PKH Ventures Ltd: Avoid

PKH Ventures Ltd: Avoid
  • Date

    30 Jun 2023 - 04 Jul 2023

  • Price Range

    ₹140 - ₹148

  • Minimum Order Quantity

    100

  • (D) RHP

    View

Incorporated in 2000, PKH Ventures Ltd. is in the business of construction & development, hospitality and management services. They are into the execution of civil construction works for third-party developers on a project basis and have been awarded two government projects viz., Hydro Power Pro- ject and Nagpur Project, and three Government Hotel Development Projects viz., Rajnagar Garhi Project, Pahadikhurd Project and Tara Resort Project. The civil construction business is executed by their subsidiary and construction arm, Garuda Construction. The company’s hospitality vertical is in the business of owning, managing and operating hotels, restaurants, QSRs, spas and the sale of food products. PKH Ventures have been responsible for the development of the Delhi Police Head- quarters in April 2021, which involved the construction of twin towers of seventeen storeys each, with a complete glass façade and steel bridge connecting the two towers. The company is looking forward to developing forthcoming development projects which include real estate development at Amritsar, Punjab; real estate redevelopment project at Dadar-Matunga, Mumbai; agro-processing cluster at Jalore, Rajasthan; cold storage park/facilities at Indore, Madhya Pradesh; and a wellness centre & resort at Chiplun, Maharashtra. The knowledge and experience gained while developing their Mum- bai hotels led the promoter to venture into the business of civil construction through, Garuda Con- struction, which is now their subsidiary since 2 April 2020. Garuda Construction provides end-to-end construction services for residential and commercial buildings. Under the Management Services ver- tical, the company in the past managed airport entry ticket counters, retail outlets at airports and toll management services. Presently, there are no such active contracts for these Management Services. At present under Management Services vertical, they provide services for the annual maintenance of the DelhiPolice headquarters as per the agreement entered into with the concessionaire.
Objects of the issue:
The net proceeds from the fresh issue will be used towards the following purposes: Investment by way of equity in its subsidiary, Halaipani Hydro Project Private Limited, for the development of Hydro Power Project (Civil Construction and Electromechanical Works);
  • Investment by way of equity in its subsidiary, Garuda Construction, for funding long-term working capital requirements;
  • Pursuing inorganic growth through acquisitions and other strategic initiatives; and To fund expenditures towards general corporate purposes.
Investment Rationale:
Diversified business model helps in cushioning business performance during downtimes PKH Ventures are in the business of Construction & Development, Hospitality and Management Services. The company’s businesses generate income from diverse activities completely independent of each other. Eternal Building Assets has already received an annuity for a period of three years on part COD and will receive an annuity of Rs. 780 million per year till FY33. Considering a 40% equity stake in Eternal Infra, the company will be entitled to a pre-tax amount of Rs. 278.6 million per an- num. Its civil construction works for third-party developers generate revenue from works contract charges and its hospitality vertical generates income from hotels, restaurants, and the sale of food. Further, under the Hydro Power Project awarded by the State of Arunachal Pradesh, the company will receive income from the sale of power once the Hydro Power Project is commissioned by June 2024. Asset light model in civil construction business aids financial performance The company has adopted an asset-light model approach for its civil construction business and for that, it relies on third-party suppliers for equipment and labour. Since the location of the Government Projects, Government Hotel Development Projects and forthcoming Development Projects are in different geographies like Punjab, Arunachal Pradesh, Maharashtra, Madhya Pradesh and Rajasthan, it is difficult and unviable to mobilize heavy equipment and machinery from one place to anoth- er for the execution of projects at such diverse locations. Also, a large amount of capital is required to acquire construction equipment and machinery, which can otherwise be effectively and more profitably deployed in other areas of the company’s business. The deployment of equipment and labour through third-party contractors at these locations helps to reduce fixed costs, make the execution of construction projects cost efficient and increase margins
Valuation and Outlook:
The construction and development sector will be a major driver for growth in India. The construction sector is the country’s second-largest economic segment after agriculture. The sector contributed 8% to the national GVA (at constant price) in FY22. PKH Venture’s diversification into new areas for the Construction & Development vertical will increase their financial and technical ability, making the eligible to bid for larger future projects and to effectively leverage their experience in the execution of such projects. Further, its subsidiary, GarudaUr-ban Remedies Limited, is proposing to set up an agro-processing cluster in the Jalore district of Rajasthan. The agro-processing cluster will provide basic enabling infrastructure like roads, water supply, power supply, drainage etc. and core infrastructure like warehouses, cold storage, sorting, grading etc. However, we are of the opinion that the company’s focus across different segments may be a concern in their effective implementation. On the financial front, the debt has increased significantly to Rs. 748 million for the nine months ended31De-cember 2022 compared Rs. 486 million posted in the year ended 31 March 2022 , whereas the revenue has shown a degrowth in the last three years. On the upper end of the price band, the issue will be valued at 24.8x of annualized FY23 earnings which we believe is richly valued. We, thus, recommend an “Avoid” rating for the issue