Interarch a proxy to ride manufacturing capex rebound

ET Intelligence Group: Interarch Building Products, a provider of pre-engineered steel construction solutions, plans to raise ₹600 crore through its initial public offering (IPO). This amount includes ₹200 crore from new shares, which will be used for the expansion of its plants and enhancing working capital. The remaining ₹400 crore will be an offer for sale by the promoter and a private equity firm exiting its 17-year investment.

The promoter's holding will decrease from 88% to 60% post-IPO. Pre-engineered construction is comparable to capital goods suppliers as it is highly customised and integrated with operational flows, giving organised players an edge. The company is positioned as a proxy play on the recovery of corporate capital expenditure, especially in new factory setups in the semiconductor, electronics manufacturing, and paint sectors.

Being debt-free, Interarch's earnings are expected to be boosted by higher capacity addition. Given these factors, long-term investors may consider subscribing to the IPO.

Business Model: Established in 1983 Delhi-based Interarch manufactures, designs, and sells pre-engineered steel buildings (PEBs) on a turnkey basis. It has a total installed capacity of 141,000 tonnes across four plants in Uttarakhand and Tamil Nadu. It is the second-largest PEB manufacturer in India with a 6.5% market share in operating income among integrated PEB players.

Financials: Revenue increased annually by 25%, reaching ₹1,306 crore from FY22 to FY24, while operating profit (Ebitda) grew by 85% to ₹113 crore, achieving an Ebitda margin of 8.6%. Net profit surged by 124% annually to ₹86.2 crore over the same period. The company has experienced some of the highest revenue and profit growth among its peers between FY22 and FY24.

Industrial construction accounts for 68% of the total revenue. Three-quarters of the revenue was from repeat orders in FY24. The current order book is at ₹1,153 crore, equivalent to around nine months of sales.

Risks: The company's financial performance is highly dependent on the availability of raw materials, particularly steel, which constitutes 86% of the total raw material costs. Any significant fluctuations in steel prices may impact profitability.

Valuation: At the higher end of the price band, the company is seeking a price-to-earnings multiple of 17 times based on FY24 earnings. Listed peers Pennar Industries and Everest Industries are trading at multiples of 38 and 70 times, respectively. Interarch boasts higher operating margins and a superior return on equity.