A2Z FINAL

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FINANCIAL SERVICES

IPO ASSESSMENT OF

A2Z MAINTENANCE AND ENGINEERING SERVICES

SUBMITTED BY

CDR ANIL KUMAR SHARMA

PGDM(2010-2012)

FACULTY-Dr. HARISH SINGLA

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A2Z MAINTENANCE AND ENGINEERING SERVICES

A2Z IPO HIGHLIGHTS

Company background

1. A2Z was originally incorporated in January 2002. The company was acquired by the

current promoter, Mr. Amit Mittal, during FY2003–04. Commencing its operations as an FMS

provider in 2002, the company gradually ventured into power distribution EPC during 2006. A2Z

has executed various projects involving the installation of distribution line infrastructure,construction of substations, system strengthening and rural electrification projects. The

acquisition of a transmission EPC company during 2008 marked the entry of A2Z into the power

transmission segment. A2Z‘s power transmission portfolio includes the construction of EHV

substations of up to 400kV and EHV transmission lines of up to 765kV.

During 2008, A2Z ventured into the MSW management service business, where it bagged

contracts to set up IRRF on a BOOT basis with an aggregate MSW capacity of 3,800tonnes/day in

six cities. Recently, A2Z forayed into the power generation business choosing renewable energy

sources of fuel such as biomass, agro waste and RDF generated from its MSW projects. A2Z

operates in five business segments: EPC, FMS, MSW management, renewable energy generation

and power IT solutions. The businesses are carried out by group companies of A2Z Maintenance

and Engineering Services.

Sector Infrastructure

Website http://a2zgroup.co.in

Issue Opens 8 December 2010

Issue Closes 10 December 2010

No. of Shares-Fresh Issue 1.65 Crore

Offer For Sale 45.56 Lakh Shares

Aggregating (at upper band) ` 862 Crore

Key Executives Amit Mittal, Rakesh Gupta

Amit Sardana, Ashok K SainiRegistrar Link Intime

BRLM SBI Capital, ICICI Securities, IDFC Capital

Enam, DSP Merill Lynch, Yes Bank

Post Issue Equity ` 73. 8 Crore .

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OBJECTIVE OF THE ISSUE

2. The company plans to raise about 862 Crore (at upper band) from the issue. 675 Crore will

accrue to the company, rest 187 Crore is Offer for Sale. It plans to utilize issue proceeds as

Business segments

3. EPC: In the EPC segment, the company mainly focuses on the power distribution sector,

providing services such as the installation of distribution line infrastructure with capacities of up

to 33kV, the construction of substations of up to 33kV and participation in system strengthening

projects and rural electrification projects. In the power transmission sector, A2Z undertakes

select projects involving the construction of extra high voltage (EHV) substations of up to 400kV

and EHV transmission lines of up to 765kV. Since FY2006, the company has been receiving EPC

contracts to install ~21,000ckm of HT distribution line, 19,500cKm of LT distribution line,

1,200cKm of transmission line, 5,800km of aerial bunched cable, 124,000 transformers, 930,000

poles and 735 substations of different capacities up to 220kV; and to provide connections to

approximately 1,200,000 below-poverty-line households. As of July 31, 2010, the company’s

outstanding order book in the EPC business (T&D) stood at ~ `1,292cr.

4. FMS: In this segment, A2Z provides services such as engineering maintenance, energy

saving solutions and security services to public and private sector clients. The company also

provides specialised services to Indian Railways under various schemes in 11 out of 16 railway

zones.

Particulars Est Cost Amount Spent From IPO

Investment in 3 biomass (bagasse)-based power cogeneration

projects of 15 MW each in the State of Punjab 246 49. 7 68

Investment in 5 biomass-based power generation

projects of 15 MW each in the State of Rajasthan 400 0. 27 120

Investment in subsidiaries

Share capital in A2Z Infrastructure for the 15 MW

biomass-based power generation project in Kanpur 85 16. 36 25

Share capital in A2Z Infrastructure and its subsidiariesfor certain MSW projects 238. 36 34. 47 42. 34

Share capital in Mansi Bijlee & Rice Mills Pvt Ltd (“Mansi Bijlee”)

the subsidiary that will implement one rice mill and associated rice-husk

based biomass power generation project in the State of Punjab 102. 33 1. 8 102.33

Repayment of loan granted by L&T Infrastructure Finance to the Company 41. 67 41. 67

Working Capital Requirements 125 125.00

Total Rupees Crore 1238. 36 102.6 524.34

Besides, it plans to meet General Corporate Expenses & Issue expenses etc. from the

proceeds.

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5. MSW management services: In this segment, A2Z involves in the collection,

transportation, processing, disposal and treatment of MSW across various cities in India.

The company has been awarded various contracts for setting up IRRFs on a BOOT basis

with an aggregate MSW capacity of 3,800tonnes/day in six cities. The company has also

bagged contracts for the collection and transportation of MSW for an aggregate capacity of 910TPD in two cities and the processing and disposal of MSW for an aggregate capacity of

855TPD in 12 cities in India.

6. Renewable energy generation: The company recently forayed into the power

generation business through renewable energy sources of fuel such as biomass, agro waste

and RDF generated from its own MSW projects. The company would be setting up a

number of cogeneration and biomass-based power generation projects totaling 235MW in

Uttar Pradesh, Rajasthan and Punjab. Most of the above projects are expected to be

completed by FY2012.

7. Power IT solutions: A2Z has recently diversified into the power IT solutionsbusiness, wherein it would be executing projects as a systems integrator by developing

solutions for AT&C loss reduction. The company along with its consortium partner, Sterlite

Technologies Ltd., has been empanelled by Power Finance Corporation of India Ltd. as a

system integrator to provide IT applications for reduction in AT&C losses.

IPO details

8. A2Z will be accessing the capital market with an initial public offering (IPO) of 2.1cr

equity shares of `10 each at a price band of `400–410/share. The IPO comprises fresh issue

of up to 1.65cr equity shares and an offer for sale of 0.46cr equity shares by existing

shareholders. The issue opened on December 8, 2010, and closes on December 10, 2010.The issue proceeds would be utilized to fund the company’s forays into biomass-based

power generation and MSW management projects in addition to funding its working capital

requirements and for general corporate purpose.

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Basis For Issue Price(as per prospectus)

9. The Issue Price has been determined by the Company and the Selling Shareholders,

in consultation with the BRLMs and the CBRLM, on the basis of the demand from investors

for the Equity Shares through the Book Building Process and is justified based on the below

accounting ratios.

10. Qualitative Factors The company has the following principal competitive

strengths:

(a) Ability to identify new business opportunities and scale businesses in high growth

sectors

(b) Proven project execution capabilities and demonstrated track record

(c) In-house engineering capabilities and strong quality management systems

(d) Qualified and experienced management and motivated employee base

(e) Diversified business and operations

11. Quantitative Factors Information presented in this section is derived from therestated summary statements included in the Prospectus. Some of the quantitative factors

which may form the basis for computing the Issue Price are as follows: 1. Earning per Share (EPS)(1)(2):

As per the Company’s restated unconsolidated summary statements: Year ended Basic EPS (in Rs.) Diluted EPS (in Rs.) Weight

March 31, 2010 17.66 17.66 3

March 31, 2009 10.80 10.65 2

March 31, 2008 9.41 9.16 1

Weighted Average 14.00 13.91

July 31, 2010(3) 5.40 5.40

As per restated consolidated summary statements:

Year ended Basic EPS (in Rs.) Diluted EPS (in Rs.) Weight

March 31, 2010 17.28 17.28 3

March 31, 2009 10.69 10.54 2

March 31, 2008 9.32 9.08 1

Weighted Average 13.76 13.67

July 31, 2010(3) 4.56 4.56

_________

(1) Earnings per share represents basic earnings per share calculated as net profit

attributable to equity shareholders as restated divided

by a weighted average number of shares outstanding during the year.(2) Face value per share is Rs. 10.

(3) Not annualized.

Note:

a) The earning per share has been calculated on the basis of the restated profits and losses

of the respective years.

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b) The earning per share calculations have been done in accordance with Accounting

Standard 20- “Earning per share” notified by the Companies (Accounting Standards) Rules,

2006, [as amended].

2. Price Earning Ratio (P/E ratio)

The Price/Earning (P/E) ratio, on the basis of an Issue Price of Rs. 400 per Equity Share isas set forth below:

a) As per the Company’s restated unconsolidated summary statements:

(i) for the period ended July 31, 2010: 74.07

(ii) for the year ended March 31, 2010: 22.65

(iii) for the year ended March 31, 2009: 37.04

b) As per our restated consolidated summary statements:

(i) for the period ended July 31, 2010: 87.72

(ii) for the year ended March 31, 2010: 23.15

(iii) for the year ended March 31, 2009: 37.42

c) Peer Group P/E – *

a. Highest:(i) Engineering - Turnkey Services: 54.4

(ii) Electric Equipment: 79.7

(iii) Transmission Line Towers/Equipment: 34.0

b. Lowest:

(i) Engineering - Turnkey Services:

(ii) Electric Equipment:

(iii) Transmission Line Towers/Equipment: NA

c. Industry composite:

(i) Engineering - Turnkey Services: 33.2

(ii) Electric Equipment: 29.4

(iii) Transmission Line Towers/Equipment: 17.0

3. Return on Net Worth(1):

Return on net worth as per the Company’s restated unconsolidated summary statements:

Year Ended RONW (%) Weight

March 31, 2010 23.84 3

March 31, 2009 26.60 2

March 31, 2008 56.11 1

Weighted Average 30.14

July 31, 2010(2) 7.07

Return on net worth as per our restated consolidated summary statements:Year Ended RONW (%) Weight

March 31, 2010 23.62 3

March 31, 2009 26.45 2

March 31, 2008 55.89 1

Weighted Average 29.94

July 31, 2010(2) 6.11

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(1) Return on Net Worth = Profit after tax as restated/ Net Worth at the end of the year

(excluding preference share capital)

(2) Not Annualised

4. Minimum Return on Increased Net Worth required to maintain pre-issue earning per

share for the year ended March 31, 2010:a. Based on basic earning per share:

At the Floor Price: 11.97% and 11.77% based on the restated unconsolidated summary

statements and the restated consolidated summary statements, respectively.

Business Strategy

11. Strengthen Presence In The Power Sector A2Z would be focusing on

consolidating its presence across various segments in the power sector. In the EPC

business, the company expects to consolidate its presence in power distribution projects

and would seek to increase its participation in larger projects, including the transmission

segment on a BOOT basis, as well as enter into distribution franchise arrangements with

power utilities. The company is also mulling on opportunities to participate in transmission

line projects for REC/PFC on BOOT basis through a tariff-based competitive bidding

process in consortium with other parties. A2Z also intends to expand its renewable energy

generation business by exploring opportunities in other energy sources and entering into

fuel linkages with its MSW projects and other third parties.

12. Continued expansions across existing businesses

A2Z plans to diversify its EPC business by providing EPC services to other

infrastructure sectors such as road, telecommunications and water infrastructure.

The company intends to participate in Provision of Urban Amenities in Rural Areas(PURA) projects and has submitted bids for certain projects.

In the MSW business, A2Z intends to expand its offering of integrated waste

management solutions using innovative engineering practices, strengthening the

MSW off-take value chain by establishing better sales channels for the by-products

generated and focusing on award of projects on a cluster-based approach.

In the renewable energy generation business, the company plans to significantly

increase its power generation capacity through various sources of renewable

energy. A2Z expects the BOOT projects in MSW business and the renewable energy

generation business to generate long-term sources of revenue and cash flowstability and would be focusing on obtaining more BOOT contracts.

In its FMS business, A2Z would 1) focus on large customers, 2) offer multiple

services under long-term contracts, 3) increase its range of services to include

maintenance of telecommunication towers and industrial/plant maintenance and 4)

continue to provide energy savings solutions.

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INDEPENDENT ASSESSMENT

KEY CONCERNS

13. High working capital requirements: The EPC business requires significant

amount of working capital, which varies according to the nature of the project. Large

amount of working capital gets tied up to finance the purchase of materials and theperformance of engineering, construction and other work on projects before payment is

received from clients. Lack of experience in MSW or power generation: A2Z’s promoters do

not have prior experience in the development and operation of power generation projects

or the MSW business. The deployment of large amount of the IPO proceeds in these

unrelated businesses where the company has no prior experience may further strain the

financial position of its profitable EPC division. It is pertinent to note that despite being

highly profitable, the EPC business has been reporting negative cash flows.

14. Lack of experience in MSW or power generation: The promoters do not have

prior experience in the development and operation of power generation projects or the

MSW business. The deployment of large amount of the IPO proceeds in these unrelatedbusinesses where the company has no prior experience may further strain the financial

position of the its profitable EPC division. It is pertinent to note that despite being highly

profitable, the EPC business has been reporting negative cash flows.

15. Non-availability of fuel stock to impact profits: In the renewable energy

segment, the sourcing of fuel stock at competitive prices is likely to be a key concern going

forward. Projects that are dependent on bagaase and other crop residues would need to

source alternative feedstock in the off-season. Delays or failure in the timely sourcing of

fuel stock could negatively impact the optimum utilisation and reduce the profitability of

these projects.

16. Other Risks

The industry is directly impacted by economic growth and Infra-spending by Govt

plays an important role for the industry. A2Z gets about 95% of the business from

PSUs/Govt Agencies.

Orders are won after competitive bidding; very aggressive bidding to get order may

dent margins.

There are risks associated with long execution period of the projects.

Volatile prices of metals, cement etc. directly impact the margins.

The issue looks stretched as Peers are trading at more attractive valuations.

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17. Outlook and valuation: Currently, A2Z derives its revenue and profitability from

the power EPC business; the MSW and power generation projects are expected to

contribute meaningfully from FY2013. Since FY2011 and FY2012 revenue would largely be

dominated by the power distribution EPC business, the appropriate peer comparisonwould be with Jyoti Structures, KEC International and Kalpataru Power Transmission Ltd.

Even at the lower price band of `400, A2Z would trade at a P/E multiple of 29x FY2010

earnings, while its peers are currently trading at an average P/E of around 15x their TTM

earnings, thus placing the scrip relatively expensive.

Financial highlights

` Crore FY 10 4M July 2010 FY 11 ETotal Income 1225.29 418.09 1316.98

Operating Expenses 1018.51 341.04 1079.93

PBDIT 206.78 77.05 237.06

Interest & Bank Charges 49.33 19.37 60

Depreciation 3. 58 2. 82 11

PBT 153.87 54.86 166.06

Tax 55.63 20.07 59.78

PAT 98.24 34.79 106.28

Other Adjustments 0 0 0.00

Net Profit 98.24 34.79 106.28

Equity (FV 10) 57.3 57.3 73.8

EPS 17.14 6. 07 14.40

Peer Evaluation

` Crore (FY 10) A2Z** Kalpataru Power Jyoti Structutres KEC International

FY 10 Total Sales 1225.29 4021.04 2018.63 3908.22

FY 10 PAT 98.24 195.57 91.92 189.66

Equity 73.8 30.69 23.6 51.42

Face Value 10 2 2 10

H1 FY 2011 Total Sales 418.09 1191.44 1107.53 1846.78

H1 FY 2011 PAT 34.79 78.2 51.18 69.1

H1 EPS 4.71 5. 10 4. 34 13.44

CMP 410 170 128 454

PE (Annualized) 28.99 16.68 14.76 16.89

Market Cap 3026 2609 1510 2334

M Cap/Sales 2.47 0. 65 0. 75 1. 26

PAT (%) 8.02 4. 86 4. 55 3. 74

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18. Recommendation.

A2Z maintenance is into the business of EPC Contract, Waste management etc. It is foraying

into Biomass based Power Plants.The valuation of the issue look steep. However, given

High “4/5” ratings by Care & Present investment of High Profile Investors like Rakesh

Jhunjhunwala, retail investors can keep this on radar and if there is interest shown by

Institutional investors, can gamble however solely on basis of valuation it looks costly and

hence risk averse investors should avoid .

POST ISSUE SCENARIO

19. Listing Gains/Loss.

date issue price closing price gain/loss %age loss

23/12/2010 400 328.9 -71.1 -17.775

A2Z Maintenance and Engineering Services IPO made a weak debut on bourses on

December 23. The share of A2Z Maintenance opened below issue price at Bombay Stock

Exchange (BSE) at Rs. 390, down 2.5%. However, at National Stock Exchange (NSE), the

stock listed at Rs. 500, but immediately drifted below its issue price. The listing price was

within expectations as the IPO was overpriced and garner less subscription. The IPO was

only subscribed 0.96 times. The issue price of the share was Rs. 400 apiece.

20. Gains Loss Month On Month Basis.

MonthOpenPrice Close Price gain/loss % change

Dec-10 390 323.65

Jan-11 324 267.25 -56.4 -17.4262

Feb-11 268 265.5 -1.75 -0.65482

Mar-11 266.5 279.75 14.25 5.367232

Apr-11 280.35 255.5 -24.25 -8.66845

May-11 257.85 236.25 -19.25 -7.53425

Jun-11 238.5 251.7 15.45 6.539683

Jul-11 254.25 257.95 6.25 2.483115Aug-11 263.25 179 -78.95 -30.6067

Sep-11 179.8 208.1 29.1 16.25698

Oct-11 205.05 205.15 -2.95 -1.41759

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21. IPO TIME LINE.

STAGE 1: (MONTH 11-12)

Issuer selects counsel.

Issuer organizes financials and other corporate documents.

Lead Manager (Underwriter) and counsel begin due diligence process.

Drafting of Registration Statement begins.


Co-manager(s) is selected.

Registration Statement completed.

Issuer completes audited financials.


Registration Statement filed with SEBI.

Wait 30 - 40 days for comments from SEC.


Receive comments from SEBI.

Amendments to Registration Statement are filed.

Preliminary prospectuses are printed.

Institutional sales executives set up road show meetings.

Road show (2-3 weeks).


SEC declares Registration Statement effective.

Pricing call day before offering.

Underwriting documents signed.

OFFERING.

Press release issued after offering.

Final prospectuses are printed.

Filing final prospectus with ROC

STAGE 6: (D month)

Mandatory advertisement

Issue opens 08 Dec 10

Issue closes 10 Dec 10

Closing documents are signed.

Securities are distributed.

Listing date 23 Dec 10

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22. The Process:

The Issuer who is planning an offer nominates lead merchant banker(s) as 'book

runners'.

The Issuer specifies the number of securities to be issued and the price band for the

bids. The Issuer also appoints syndicate members with whom orders are to be placed by

the investors.

The syndicate members input the orders into an 'electronic book'. This process is

called 'bidding' and is similar to open auction.

The book normally remains open for a period of 5 days.

Bids have to be entered within the specified price band.

Bids can be revised by the bidders before the book closes.

On the close of the book building period, the book runners evaluate the bids on the

basis of the demand at various price levels.

The book runners and the Issuer decide the final price at which the securities shall

be issued. Generally, the number of shares are fixed, the issue size gets frozen based on the

final price per share.

Allocation of securities is made to the successful bidders. The rest get refund orders.

Documents

A2Z FINAL