What you must know about Chavda Infra IPO

Chavda Infra Ltd was incorporated in 2012 to provide construction and allied services. It provides these services across the gamut of residential, commercial, and institutional projects in the state of Gujarat. The group is broadly active in the cities of Ahmedabad, Gandhinagar, and Rajkot. The group, overall, operates under 3 verticals viz. Chavda Infra, Chavda RMC and Chavda Developers. It has already developed and delivered more than 100 projects in Gujarat spread across residential, commercial, and institutional properties. It offers the full gamut services ranging from planning, design, construction, and post-construction activities. Chavda Infra is divided into 3 business lines, which include contracting services, development services and commercial renting services.

Some of the popular and reputed projects completed by Chavda Infra in Ahmedabad include Straft Luxuria, Shivalik Parkview, Shivalik Sharda Harmony among key residential projects. Among commercial properties developed, they include AAA Corporate House, Sadbhav House, Solitaire Sky, Sandesh Press, Suyash Solitaire and Solitaire Connect. Some of its premium projects include the Nirma University (old building), Zydus School and AIS Toddlers Den. It currently has about 26 ongoing projects at various stages of completion with a combined value of over ₹600 crore. These 26 projects include 4 commercial property projects, 4 institutional infrastructure projects and 18 residential projects. The total employee strength of Chavda Infra Ltd stands at 250.

Key terms of the Chavda Infra IPO

Here are some of the highlights of the Chavda Infra IPO on the SME segment of the National Stock Exchange (NSE).

• The issue opens for subscription on 12th September 2023 and closes for subscription on 14th September 2023; both days inclusive.
   
• The company has a face value of ₹10 per share and it is a book building issue. The issue price band for the fresh issue IPO has been fixed in the band of ₹60 to ₹65 per share. For all analysis purposes, the upper end of the price band has been considered.
   
• The IPO of Chavda Infra Ltd has only a fresh issue component with no book built portion. It must be remembered that the fresh issue portion is EPS dilutive and equity dilutive, but OFS is just a transfer of ownership and  hence it is not EPS or equity dilutive.
   
• As part of the fresh issue portion of the IPO, Chavda Infra Ltd will issue a total of 66,56,000 shares (66.56 lakhs), which at the upper end of the band price of ₹65 per share aggregates to a total fund raising of ₹43.26 crore.
   
• Since there is no offer for sale portion, the total size of the fresh issue will also be the total size of the IPO. Hence the total IPO size will comprise of 66.56 lakh shares, which at the upper end of the price band of ₹65 per share will aggregate to ₹43.26 crore.
   
• Like every SME IPO, this issue also has a market making portion with a market maker portion allocation of 3,36,000 shares. The market maker for the issue is Spread X Securities Ltd and they will provide two-way quotes to ensure liquidity on the counter post listing and low basis costs.
   
• The company has been promoted by Mahesh Chavda, Dharmishta Chavda and Johil Chavda. The promoter holding (including the promoter group) in the company currently stands at 100%. However, post the fresh issue of shares and the IPO, the promoter equity holding share will reduce to 73%.
   
• The fresh issue funds will be used by the company for filling its working capital funding gaps and also for general corporate purposes. Part of the funds raised will also go towards meeting issue expenses.
   
• While Beeline Capital Advisors Private Ltd will be the lead manager to the issue, KFIN Technologies Ltd will be the registrar to the issue. The market maker for the issue is Spread X Securities Ltd.

IPO allocation and minimum lot size for investment

The company has allocated 50% of the issue size for the QIBs, 35% for the retail investors and the balance 15% for the HNI / NII investors or the non-retail investors in the IPO of Chavda Infra Ltd. This refers to the net issue after market maker quota. The break up in terms of minimum and maximum allowed quota has been captured in the table below.

The minimum lot size for the IPO investment will be 2,000 shares. Thus, retail investors can invest a minimum of ₹1,30,000 (2,000 x ₹65 per share) in the IPO. That is also the maximum that the retail investors can invest in the IPO. HNI / NII investors can invest a minimum of 2 lots comprising of 4,000 shares and having a minimum lot value of ₹2,60,000. There is no upper limit on what the QIBs as well as what the HNI / NII investors can apply for. The table below captures the break-up of lot sizes for different categories.

Key dates to be aware of in the Chavda Infra IPO (SME)

The SME IPO of Chavda Infra Ltd IPO opens on Tuesday, September 12th, 2023 and closes on Thursday September 14th, 2023. The Chavda Infra Ltd IPO bid date is from September 12th, 2023 10.00 AM to September 14th, 2023 5.00 PM. The Cut-off time for UPI Mandate confirmation is 5 PM on the issue closing day; which is September 14th, 2023.

It must be noted that in ASBA applications, there is no refund concept. The total application amount is blocked under the ASBA (applications supported by blocked amounts) system. Once the allotment is finalized, only the amount is debited to the extent of the allotment made and the lien on the balance amount is automatically released in the bank account.

Financial highlights of Chavda Infra Ltd

The table below captures the key financials of Chavda Infra IPO for the last 3 completed financial years.

Data Source: Company DRHP filed with SEBI

The company has reported net margins in the range of 5% to 7% in last 3 years, which his acceptable for the construction and real estate development basis. However, the return on the net worth has been consistently been in the range of 30% to 40%, but that is more due to the smaller equity base. One area of concern could be that the borrowings have been consistently around twice the size of the net worth and that is likely to put pressure, especially with interest rates at relatively higher levels. In terms of its business positioning, it has surely carved a niche in the Gujarat region and that should hold the cash flows and the top line growth in good stead. How does the stock look in valuation terms.

How does the stock look on P/E terms? The company has a weighted average EPS of ₹4.72 for the last 3 years while the EPS for the latest year stands at a more realistic ₹6.69. If you compare the IPO upper band price of ₹65, we are looking at a P/E discount in the range of 8-10 times earnings, which is very conservative compared to the peer group. Also, in terms of the asset turnover ratio, the asset sweating looks healthy at around 1 time and that should keep the ROE robust. That should be good enough to justify the valuations. However, the construction business has tended to be cyclical in the past and moves with the demand and supply cycles in a particular geography. That will be a risk, especially considering it is a small cap realty play. Investors in the IPO must be prepared for a longer haul and also be ready for a higher level of risk.