the project portfolio

6) Explore potential ways to capture sectorial initiatives undertaken by the Government to improve economic growth

Financial Analysis

  1. Visible growth through robust order book and steady execution:

The Order Book as of March 31, 2018 was Rs. 22,406.8 crore which translates into approximately six times the total operating revenue in FY18, indicating revenue growth getting better ahead.

Breakup of Projects for the Order Book of FY 18

  1. Construction business operates in diverse sectors covering many countries:

With respect to geographically diversified business operations, IRCON has so far completed more than 127 projects in more than 24 countries across the globe, and 380 projects in various states in India, as of March 31, 2018.

Over the years, Company has extended their operations to other geographies including countries like Algeria, Bangladesh, Indonesia, Iran Iraq, Jordan, Malaysia, Nepal, Saudi Arabia, Tanzania, UK and Zambia. Presently, IRCON has projects in Malaysia, Sri Lanka, Algeria and Bangladesh.



  1. Decline in Margin Due to Failure to Secure International Orders:

Its profits were dented from 2015 onwards due to failure to secure international orders where it enjoyed higher margins. It earned 17.6% margins in FY15 Vs 9.8% for FY18. Now, the company plans to focus on high value orders as they provide more margins and face less competition. It bids for orders worth Rs 500 crore or above.


  1. EPS

5. P/E Ratio

6. Price to Book Value

Peer Comparison:

Authors Note

The company is a sectoral leader. IRCON has a highly experienced management team which performs well over the years with good economies of scale, healthy order book position which implies an order book to bill ratio of 6x on FY18 numbers.

The company has been virtually debt-free with the net worth of the company as of 31st March 2018 close to Rs 3,762 crore, translating into a book value of Rs 400 per share as against Rs 1,200 crore in cash i.e. cash per share of Rs. 128.

The valuations of the IPO are attractive, it has a P/E of 10.81 and the Price to Book Value is 1.18, which appears to be low on valuations, but with no direct peer comparison. But for comparing valuations, NBCC and RITES Ltd. have been considered.It might have muted gains on listing, however from a longer-term perspective it seems to be a good pick.


-Report by Apeksha Shetty