With over 60 years of experience in delivering major infrastructure projects, Afcons’ upcoming IPO offers a great opportunity for investors who want to benefit from India’s growing infrastructure sector. Let’s take a closer look at the company’s strengths and potential challenges.
Afcons plans to use the money from the IPO to improve its financial health. The funds will be used as follows: ₹600 crore to pay off high-interest loans, ₹320 crore for working capital, and ₹80 crore for capital expenses. These steps will help reduce debt and improve efficiency.
A Leader in Infrastructure
Afcons has become a top player in the infrastructure sector, consistently performing better than competitors in key financial areas. Over the last three years, the company has maintained strong profit margins and a good return on capital employed (ROCE). This has helped Afcons surpass companies like KEC International, Kalpataru Project International, and Dilip Buildcon in the market.
However, some experts urge caution. Deven Choksey, Managing Director of KRChoksey Financial Services, believes that Afcons’ high ROCE may not last long. He says the main things to watch after the IPO are the number of new contracts the company secures and the prices at which these contracts are won. If Afcons starts bidding aggressively to grow its business, its profit margins could drop, and this will eventually lower its ROCE to industry levels.
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Strong Order Book
As of June, Afcons had a diversified order book worth ₹31,747.4 crore. The biggest part of its business is urban infrastructure, which includes metro projects, bridges, flyovers, and elevated corridors. This segment accounts for 48% of the company’s order book.
Other major segments include hydro and underground projects (28%), marine and industrial projects (9%), oil and gas (6%), and surface transport (11%). Afcons’ diversified portfolio shows its expertise across different sectors and helps reduce risks if one sector faces a downturn.
Even though the infrastructure business is capital-intensive, Afcons has managed its debt well. Its debt-to-equity ratio has been below the industry average, with a median of just 0.6 over the past three years. This shows the company’s strong financial management.
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Challenges Ahead
While Afcons has shown steady revenue growth, with a compound annual growth rate (CAGR) of 10% between FY22 and FY24, some experts think it could do better. Deven Choksey says that Afcons’ future revenue growth depends on maintaining consistent performance and finding new areas for growth.
Afcons’ revenue from international projects has dropped over the past three years, from nearly one-third to one-quarter in FY24. The company is exposed to global risks, particularly in countries like Bangladesh, which is currently experiencing political unrest. Afcons is working on three road projects and one rail project in Bangladesh, valued at ₹3,406 crore. According to G. Chokkalingam, founder of Equinomics Research, if more than 10% of Afcons’ revenue comes from Bangladesh, it could hurt the company’s profit margins.
Afcons’ management has outlined a risk management strategy to deal with challenges in foreign markets. Managing Director Paramasivan Srinivasan said that the company avoids projects that don’t fit their risk profile, even if they seem profitable. This strategy ensures that Afcons is protected from unexpected risks in overseas markets.
Rising Employee Attrition
One of the challenges Afcons faces is an increasing employee attrition rate, which has grown from 11% in FY21 to 19% in FY24. While most of the attrition is at the junior level, losing skilled workers can slow down project timelines and raise costs.
Afcons’ management acknowledged the issue and stated that they are focused on bridging skill gaps, especially since many engineers have shifted to the IT sector, creating a shortage of talent in civil engineering.
Growth Opportunities
Despite these challenges, Afcons is in a good position to take advantage of future growth. India’s infrastructure sector is expected to grow at a CAGR of 10% between FY23 and FY28, fueled by increased government spending.
Several international markets where Afcons operates, such as West Asia and Sub-Saharan Africa, are also expected to grow significantly. Countries in West Asia, benefiting from higher oil revenues, are expected to accelerate their infrastructure development. Meanwhile, Sub-Saharan Africa’s growing population and middle class are driving the need for more infrastructure investment.
These favorable conditions give Afcons the chance to expand its project portfolio and take on bigger, more ambitious projects.
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