A2Z Maintenance and Engineering Services IPO Review – Good Quality EPC,Facilities,Waste Management Company entering Biomass Energy Fairly Valued

A2Z Maintenance and Engineering Services is a  Private Equity Promoted Facilities Management,Waste Management and EPC Company which is getting into the business of  biomass energy.Company has fixed a price band at Rs 400-410 comprising of fresh issue of Rs 675 crore (~$150million) by the company and an offer for sale of upto 4.5 million shares by the selling shareholders.Note Renewable Energy in India has a bright future with around 5 GW of Renewable Energy Capacity to be installed per year over the next decade.However Biomass Energy may not be the best area considering the considerable expense and uncertainty in acquisition of feedstock.The Company already operates in 3 distinct sectors namely.

a) EPC – They EPC services to power generation companies and companies in other sectors, including road and telecommunications.Focus primarily on the power distribution sector

b) MWS – In the MSW business, we provide collection, transportation, processing, disposal and treatment of municipal solid waste (“MSW”). In a short span of time since 2008, we have been awarded contracts for (a) setting up IRRFs on a BOOT basis with an aggregate MSW capacity of 3,800 tons per day (“TPD”) in six cities

c) FMS – We have established ourselves as a multi-location, multi-service FMS provider in the Indian market. We also provide specialized services to the Indian Railways under the Clean Train Station (“CTS”) scheme, the Intensive Rake Cleaning (“IRC”) scheme and the On-Board Housekeeping Services (“OBHS”) scheme in 11 out of 16 railway zones.

New Business

Renewable Energy – “We are constructing three 15 MW renewable energy cogeneration projects in sugar mills located in the State of Punjab on a BOOT basis and a 15 MW biomass-based power plant at Kanpur in the State of Uttar Pradesh where we intend to primarily use, among others, RDF generated from our MSW business as a source of fuel. We expect these four power plants to be commissioned in March 2011. In addition, we are also setting up five 15 MW biomass-based power generation projects in the State of Rajasthan that will primarily utilize crop residue as fuel”

Advantages

1) Good Growth and Great Industry – The company has grown at a stunning 95%+ topline and 100%+ bottomline CAGR over the past 3 years.The company operates in the fast growing sectors of Facility Management Services (FMS),Municipal Solid Waste  (MWS) and EPC.The company has  solid long term relationships with local governments and PSUS and  has won prestigious contracts like Commonwealth Games

2) Good Promoters – The Company is backed by PE players Beacon,Lexington and Rakesh Jhunjhunwala.The Management also seems to be well qualified.The promoter Amit Mittal has 20 years of experience after passing out of IIT Roorkee and does not seem to have any bad antecedents unlike a lot of other company promoters (Prakash Steelage,Claris Lifesciences etc)

3) Diversified Company– The Company is well diversified with presence in 3 high growing sectors of EPC,MWS and FMS.The 4th sector Renewable Energy (Biomass Energy) is also a decent choice.However such rapid diversification leads to the question of management bandwidth and overheating as well.

Risks

1) Renewable Energy Lack of Experience – The Company has little experience in biomass energy projects execution.The Company is setting  135 MW capacity mainly in Rajasthan and Punjab and it has not contracted PPAs for these projects.The company is dependent on a single Chinese supplier for technology transfer of the boilers to be used  in biomass energy.

2)Negative Cash Flows – The Company has generated negative cash flows over the last 3 years.This is not a significant deal-breaker as the company is expanding fast at around 95% CAGR in a working capital intensive business.The Company’s receivables has been increasing rapidly leading to negative operating cash flows.Debt at around Rs 400 crores is also quite high compared to the Net Worth of Rs 414 crores.

Valuation

The Company will be valued at Rs 2300 crores with 5.7 crores shares priced between Rs 400-410.Taking out the Rs 675 crores which will be raised will give the company roughly a P/B of 4x.The P/E on a trailing basis will be about 23x without taking in the IPO money into account.On a P/S basis the Company will trade at approximately 2 times.

Summary

A2Z is very similar in nature and valuation to VA Tech Wabag which did a successful IPO recently.The margin profile,growth and management is very similar.As such A2Z is a decent company however its not a compelling buy given the valuation.Note Biomass Energy is a tough sector to operate in and Orient Green Power has done badly since its IPO without having done anything badly as such.A2Z given the overall qualitative and quantitative factors seems a good stock at fair valuation.This makes the company  a decent one to buy for the long term.