With a six-decade legacy of delivering complex infrastructure projects, Afcons’ IPO presents a compelling opportunity for investors seeking exposure to India’s burgeoning infrastructure sector. But let’s examine the company’s strengths and challenges to assess its potential.
Afcons plans to use the IPO proceeds to enhance its financial position. It will allocate ₹600 crore to repaying high-cost loans, ₹320 crore to supporting working capital, and ₹80 crore for capital expenditure. These measures aim to reduce debt and boost operational efficiency.
A proven leader in infrastructure
Afcons has cemented its position as a dominant player in the infrastructure sector, consistently outperforming its peers on key financial metrics. Over the past three fiscal years, the company has maintained healthy operating margins and an impressive return on capital employed (ROCE). This has propelled Afcons to the forefront of the industry, surpassing competitors such as KEC International Ltd, Kalpataru Project International Ltd, and Dilip Buildcon Ltd.
However, industry experts advice some caution.
Deven Choksey, managing director of KRChoksey Financial Services Pvt. Ltd, said the “higher ROCE may be a short-lived phenomena. Post-listing key factors to watch out would be inflow of new orders and the price at which they are won”.
He added: “Aggressive positioning in bidding and winning contracts for growing the size of the book (call it quarterly results syndrome) could lead to margins falling in line with peers in the industry and will reflect in the ROCE eventually.”
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Afcons boasted a robust and diversified order book worth ₹31,747.4 crore as of June. The company’s largest segment, urban Infrastructure—which primarily covers elevated and underground metro works, bridges, flyovers and elevated corridors—accounts for 48% of its total order book.
Other major segments include hydro and underground (28%), marine and industrial (9%), oil and gas (6%), and surface transport (11%).
This well-diversified portfolio showcases Afcons’ expertise across multiple sectors and its ability to mitigate risks associated with market fluctuations in any single area.
Despite operating in a capital-intensive industry, Afcons maintains a favourable debt profile. The company’s debt-to-equity ratio has consistently remained below the industry average, reaching a median of just 0.6 times over the past three years. This strong financial position underscores Afcons’ prudent financial management.
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The company is also fairly valued, said experts.
“Afcons Infrastructure is trading at over 33 times price-to-earnings on the offer price, which seems justified given its track record of executing prestigious projects and the current market valuation of reputable infrastructure companies,” said G. Chokkalingam, founder and managing director of Equinomics Research.
Vulnerable to global headwinds
Afcons has demonstrated steady revenue growth, with a compounded annual revenue growth rate (CAGR) of 10% between FY22 and FY24, which appears modest compared with its peers.
Choksey said Afcons has the potential to improve its revenue growth, but added that this hinges on two key factors: achieving consistent growth; and identifying new sources or drivers of exceptional growth.
Afcons’ overseas revenue share has declined over the past three years, from almost a third to a quarter in FY24. Its exposure to international markets, including Africa, West Asia, South Asia (excluding India), Bangladesh, and the Maldives, makes Afcons vulnerable to global economic headwinds.
Bangladesh, currently experiencing civil unrest, is home to three road projects and one rail project being executed by Afcons, with a combined value of ₹3,406 crore. “If the share of revenue from Bangladesh is substantial (say more than 10%), it could impact its margins. Otherwise, it is manageable,” Chokkalingam said.
In a recent discussion, Afcons’ management outlined their risk management strategy for international operations, providing insights into their approach to mitigating challenges in diverse markets.
“Even if there are attractive opportunities in some countries, if they don’t fit within our risk framework, we don’t pursue them. This is a core part of our risk management strategy, ensuring that force majeure clauses are accounted for,” said Afcons managing director Paramasivan Srinivasan.
“Overseas, we are not only present in the Middle East but also in neighbouring countries, Africa, and to some extent Eastern Europe. If there’s a downward trend in the Middle East, we see an upward swing in Saudi Arabia. This allows us to consistently generate revenue across various global markets.”
Employee attrition
Another challenge for Afcons is its rising employee attrition rate, from 11% in FY21 to 19% in FY24. While the attrition is primarily at the junior level, the loss of skilled workers can disrupt project timelines and increase costs.
The company’s management acknowledged this issue.
“Our attrition is primarily at the junior level, with senior leadership remaining relatively stable. Over the past 15 years, a significant number of engineers shifted to the IT field, leading to a shortage of skilled professionals in civil engineering. We are now focusing on bridging these skill gaps,” the company’s management said at a press briefing.
Opportunities for growth
Despite these challenges, Afcons is well-positioned to capitalize on significant growth opportunities.
India’s infrastructure sector is expected to grow at a CAGR of 10% between FY23 and FY28, driven by increased government spending on infrastructure development.
Several of Afcons’ key international markets are poised for significant growth. West Asian countries, fueled by higher oil revenues, are also anticipated to accelerate infrastructure development.
Sub-Saharan Africa, driven by demographic trends, a burgeoning middle class, and substantial infrastructure investments, is expected to be the region’s fastest-growing market. These favourable conditions present Afcons with a prime opportunity to expand its project pipeline and undertake more ambitious projects.
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