Reg: Proposal for investment in the Public Issue of Equity Shares of Bedmutha Industries Ltd

ISSUE SIZE PRICE Bid OPENING CLOSING LISTING BOOK RUNNING

BAND lot DATE DATE ON LEAD MANAGERS
No of Shares Amt
(In INR)

IDFC CAPITAL

INR BofA MERRILL
~16.5 mn fresh 8th 10th
1,824 15 NSE LYNCH
shares, 4.56 mn 400 - December December
– 
Shares by existing 410 Share BSE ENAM
1,869
shareholders 
mn ICICII SECURITIES

SBI CAPITAL
MARKETS

Overview

A2Z Maintenance & Engineering Services Pvt. Ltd. operates as engineering, procurement, and
contracting company. The company engages in the design, engineering, construction/erection,
testing, and commissioning of substations, cable laying systems, GIS, overhead traction systems,
and supportive catanary systems. It also offers facility management, network energy management,
project management consultancy, and power distribution and transmission services.
In addition, the company provides solid waste management, sewage treatment, renewal energy and
cogeneration, liquid waste management, bio-organic fertilizer, and compress electric and
maintenance services, as well as power generation services from municipal solid waste.
It undertakes consumer distribution and metering, substation automation and SCADA
implementation, and metro projects. A2Z reported a total operating income of INR12.2bn during
FY10, up by 69% due to higher value of orders executed by the company. PBIDT margin at 16.8%
was lower than that in FY09. Interest costs increased by 25% in FY10, due to higher borrowings
during the fiscal to fund the expanding operations of the company. Nonetheless, the company had a
PAT margin at 8.0% in FY10, marginally lower than that in FY09.

Investment Rationale:

Strong expansion in transmission network Under Xth Five Year Plan, the government had laid
strong emphasis on on accelerating and upgrading the India transmission and distribution
infrastructure through APDRP and RGGVY schemes. These are expected to keep demand strong
for EPC players in the country involved in laying of transmission lines. A2Z has strong experience in
laying transmission lines and substation for up to 33KVA and in difficult terrains of India.

Reducing dependence on EPC business At present, EPC business constitutes over 92% to the
total revenues of the company, followed by its facility management services (FMS) division. With
application of raised funds to develop other business streams of Municipal Solid Waste Management
(MSW) and Renewable energy generation are expected to reduce its revenue dependence on EPC
business.

Expected fast growth in renewable energy In the recent past, renewable energy-based power
capacities have registered the highest pace of growth in the overall capacity additions in India
compared to non- renewable sources, increasing their share of total power capacity from 2% in FY
2003 to around 10% in FY 2010. The company’s plan to set up renewable power generation
capacities should result in improvement in both top-line and bottom line.

Investment Concerns:

Complaint against the promoter by Central Vigilance Commission (CVC) for a FMS contract in
commonwealth games The CVC has filed a complaint against the promoter, Mr Amit Mittal, for
paying money to certain government officials in connection with the FMS contract (worth INR193mn)

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been awarded to the company during commonwealth games in Delhi in 2010. Any adverse action by
the government of India against promoter may impact the operations of the company adversely.
Lack of expertise in new businesses The company do not have any prior experience in
developing, constructing, commissioning and operating and managing power generation projects or
in competing in the power generation business. Also it does not have any prior experience in
processing, treating and disposing municipal solid waste and operating rice mills for processing
paddy or storing rice. This could result in managerial, technical and logistical challenges to be faced
by the company while implementing such projects and could cause disruptions in business
Revenue dependence on government and public sector undertakings In FY08, FY09 and FY10,
the company derived 96.46%, 95.22% and 94.33% of the total income from government and public
sector undertaking contracts only. We expect that contracts awarded by government authorities and
public sector undertakings will continue to account for a high proportion of our business. In EPC
business, it has faced delays due to the government authority’s delay in procuring rights and has
also faced the risk of non-payment or delay in the collection of payments from government-owned or
controlled entities.
Limited ability to negotiate for increased costs could suppress margins Since contracts with
government entities usually contain standard terms, the company has limited ability to negotiate such
contracts and hence may result in suppression of margins in the future.

Management:

Designation
Non-Executive Chairman
Managing Director
Whole Time Director
Non-Executive Director
Name
Mr. Surender Kumar Tuteja
Mr. Amit Mittal
Mrs. Dipali Mittal
Mr. Rakesh R Jhunjhunwala

OBJECTS OF THE ISSUE:

The object of the Issue is to finance:

1. Three biomass (bagasse) based power cogeneration projects (15MW each) in Punjab,
2. Five biomass-based power generation projects (15MW each) in Rajasthan,
3. Investment in Subsidiaries (A2Z Infrastructure and its subsidiaries, Mansi Bijlee & Rice
Mills),
4. Repayment of a loan (INR417mn) by L&T Infrastructure Finance Company Limited,
5. Working capital requirements,
6. General corporate purposes.

Issue Details

The company is contemplating to mobilize approximately ~INR8.5bn through 21mn equity

shares of the Face Value of Rs 10 each with a price band of INR400 to INR410 per share.
The bid/issue open on 8th December (other than QIB) / 7th December (QIB) and closes on
10th December 2010. Bid Lot is of 15 shares.

Offer to QIBs:

The allocation to QIBs is to the extent of 10.5mn Equity Shares (Amounting ~INR4,264mn)
on a proportionate basis. Out of which 0.525mn shares are reserved for MFs only.

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Financial
INR mn Yearly
FY10 FY 09 FY08
Equity Paid Up 573.01 216.47 941.36
Reserves 3,569.96 2,015.12 700.42
Net worth 4,142.97 2,232.27 1,641.78
Income 12,192.85 7,157.10 4,789.98
Other Income 60.11 81.70 23.49
Book Value (INR/share) 72.3 38.95 28.80
PBT 1,538.43 943.09 768.59
PAT 982.45 590.53 498.42
EPS (INR - post issue) 13.31 8.00 6.75
RONW (%) 23.71% 26.45% 30.35%
DIVIDEND DECLARED - - -

IPO Grading

CARE has assigned an IPO 4/5 this indicates the above average fundamentals of the company.

Verification of defaulter list of RBI site:

The company’s name is not appearing in the defaulter list.

Valuation

Each equity share is priced at 30.1x at the lower end of the price band of INR400, and at 30.8x at the
upper end of price band of INR410 on FY10 fully diluted earnings of INR13.3 (post IPO basis). Its
nearest competitors Jyoti Structures, ABB, KEC International and Kalpataru Power are trading at
11.3x, 47.8x, 13.1x and 13.1x FY10 earnings respectively. Post issue the market capitalization of
the company will be INR3,200mn at the upper price band of the issue.

View

The EPC industry in India is highly competitive, flooded with large number of big and small. The
company’s high EBITDA margin at 18% in FY10, does not seem to be sustainable. The company
has D/E ratio of 1.3x in FY10. Considering the premium valuations we recommend
‘UNSUBSCRIBE’ for the issue.