Dinesh Engineers IPO opens: Should you subscribe?

September 29
03:33 2018

Mumbai-based fibre network services provider Dinesh Engineers has opened its initial public offering for subscription on September 28 with a price band of Rs 183-185 per share.

The initial public offering, which consists up to 1 crore equity shares, will close on October 3.

The company, which intends to raise Rs 185 crore from the issue, will utilise issue proceeds for expansion of business by setting up of further OFC network under IP-1 licence; fund expenditures towards general corporate purposes; and to meet public issue expenses.

Dinesh Engineers is a passive communication infrastructure provider company in India, focused on providing passive communication infrastructure services mainly to the telecom operators and internet service providers (ISPs).

Company’s financials are strong and the company is also expected to do well in future, but brokerage houses advised either subscribing with caution or said high risk appetite investor may opt this public issue due to current equity market conditions and dependency of the company on limited number of large customers for revenue.

On valuation front, at higher price band, the company is demanding a P/E valuation of 11.8x (to its restated FY18 EPS of Rs 15.6), Choice Broking said.

Considering the positive future outlook, strong financial performance and capacity expansion in the higher EBITDA margin segment, the research house feels the issue is attractively priced.

However, considering the sustainability in the profitability margins, current turbulence in the equity market and listing in “T” category, it assigns a Subscribe with Caution rating to the issue.

SMC Research said with established optic fiber network in India, strong project management & execution capabilities and efficient Business Model, the company is expected to do well in future, but a significant portion of company revenue is generated from limited number of large customers.

Hence, a high risk appetite investor may opt the issue, it advised.

The key risk highlighted by SMC is that a significant portion of company revenue is generated from limited number of large customers and if they are unable to maintain company relationship with such customers, its business, results of operations and financial condition will be materially and adversely affected.

ICICI Securities also said the company is exposed to client concentration risk as well region concentration risk. “It may face pricing pressure from clients while any adverse regulatory regulations may impact its financials substantially.”

Furthermore, the research house said it is concerned about company’s i) aggressive accounting policy (unbilled revenue reported as part of topline), ii) sustainability about high margin in EPC business, and iii) mismatch in tax provision in P&L and actual tax payment for FY18 as per cash flows.

Since the receipt of the IP-I license, the company have created its own optic fibre network of around 7,500 kms which runs across the state of Rajasthan, Gujarat, Maharashtra, Goa, Karnataka, Andhra Pradesh and Telengana. Its wired network infrastructure solutions are used by many telecom companies such as Airtel, BSNL, Reliance Jio, Vodafone, Idea, Tata Communication etc.

Since the year 2011, it has laid fibre network of around 9500 Kms for the telecom operators under the vendor projects. Apart from telecom clients, it also has Mahanagar Gas in client list for laying gas pipeline in Mumbai. The work of laying the gas pipeline has been undertaken through outsourcing the same to the sub-contractors.

On financial front, over FY16-18, Dinesh Engineers reported a 57.2 percent CAGR rise in the consolidated operating revenue to Rs 274.69 crore in FY18. Consolidated EBITDA increased by 97.3 percent CAGR to Rs 107.96 crore in FY18. EBITDA margin expanded from 22.7 percent in FY16 to 35.7 percent in FY18.

Reported PAT increased by 118.8 percent CAGR to Rs 61.7 crore in FY18. PAT margin expanded from 10.5 percent in FY16 to 20.4 percent in FY18. Cash flow from operations was positive over FY16-18 with an average annual cash flow of Rs 34.38 crore.

Baring FY17, free cash flow was positive throughout the period and increased by 68.4 percent CAGR to Rs 25.51 crore in FY18. Average RoE was around 50 percent over FY16-18. Average RoCE was around 30 percent during the period.

Investor should also consider risks and concerns highlighted by brokerage houses related to the issue which are slowdown in the telecommunication sector, adverse regulations, poor capacity utilisation in fiber leasing business, highly labour oriented operations, competition, no non-compete agreement with other promoter group companies engaged in similar business, stretched working capital, and contingent liabilities.

Disclaimer: Reliance Industries Ltd. (which owns Reliance Jio) is the sole beneficiary of Independent Media Trust which controls Network18 Media & Investments Ltd.

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