Ashoka Buildcon IPO Review – Fast Growth Leveraged to Indian Infrastructure Story but Management and Valuation Questionable

Ashoka Buildcon is a Construction Company primarily focused on the Road Segments.The company is looking to raise Rs 225 crores ($50mm) which would dilute around 15% of the equity.Given India’s huge demand for infrastructure and roads,the company is growing at 50%+ growth rates.However the quality of management is suspect given tax seizures,criminal cases and related transactions.The valuation of the company is also not cheap  at around 22-23x P/E (Rs 1700 crore market cap with Rs 75 crore net profit)and around 3x P/B.The Company has grown at an excellent rate while maintaining a Net Margin of 8-10%.The Road Sector in India is one of the best to invest in right now given the huge supply-demand mismatch and the urgency to accelerate the pace of growth.Ashoka Buildcon has already executed 17 of the 26 of the Road Projects making it one of the biggest in the country.Here are the pros and cons of the issue

Pros

1) Road Sector to see more than$20 Billion in Annual Investments in India.There is huge Demand  with Supply not coming up fast enough.Traffic Jams are omnipresent in India with vehicle capacity outstripping Road Growth by a Wide Margin

2) Growth – The Company has grown at a very rapid clip in the recent past with even the 2009 Global Downturn failing to affect the pace of growth.With over 60% CAGR in Net Profit over the last 5 years,the company has managed terrific growth with stable margins.

3) Order Books and Size – The Company is one of the Biggest Operators in the Road Segment with a Long Operating History.It has a good order book position of Rs 1600 crores as well.

Cons

1) Management seems Shady – Like lots of other companies operating in India,Management is Shady with Tax Raids finding Rs 20 Crores of unaccounted Cash,Criminal Cases against Promoters etc.There is low trust in the Company’s Management to adequately and honestly respect the fights of the minority shareholders.

2) Debt – The Company’s Consolidated Debt is quite large but Road Projects by the very nature are highly leveraged and this is not of huge concern unless the projects get stalled or run into huge time delays.

Summary

While I like the Road Sector in India and the Company is a well positioned company in this sector,I hate to invest in a company where Management seems untrustworthy.The valuation of the company is not exactly cheap either without being very expensive at around 20x.However  if something bad happens Macro wise then expect the stock price to plummet .There are other companies in the Road Sector like ITNL  which operates in the same segment but has a better management trust quotient.