Garuda Construction and Engineering IPO Launches Today: Is It Worth Subscribing?

The much-anticipated initial public offering (IPO) of Garuda Construction and Engineering Ltd. opens today, October 8, 2024, and will close on October 10, 2024. The company aims to raise around ₹264.10 crore through the IPO, positioning itself as a prominent player in the Indian construction market. Analysts are largely in favor of subscribing to the IPO, citing the company’s strong financials, diversified projects, and substantial order book as compelling reasons for investors to consider.

Institutional Investment and Anchor Book Allocation

Ahead of the IPO launch, Garuda Construction and Engineering successfully raised ₹75 crore from institutional investors through its anchor book allocation. The largest buyer among these investors was AG Dynamic Funds, which purchased 21.05 lakh shares worth ₹20 crore. Other institutional investors, including Trust Mutual Fund, Maybank Securities, North Star Opportunities Fund, Resonance Opportunities Fund, and Bridge India Fund, each acquired 10.52 lakh shares worth ₹10 crore.

The smallest buyer in the anchor book allocation was Cognizant Capital Dynamic Opportunities Fund, purchasing 5.26 lakh shares for ₹5 crore. This pre-IPO fundraising adds to the company's credibility and showcases strong demand from institutional investors.

Analyst Recommendations for the IPO

Various brokerage firms have given their views on Garuda Construction and Engineering's IPO, with most analysts issuing a favorable 'Subscribe' rating. The company's strong fundamentals, including its impressive order book and diversification across multiple project types, have been highlighted as major strengths.

Swastika Investmart: Long-Term Investment Recommendation

Shivani Nyati, the Head of Wealth at Swastika Investmart, recommended investors with a higher risk appetite consider subscribing to the IPO for long-term growth. Nyati emphasized that the company’s diversified project portfolio and robust order book are key strengths. While the company showed strong revenue and profit growth in FY23, growth in FY24 was somewhat subdued due to the election year. Despite the company's cyclical nature, the strong return on net worth and price-to-earnings (P/E) ratio in line with industry peers offer promising potential for long-term gains.

SMIFS Ltd.: Strong Financials Support 'Subscribe' Rating

SMIFS Ltd. has also assigned a 'Subscribe' rating to the IPO, noting that Garuda Construction and Engineering boasts the highest return on equity (ROE) and return on capital employed (ROCE) among its industry peers. For FY24, Garuda recorded an ROE of 36.14% and an ROCE of 46.69%, alongside an almost debt-free status. These factors position the company to capitalize on growth opportunities within the Indian construction market.

Arihant Capital: Subscribe for Listing Gains

According to Arihant Capital, the company’s focus on maintaining an asset-light model and securing high-margin projects makes it an attractive investment. Arihant Capital has recommended subscribing to the IPO for potential listing gains. The firm highlighted that at the upper price band of ₹95, the issue is priced at a P/E ratio of 24.24x based on FY24 earnings per share (EPS) of ₹3.92.

Key Risks and Concerns

Despite the largely positive outlook from analysts, Garuda Construction and Engineering faces some challenges that potential investors should consider.

• Cyclical Nature of the Industry: The construction industry is known for its sensitivity to economic cycles, and Garuda's performance is not immune to these fluctuations.

• Revenue Concentration: A significant portion of the company’s revenue comes from its top 10 clients, making it vulnerable to client-specific risks.

• Negative Cash Flow: The company has experienced negative cash flow in the past, which could be a concern for investors focused on liquidity.

• Dependence on Real Estate Market: The company’s profitability is closely tied to the real estate sector, which has its own set of challenges.

• Competitive Industry: Operating in a highly competitive construction industry means Garuda faces significant pressure from both domestic and international players.

• Working Capital Requirements: The company’s operations require significant working capital, and any disruptions could impact its ability to execute projects efficiently.

Key Strengths of Garuda Construction and Engineering

Despite the risks, Garuda Construction and Engineering has several strengths that make it a solid investment choice for those looking at the Indian construction sector.

• Focused Business Approach: The company maintains a sharp focus on civil construction and related services, allowing it to build a strong market presence.

• Proven Track Record: Garuda has an established track record of successfully completing complex projects, which adds to its credibility.

• Strong Financials: The company has demonstrated strong financial performance, as seen in its revenue growth and profitability.

• Robust Order Book: The company’s current order book stands at ₹1,408 crore, providing visibility for future growth.

• Healthy Balance Sheet: Garuda’s almost debt-free status and superior return ratios make it stand out among its peers.

IPO Price Band and Subscription Details

Garuda Construction and Engineering is offering its shares in a price band of ₹92 to ₹95 per equity share. Investors can bid for a minimum of 157 equity shares in one lot and in multiples thereafter. The offer includes a fresh issue of up to 1.83 crore equity shares, amounting to ₹173.85 crore, along with an offer for sale of up to 95 lakh equity shares, aggregating ₹90.25 crore.

Grey Market Premium (GMP)

According to market observers, the grey market premium (GMP) for Garuda Construction and Engineering's IPO stood at ₹22, indicating a potential listing premium of around 23%. This suggests that the IPO is receiving strong interest from retail investors, and the demand in the grey market bodes well for its listing performance.

IPO Objectives and Use of Proceeds

The net proceeds from the fresh issue will be used for the following purposes:

• ₹100 crore towards working capital requirements, ensuring the company has sufficient funds to execute its growing order book.

• General corporate purposes, including potential acquisitions to fuel inorganic growth.

Business Overview and Financial Performance

Garuda Construction and Engineering is a civil construction company that specializes in a wide range of projects, including residential, commercial, infrastructure, and industrial construction. Additionally, the company provides operations and maintenance services (O&M), mechanical, electrical, and plumbing (MEP) services, and finishing works.

In terms of financial performance, the company’s revenue grew from ₹77 crore in FY22 to ₹154 crore in FY24, representing a compound annual growth rate (CAGR) of 26.03%. Profit after tax increased from ₹18.78 crore in FY22 to ₹36 crore in FY24, at a CAGR of 24.72%.

IPO Allotment and Listing Date

The allotment for the Garuda Construction and Engineering IPO is expected to be finalized on October 11, 2024, with the shares likely to list on October 15, 2024 on both the BSE and NSE.