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Karda Constructions
Thursday, March 15, 2018
Focused on Nashik
CM RATING38/100
Karda Constrictions, promoted by Naresh Karda, is engaged in the business of real estate development in the city of Nashik. The company incorporated in 2007 with a view to corporatize the group's activities in the real estate sector is focused on quality and affordable residential and mixed use developments. So far it has successfully completed and delivered 17 projects with an aggregate carpet area of 1.05 million square feet (msf) spread over 1,107 units of which pure residential is 0.86 msf and balance are residential cum office space. The company currently has 11 ongoing projects with an aggregate carpet area of 1.53 msf and 3 planned projects with an aggregate carpet area of 0.19 msf. Over and above it has a land reserve aggregating to about 0.41 msf.

The company outsources key services such as project construction and design to third party construction companies or sub contractors and architects etc.

Recently the company ventured into undertaking construction contracts for public and private sector. The company has bagged four government contracts with an aggregate contract value of Rs 24.71 crore from Goa and Maharashtra state governments. Further it has also won a private sector work contract of Rs 35.09 crore in value. The construction contracts are largely from verticals such as residential, market complexes, community and health centres.

Offer and Objects

The initial public offer (IPO) of the company comprises fresh issue (of 2300000 equity shares) as well as offer for sale (of 2000000 equity shares) by the promoters. Proceed from fresh issue will be used to (a) Part repayment of overdraft facilities; (b) Part repayment of term loans; (c) General corporate purpose and (d) to meet issue related expenses.

Strengths

The experienced player in the Nashik real estate market has presence across all price/market segments namely low, medium and premium segments. All its projects start with 'Hari' and thus it an established brand in the Nashik market.

Focus on residential and residential cum office projects in real estate business ensures cash flow based on milestone completion. The company though takes up residential cum office projects, it follows sale model so there is no need for upfront capital investment on commercial space.

Weaknesses

The company has total debt of Rs 132.50 crore against net worth of Rs 35.87 crore as of September 2017.

The company outsources construction activities of its own projects but has entered in to construction contracting business for other public and private sector projects. As new entrant the company may be forced to compromise on margin for the sake of volume in both tender driven public sector projects as well as private sector projects.

Presence in only one city market of Nashik, Maharashtra, exposes it to geographical concentration risks.

As group companies such as Karda Buildcon, Shree Sainath Land & Development engage in similar line of business and absence of no non- compete clause between the company and such companies there may be conflict of interest on the part of promoters in allocating business opportunities amongst the group companies including the company. Further the company also had/has related party transactions as it has recently awarded a turnkey work contract to one of the group companies increasing the conflict of interest further.

The company has an unsecured loan amounting Rs 11.06 crore which are repayable on demand as end of Sep 30, 2017. Sudden demand for repayment will adversely affect the cash flow and financial conditions of the company.

One of the Non-Executive Independent Directors as mentioned in the Draft Red Herring Prospectus, Mohan Gurnani was declared as a disqualified director under section 164(2)(a) of the Companies Act, 2013 due to which he was ineligible to be a Director of the Company. Accordingly, the company on February 16, 2018, replaced Mohan Gurnani and appointed Sandeep Shah as a Non-Executive Independent Director of our Company. Further, since the Company was unable to disclose this Post-DRHP development to SEBI on a timely basis, SEBI has issued a warning letter to the company dated March 01, 2018 informing the company that the non-compliances has been viewed seriously, further advising the company to be careful in the future and to improve the compliance standards to avoid recurrences of such lapses.

Valuation

Sales for the fiscal ended March 2017 was up by 5% to Rs 105.31 crore and the net profit was up 26% to Rs 8.03 crore. Thus the EPS for FY 2017 on post issue diluted equity was Rs 6.5. The PE at the offer price band of Rs 175-180 works out to 26.9-27.7 times. In comparison the PE of Kolte Patil (focused on Pune real estate market) on FY consolidated EPS was 29.3 times. At the offer price band the price/ book value (post IPO) of the company is 3.0 compared to 3.1 times for Kolte Patil. However Kolte Patil is Rs 1000-crore revenue company compared to Rs 100 crore revenues of Karda Constructions.

Karda Constructions : Issue Highlights

SectorReal Estate
Offer Size (in Rs crore)
Fresh Issue (23 Lakh shares)40.25-41.40
Offer for sale (20 Lakh shares)35-36
Price Band (in Rs)175-180
Post Issue Equity (Rs Crore)12.30
Post-Issue Promoter stake (%)65.04
Issue Open date16/03/2018
Issue Close date 21/03/2018
ListingBSE, NSE
Rating38/100

Karda Constructions: Financials

1709 (6)1703 (12)1603 (12)1503 (12)1403 (12)1303 (12)
Sales40.35105.31100.7245.1457.5442.25
OPM (%)30.925.021.331.921.916.5
OP12.4826.2821.4914.4012.596.96
Other income5.354.725.221.391.541.04
PBIDT17.8331.0026.7115.7914.127.99
Interest9.5518.2617.1311.148.694.11
PBDT8.2812.749.584.655.433.88
Depreciation0.140.270.220.210.080.02
PBT8.1412.479.364.455.363.87
EO Expenses0.000.000.030.020.010.02
PBT after EO8.1412.479.344.435.353.84
Tax2.624.442.961.351.741.14
PAT5.528.036.373.083.612.70
EPS* (Rs)#6.55.22.52.92.2
* Annualised on post issue diluted equity of Rs 12.30 crore. Face Value: Rs 10
EO: Extraordinary items
EPS is calculated after excluding EO and relevant tax
#EPS can not be annualized due to seasonality in business
Figures in Rs crore

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