Desco Infra BSE SME IPO review (May apply)

•    The company is engaged in the business of providing infrastructure and maintenance services for city gas/ power distribution, and water supply related services. 
•    It marked static top lines for FY23 and FY24, but posted higher margins for FY24,
•    The company posted bumper margins for H1 of FY25 that raises eyebrows and concern over its sustainability.
•    It is operating in a highly competitive and fragmented segment. 
•    Based on its super recent earnings, the issue appears aggressively priced. 
•    Low equity base post-IPO indicates longer gestation period for migration.
•    Well-informed investors may park moderate funds for long term. 

ABOUT COMPANY:
Desco Infratech Ltd. (DIL) is engaged in providing infrastructure and maintenance services to city gas distribution divisions in India. It engages in activities such as pipeline laying, installation, testing, erection and commissioning for Piped Natural Gas (PNG) utilized by both domestic and commercial users. Its Operation and Maintenance services (“O&M Services”) encompass both underground and above ground gas pipeline work for carbon steel and MDPE pipelines. As part of its O&M Services, it conducts lock pressure and leak detection tests on MDPE pipelines to identify leaks and prevent significant natural gas losses and potential accidents resulting from these leaks. 

The company maintains client dedicated emergency response vehicles designed to detect leaks and deter unauthorized access, addressing potential hazards proactively. When a situation arises, a specialized team comprising an engineer, technicians and support staff is mobilized to the location. This team takes safe and immediate action to assess the situation and implement necessary measures, ensuring a quick operational recovery and minimizing any uninterrupted gas supply.

The Company has recently begun offering services in the power division, focusing on the installation, connectivity, commissioning, and erection of Low Tension (LT) and High Tension (HT) cables. These services ensure efficient power transmission and distribution across industrial, commercial, and residential applications. In the month of April, 2023, it received first order to provide services works for execution of works for connectivity and laying of double walt cable and HDPE pipes including cabling and termination works for Traffic Signal Lights in Surat. As part of business strategy, it has also expanded service portfolio to include water distribution projects following the closure of the financial year on March 31, 2024. The company is now offering infrastructure services such as designing and constructing water distribution networks, open wells, sump wells, overhead tanks, and well systems. 

It is involved in projects for the supply, installation, laying, and commissioning of HDPE pipes, as well as the construction of overhead tanks and open wells in Jhabua, Madhya Pradesh. Additionally, it has secured first project in the renewable energy sector at the Gujarat Hybrid Renewable Energy Park. This project involves the erection of reinforced concrete (RCC) piles for foundational and structural support, along with the installation of structures and solar modules for energy capture. It has successfully executed and currently executing projects across various states of Gujarat, Haryana, Uttar Pradesh and Punjab. DIL acquires projects through transparent competitive bidding process undertaken by the governments institutions, public sector undertakings and other private institutions. As of December 31, 2024, it had 234 employees on its payroll.

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with its maiden book building route IPO of 2050000 equity shares to mobilize Rs. 30.75 cr. at the upper cap. The company has announced a price band of Rs. 147 – Rs. 150 per share of Rs. 10 each. The issue opens for subscription on March 24, 2025, and will close on March 26, 2025. The minimum number of shares to be applied is for 1000 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE SME. The issue constitutes 26.71% of the post-IPO paid-up capital of the company. From the net proceeds of the IPO, the company will utilize Rs. 18.00 cr. for working capital, Rs. 1.04 cr. for capex on setting up corporate office at Surat, Rs.  1.68 cr. for capex on machinery purchases, and the rest for general corporate purposes. 

The IPO is solely lead managed by Smart Horizon Capital Advisors Pvt. Ltd., and Bigshare Services Pvt. Ltd., is the registrar to the issue. Rikhav Securities Ltd., is the Market Maker for the company. Rikhav Securities is also a syndicate member.

Having issued initial equity shares at par value, the company issued further equity shares in the price range of Rs. 1259 – Rs. 2195 per share between February 2024, and September 2024. It has also issued bonus shares in the ratio of 33 for 17 in March 2021, and 17 for 1 in September 2024. The average cost of acquisition of shares by the promoters is Rs. NIL, and Rs. 0.19 per share. 

Post-IPO, company’s current paid-up equity capital of Rs. 5.63 cr. will stand enhanced to Rs. 7.68 cr. Based on the upper price band of the IPO, the company is looking for a market cap of Rs. 115.14 cr. 

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, the company has posted a total income/net profit of Rs. 19.92 cr. / Rs. 0.83 cr. (FY22), Rs. 29.28 cr. / Rs. 1.23 cr. (FY23), and Rs. 29.50 cr. / Rs. 3.46 cr. (FY24). For H1 of FY25 ended on September 30, 2024, it earned a net profit of Rs. 3.38 cr. on a total income of Rs. 22.75 cr. The quantum jump in bottom lines from of FY24 not only raises eyebrows, but concern over its sustainability going forward. 

For the last three fiscals, the company has reported an average EPS of Rs. 4.69 and an average RoNW of 26.11%. The issue is priced at a P/BV of 3.71 based on its NAV of Rs. 40.46 as of September 30, 2024, but its post-IPO NAV data is missing.

If we attribute FY25 annualized super earnings on post-IPO fully diluted equity capital, then the asking price is at a P/E of 17.03. Based on FY24 earnings, the P/E stands at 33.26. The issue relatively appears aggressively priced.

For the reported periods, the company has posted PAT margins of 4.16% (FY22), 4.20% (FY23), 11.76%, (FY24), 14.94% (H1-FY25), and RoE margins of 24.53%, 27.62%, 40.61%, 19.51% for the referred periods, respectively. 

DIVIDEND POLICY:
The company has not paid any dividends since incorporation. It will adopt a prudent dividend policy post listing, based on its financial performance and future prospects. 

COMPARISION WITH LISTED PEERS:
As per the offer document, the company has shown Rudra Gas, and Likhitha Infra, as its listed peers. They are trading at a P/E of 11.9, and 16.1 (as of March 20, 2025). However, they are not truly comparable on an apple-to-apple basis. Peers compare appears to be an eyewash.

MERCHANT BANKER’S TRACK RECORD:
This is the 5th mandate from Smart Horizon in the ongoing fiscal.  From the last 3 listings so far, 1 at discount, 1 at par and 1 with a premium of 90% on the listing date.