A2Z Maintenance Engineering – AVOID – Why is Rakesh Jhunjhunwala Selling Out ?

A2Z Maintenance & Engineering Services Ltd. (AMESL) is catering to the Indian infrastructure space with diversified business model focusing on growth areas of power, municipal waste management and varied range of services.

A2Z intends to use the proceeds of the IPO for Investment in three biomass (bagasse)-based power cogeneration projects of 15 MW each in the State of Punjab, Investment in various subsidiaries, repayment of loans and working capital requirements.

The Company’s near term revenue visibility is supported by good order book of [Rs 1200 Cr] its EPC business whereas long term BOOT contracts of MSW business provides long term revenue and cash flow visibility for the company. Total Income has grown at a CAGR of 89%; EBITDA at 116% and PAT at 107% over the period 2007-10.

Financials of A2Z:
Expanded Equity Base – ~Rs 76 Cr
Fully Diluted EPS for the First 4 Months [Till July-2010] – Rs 4.4 Annualizing the same we get an EPS of Rs 13.2. Why didn’t the management of A2Z declare PAT & EPS for Sept-2010 since we are already in Dec-10 ? [Lacks transparency]

The management is confident of sailing through the IPO at this expensive valuation because of Rakesh Jhunjhunwala who will continue to hold approx. 20% in A2Z post-IPO. Adjusting for 11:3 and 3:2 Bonus pre-IPO in the last 2 years, Rakesh Jhunjhunwala’s cost price of A2Z Maintenance & Engineering Services Ltd Shares is ~ Rs 80 Rs 14 / Share. Why is Rakesh selling Rs 20 Cr worth of Shares ? Another point to note is, Rakesh Jhunjhunwala’s Praj Industries which is also into BioFuels has been an under performer in the Stock Market.

Since 90% of A2Z Income is from EPC division, and if you do a Sum of the Parts Valuation, you cannot give a forward P/E multiple of 28.47 to A2Z company when established players and with much larger order books like KEC International quote at a P/E of 15.

After a thorough review, We Recommend VALUE Investors to AVOID the IPO of A2Z Maintenance Engineering Services Ltd because of the reasons justified above. However, you can speculate in this if you want to take the GREY MARKET route, which we don’t.

Other Brokerage Recommendations will be available on DalalStreet Forum.

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