LIKHITHA INFRASTRUCTURE IPO: DETAILS & ANALYSIS
BASIS STRUCTURE OF LIKHITHA INFRASTRUCTURE IPO
The Likhitha Infrastructure IPO is all set to hit the markets on September 29, 2020. This will be twelfth on the list of IPOs 2020. The issue will remain open for subscription from September 29 to October 1.
A total of 51 lakh equity shares will be offered through the Likhitha Infrastructure IPO. The shares will be priced between Rs. 117 to Rs. 120.
The Likhitha Infrastructure IPO has a valuation of about Rs. 61.2 crores. This makes it one of the smallest IPOs in 2020.
When it comes to Initial Public Offerings, there are two primary kinds — book-building and fixed price offering.
The book-building IPO is when the shares are quoted with a price band, and not a single price. On the other hand, the fixed price offering comes with a single unique price for the shares being offered.
The Likhitha Infrastructure IPO is of the book-building type.
The other thing to note here is that the shares on offer here come from a fresh issue.
This means, the company is issuing new equity shares for the purpose of the IPO, and any proceeds from the offering will go directly to the company itself.
The other kind of shares that we often see are an offer for sale. In this category, no fresh equity shares are issued. Rather, existing shareholders sell their stake to the public. The proceeds go straight to the shareholder themselves, and not to the company.
The entire amount will be retained by the company, and will be utilised to meet the working capital requirements of the company.
The majority of the proceeds from the IPO will be utilised to meet the working capital requirements of the company. An amount of Rs. 40 crores has been earmarked for this purpose.
The rest of the proceeds will be put towards general corporate purposes and to cover the costs of the issue process.
The table below summarises all the information related to the Likhitha Infrastructure IPO. Questions like “When Likhitha Infrastructure IPO will open?”, “What is the lot size of Likhitha Infrastructure IPO?”, “When Likhitha Infrastructure IPO allotment?”, “When is Likhitha Infrastructure IPO listing date?” and others will be answered.
After the subscription window has closed, the shares of the Likhitha Infrastructure IPO will be listed
on both NSE and BSE.
ABOUT THE COMPANY
Likhitha Infrastructure Pvt Ltd was established in the year 1988 by Srinivas Rao Gaddipati. It is headquartered in Hyderabad.
Its primary business operation is related to the provision of oil and gas pipelines for infrastructure projects. It also provides maintenance services for pipelines, both in cities and cross-country.
Apart from that, the company also provides Operations & Maintenance services to various gas distribution companies in India.
As of December, 2019, Likhitha Infrastructure Pvt Ltd had 23 ongoing projects in pipeline infrastructure. This makes up about 91.23% of the total outstanding order value.
The company is promoted by Srinivas Rao Gaddipati and Likhitha Gaddipati.
The Indian government plans to invest about $100 billion in the country’s gas infrastructure in the next couple of years. Likhitha Infrastructure Limited is in a prime position to benefit from this investment.
Owing to the nature of the business operations, Likhitha Infrastructure Pvt Ltd is a B2B company — that is, their clients and customers are other companies and not individuals.
The company currently has a presence in over 16 states and 2 union territories in the country.
PRODUCTS & SERVICES
The business activities of Likhitha Infrastructure Pvt Ltd can be categorised under two different verticals pipeline infrastructure and operation and maintenance.
Pipeline infrastructure is the primary line of business and accounts for the majority of the operational revenue that is earned. In 2019, 88.97% of the total revenue came from this source.
Under this vertical, the services provided includes the laying of pipeline for cross-country projects, as well as for city distribution systems.
In 2019, Likhitha Infrastructure Pvt Ltd was responsible for completing the first cross-country pipeline for the distribution of petroleum products. This pipeline connects India to Nepal.
Likhitha is the only company in South-East Asia to have done so.
As for the operation and maintenance services, this includes repair work, maintenance of gas distribution networks, and other similar services.
As mentioned before, Likhitha Infrastructure Pvt Ltd works on a B2B business model.
Examples of clients include city gas distribution companies as well as major players in the oil and gas industry.
ONGC, GAIL, HCG and Indian Oil are some of the names in the Likhitha Infrastructure Pvt Ltd client book.
MANAGEMENT SHAREHOLDING PATTERN
The Managing Director of the company is also its founder, Srinivas Rao Gaddipati. It is primarily a family business, and the other promoter, Likhitha Gaddipati is the Managing Director’s daughter.
The table below lists out the existing shareholders in the company, along with their respective stakes.
After this offering, the promoters’ shareholding will reduce from 100% to 74.11%.
The table below contains a summary of the Likhitha Infrastructure Pvt Ltd financials from 2016 till 2020. All the figures stated below are in Rs. crores.
Between 2016 and 2020, the total revenue of Likhitha Infrastructure Pvt Ltd has grown at a CAGR of 24.31%. In that same period, the total assets have grown at a CAGR of 32.29%.
It is interesting to note here that, as an infrastructure and construction company, Likhitha Infrastructure Pvt Ltd’s expenditure is quite high. In 2019, the total expenditure came up to about 85.37% of the total revenue.
This puts a strain on the profit margin of the company. In fact, the gross profit margin in this case is 14.63% and the net profit margin is 10.73%.
Keeping this in mind, therefore, it is quite impressive that the company has shown steady growth in the net profit. Between 2016 and 2020, the net profit showed a CAGR of 50.91%.
Now let us talk about the borrowings.
As of September 2019, Likhitha Infrastructure Pvt Ltd’s total outstanding borrowings amounted to Rs. 7.59 crores. Apart from that, an amount of Rs. 53.15 crores have been sanctioned as bank guarantee.
This means, Likhitha Infrastructure Pvt Ltd has a total outstanding debt of Rs. 62.87 crores.
Apart from that, there is the negative operating cashflow in 2017, as you can see in the table. Now, having negative cashflow for a single year is often excusable, as it can be attributed to a variety of factors.
It is important to check whether the negative operating cashflow can happen again in future or not. Keeping in mind the high expenditure of the company and the fact that the profit margin is so low and uncertain, there is a chance that the operating cashflow can turn negative in future as well.
Backed by a growing global economy and the increased needs of production, the global energy consumption has been growing tremendously. In 2018, the growth rate had almost doubled from that in 2010.
A gradual shift is being observed in the pattern of energy consumption, in favour of renewable sources of energy.
However, these sources are yet to be optimally developed, and the conventional sources of oil and gas based energy will continue to dominate, at least for the next decade.
As India is a growing and developing economy, it is expected that the demand for oil and gas energy will be higher than for other developed nations.
India’s energy demand as a percentage of global energy demand was at 5.58% in 2017. This value is expected to rise to 11% by 2040.
The consumption of crude oil is expected to grow at 3.6% and reach 500 million tonnes by 2040. As for the natural gas consumption, that is expected to grow by 4.31% in that period and reach 143.08 million tonnes by 2040.
As for the demand for natural gas, that is expected to grow at 6.8% till 2030.
Thus, we can see the market for oil and natural gas is booming and this boom is going to sustain for the next few years at least, on the back of increased demand.
The graph below shows the expected demand trajectory for natural gas consumption in India.
India is primarily an importer of crude oil and petroleum. The government has taken several initiatives to allow for foreign investment and expand India’s refinery capacity.
Bharat Petroleum, Hindustan Petroleum and Indian Oil plan to invest an amount of $20 billion on these expansionary plans.
Whether it be increased production through expansion or increased imports, the demand for oil and gas infrastructure remains.
According to the RHP, Likhitha Infrastructure Pvt Ltd does not have any direct competitors. There are no listed peers.
While that may be true, there are other companies that offer similar services, particularly in the construction of oil and gas infrastructure. There are larger companies in India and overseas.
Because of their size and capacity limitations, Likhitha Infrastructure is allowed to bid on projects until a certain valuation. This restricts the opportunities for the company, especially considering the fact that many of their competitors are larger.
Thus Likhitha does not have any pricing power.
Here, we also have to mention the fact that the number of clients in this field are extremely limited, which is why the completion becomes so fierce.
Apart from that, it is also important to note that Likhitha Infrastructure Pvt Ltd has not received any long-term contracts from their clients. Whatever orders they have gotten are on a contractual basis.
Among the strengths of the company are the fact that they have reported net profits for the last five years of operations. The founder, Srinivas Rao Gaddipati has a few decades of experience in this field, and the company has benefitted from his expertise.
Because the company is still quite small, there is a lot of potential to grow and take advantage of the increased demand for the distribution of oil and gas, as well as its maintenance.
One of the primary weaknesses of Likhitha Infrastructure Pvt Ltd is the fact that their scale of operations is very small. When the size is so small, there is a lot more risk involved with any company.
If, for instance, on a particular year, they lose one of the primary clients at the last minute due to external factors. That would impose such a huge blow to their revenue and their profit margin that the company would probably make a big loss.
When the size is small, the cost of operation is higher, the revenue earned is lower and the risk involved is much higher. The graph below shows the split-up of the different components that make up the total expenditure for the company.
The second possible risk factor is that there are several outstanding cases against the promoters of the company for tax evasion purposes. If this develops into a trend, it is a very important red flag to track.
The third weakness is that even though the company’s scale of operations is so small, the debt burden is very large. In fact, the debt-to-equity ratio of the company is more than 1. If anything happens and Likhitha lost one of their major clients, they might not be able to pay their interests, and might fall into a debt trap.
There is also the fact that they have a very limited number of clients. The company does not have any long-term contracts or long-standing relationships. This means, future sources of revenue are very uncertain.
Apart from that, there is also the newest promoter of the company, Likhitha Gaddipati. The company was originally founded by her father, Srinivas Rao Gaddipati. Likhitha joined the company recently after completing her education from the USA. While Srinivas Rao Gaddipati has decades of experience in this field, Likhitha Gaddipati is practically a newcomer, with negligible experience.
The company is organised like a family owned business, where the promoters and key figures are relatives. It is interesting to note that even after the company goes public, the control over business operations and all significant business decisions will be retained by the original family group. It may even happen that the interests of the promoters will not align with those of the shareholders, in which case the shareholders would be the net losers.
The company has a habit of conducting transactions with promoters, relatives and separate companies which are owned by the promoters or relatives. This means, if any part of the work had to be outsourced to a third party or a vendor, then, Likhitha Infrastructure Pvt Ltd has given the work to companies which are owned by the promoters or their relatives.
Now, this may not seem like a problem on the surface of it, but history has shown that this is often a method of committing fraud, or embezzlement.
These factors go to show that in future, there may be a conflict of interest between the promoters of the company and its shareholders. If such conflict does arise, all the control would rest with the promoters and the shareholders would lose out.
As there are no listed peers for Likhitha Infrastructure, it is difficult to compare its valuation with others. The table below contains the expected figures for the market capitalisation of the company and its P/E ratio, along with the EPS and D/E ratio.
As mentioned in the course of the report, the company’s scale of operations is very low, which in itself is an extremely risky factor. Apart from that, there are instances of negative cash flow, low profit margin, high cost of operation and a high debt burden.
The company has been associated with tax evasion in the past, along with multiple transactions with other companies owned by the promoters.
All these factors combine to create a less than impressive future growth trajectory for the Likhitha Infrastructure IPO.