Should You Invest? A Deep Dive into the Highway Infrastructure Limited IPO
An independent analysis of the Highway Infrastructure Limited Draft Red Herring Prospectus (DRHP).
Executive Summary
This analysis provides a detailed review of the Draft Red Herring Prospectus (DRHP) for Highway Infrastructure Limited. The document outlines the company's business primarily in tollway collection, EPC Infra, and real estate, the IPO offering (comprising both a Fresh Offer and an Offer for Sale), and various associated risk factors. The aim is to help potential investors understand the key aspects of this IPO and make an informed decision.
I. Understanding Highway Infrastructure Limited
Highway Infrastructure Limited (formerly Highway Infrastructure Private Limited) was originally set up as a partnership firm in 1995. The company is primarily engaged in the business of tollway collection, EPC Infra, and real estate. As of August 31, 2024, the consolidated Order Book of the Company is ₹ 5,963.83 million, with ₹ 3,149.59 million in tollway collection business and ₹ 2,814.24 million in EPC Infra business.
For Fiscal 2024, the tollway collection business constituted 83.42% of the consolidated revenue from operations, EPC Infra business 16.08%, and real estate development 0.50%. The promoters of the company are Arun Kumar Jain, Anoop Agrawal, and Riddharth Jain.
The IPO consists of both a Fresh Offer (where proceeds go to the company) and an Offer for Sale (where proceeds go to selling shareholders). The Fresh Offer aggregates up to ₹ 1,050.00 million, and the Offer for Sale is up to 3,100,000 Equity Shares by Arun Kumar Jain and Anoop Agrawal.
II. Key Positives Highlighted in the DRHP
The DRHP, while detailing risks, also presents several positive aspects:
- Diversified Business Segments: The company operates in tollway collection, EPC Infra, and real estate, providing a diversified revenue stream.
- Significant Order Book: A consolidated order book of ₹ 5,963.83 million as of August 31, 2024, indicates a healthy pipeline of future projects.
- Dominant Revenue from Tollway Collection: The high percentage of revenue from tollway collection (83.42% in Fiscal 2024) suggests a strong position in this segment, which has a promising outlook due to infrastructure development and economic growth.
- Experienced Promoters: The company is backed by promoters with experience in the industry, which can be a valuable asset for strategic direction and execution.
- Fresh Offer Component: The Fresh Offer proceeds of up to ₹ 1,050.00 million are earmarked for funding working capital requirements and general corporate purposes, which can strengthen the company's financial position and support growth.
- Consistent Profit Growth: The company has shown consistent growth in profit after tax over the last three fiscals (from ₹ 85.19 million in Fiscal 2022 to ₹ 214.14 million in Fiscal 2024).
- Increasing Net Worth: The net worth has consistently increased from ₹ 633.71 million in Fiscal 2022 to ₹ 1,001.85 million in Fiscal 2024.
III. Significant Risks and Concerns (as detailed in the DRHP)
The DRHP explicitly states, "Investments in equity and equity-related securities involve a degree of risk and investors should not invest any funds in the Offer unless they can afford to take the risk of losing their entire investment." Here are the critical risks that warrant careful consideration:
1. Risks in Relation to First Public Offer
As this is the company's first public issue, there has been no formal market for its Equity Shares. This implies potential price and volume volatility post-listing, and no assurance of sustained trading or that the shares will trade at or above the Issue Price.
2. Revenue Concentration and Dependence on NHAI
A significant portion of the company's revenue (73.42% from the top customer in Fiscal 2024, 92.07% from top 5, and 96.43% from top 10) is derived from its tollway collection business, primarily from NHAI. Any adverse changes in government policies, delays in payments, or termination of contracts by government clients could severely impact the company's business and financial results.
3. Seasonal Fluctuations
The business is subject to seasonal fluctuations, particularly in tollway collections during the monsoon period, which can lead to lower traffic flow and revenues. This seasonality can affect cash flows and business operations.
4. Competitive Bidding Process
Projects are awarded through a competitive tender bidding process based on pre-qualification criteria and price competitiveness. Failure to win bids or meet criteria could adversely affect the business.
5. Capital Intensive Business and Working Capital Requirements
The business is capital-driven and requires significant working capital. Insufficient cash flows to meet debt payments and working capital needs, especially for fixed weekly payments in tollway collection irrespective of actual collections, could adversely affect operations.
6. Conflict of Interest with Promoters and KMP
Promoters and Key Managerial Personnel (KMP) may have interests in entities engaged in similar lines of business, including Group Companies. This could lead to potential conflicts of interest and adversely affect the company's business and prospects.
7. Regulatory Compliance and Approvals
Operating in a highly regulated industry, the company is required to obtain numerous approvals, licenses, and permits. Failure to obtain or renew these in a timely manner, or violations of existing regulations, could adversely affect the business, financial condition, and cash flows.
8. Increase in Input Prices
Increased prices of construction materials, fuel, labor, and equipment could adversely affect the EPC Infra business, especially since many contracts are fixed-price or lump-sum and may not include adequate escalation clauses.
9. Outstanding Litigation and Contingent Liabilities
The company, its subsidiary, entity in control, promoters, and directors are involved in various legal proceedings and potential litigation. As of Fiscal 2024, there were ₹ 776.40 million of contingent liabilities not provided for. Any adverse decision or materialization of these liabilities could significantly impact financial condition.
10. Geographical Concentration
The business is relatively concentrated in specific parts of India (Madhya Pradesh, Andhra Pradesh, Maharashtra, Uttar Pradesh, Gujarat, and Punjab). Adverse developments in these regions, such as slowdowns in construction activities or changes in local policies, could negatively affect the business.
11. Indebtedness and Restrictive Covenants
The company's indebtedness (total outstanding debt of ₹ 1,157.16 million as of August 31, 2024) and the restrictive covenants in borrowing agreements could limit operations and future financing.
12. Limited Contract Tenures
NHAI contracts are typically for a standard period of one year, with limited scope for extension. This limited tenure and competitive nature expose the company to uncertainty of continued revenue.
13. Dependence on Promoters and Key Managerial Personnel
The business success is highly dependent on its Promoters and KMP. Loss of their services or inability to attract and retain key personnel could adversely affect business growth.
14. Traffic Volume Forecasting Risk
Any material deviation between actual traffic volume and forecasted traffic volume for toll-based projects could adversely affect revenues and earnings.
15. Delays and Cost Overruns in Projects
Projects are subject to delays and cost overruns due to various factors like raw material unavailability, manpower shortages, and regulatory approvals, which could affect profitability.
16. Reliance on Third-Party Suppliers and Subcontractors
Dependence on third parties for raw materials, services, and finished goods, as well as subcontractors for project completion, exposes the company to risks of non-performance, late performance, or quality issues.
17. Past Non-Compliances and Delays
Instances of delayed payments for EPF, ESIC, and PT contributions, and past delays in statutory filings with the Registrar of Companies, could lead to regulatory actions and penalties.
18. Defects in Construction and Services
No assurance that construction or services will be free from defects, which could lead to contractual liabilities, losses, and negative customer perception.
19. Technological Changes
Inability to keep pace with technological changes, new equipment, and evolving industry standards could adversely affect the business.
20. Toll Collection Leakage
Revenues from toll collection could be reduced by leakage through evasion, theft, fraud, or technical defaults in systems.
21. Business Strategy Implementation Risk
Failure to implement and execute the correct business strategy in a timely and cost-effective manner could adversely affect business growth and profitability.
22. Land Acquisition and Right of Way Risks
Delays in obtaining land or rights of way for EPC Infra projects, or issues with land titles, could lead to project delays, cost overruns, or contract termination.
23. Intellectual Property Rights
Failure to protect intellectual property rights (e.g., trademarks like the "Highway Infrastructure" device trademark) could harm the brand and business growth.
24. Directors' Experience
Some directors may have limited experience in the specific line of business, which could potentially affect management and operations.
25. Fraud, Theft, and Employee Negligence
Operations are subject to risks of fraud, theft, employee negligence, or security lapses, and insurance may not cover all losses.
26. Insufficient Insurance Coverage
Existing insurance may not be sufficient to cover all damages or third-party liabilities, potentially leading to significant financial losses.
27. No Proceeds from Offer for Sale to Company
The company will not receive any proceeds from the Offer for Sale portion of the IPO, as these funds will go directly to the selling shareholders.
28. Broad Discretion over Net Proceeds
Management will have broad discretion over the use of Net Proceeds from the Fresh Offer, and their deployment may not always lead to an increase in shareholder value.
29. Promoter Control and Potential Conflicts of Interest
Promoters will retain significant control post-Offer, potentially influencing decisions in a manner that could conflict with the interests of minority shareholders.
IV. Financial Performance Summary (₹ million)
| Particulars | Fiscal 2024 | Fiscal 2023 | Fiscal 2022 |
|---|---|---|---|
| Equity Share Capital | 96.32 | 96.32 | 96.32 |
| Net Worth | 1,001.85 | 748.11 | 633.71 |
| Revenue from operations | 5,734.54 | 4,551.33 | 3,550.27 |
| Profit/ (loss) after tax | 214.14 | 138.00 | 85.19 |
| Total borrowings | 696.22 | 633.60 | 567.58 |
The financial data indicates consistent growth in revenue from operations, profit after tax, and net worth. Total borrowings have also shown an increasing trend.
The Verdict: A High-Risk Proposition with Potential
Based on the detailed review of the Highway Infrastructure Limited DRHP, applying for this IPO involves a high degree of risk. While the company operates in a growing sector (infrastructure development and management, especially tollway collection) and has demonstrated consistent financial growth, the extensive list of significant risks warrants careful consideration. The Fresh Offer component is a positive, as it brings funds into the company for working capital and general corporate purposes.
Key reasons for the high-risk assessment:
- Revenue Concentration and Government Dependence: The heavy reliance on a few key customers, primarily NHAI, and the government sector for revenue exposes the company to significant risks related to policy changes, payment delays, and contract terminations.
- Operational and External Risks: The business is susceptible to seasonal fluctuations, competitive bidding pressures, capital intensity, and various operational risks including potential delays, cost overruns, and reliance on third parties.
- Financial and Legal Complexities: The presence of significant outstanding litigation and contingent liabilities, along with past non-compliances and extensive related party transactions, adds layers of financial and operational risk that need thorough evaluation. The increasing trend in total borrowings is also a point to note.
- First Public Offer: As a first-time public issue, the lack of a formal market for its shares implies potential price and volume volatility post-listing.
While the Indian infrastructure sector has growth potential, and Highway Infrastructure Limited has shown a positive financial trajectory, the magnitude and breadth of the identified risks suggest a highly cautious approach.
For a conservative investor, it would be prudent to exercise extreme caution, and this IPO might not be suitable. This IPO is primarily suitable for investors with a high-risk appetite who:
- Have thoroughly understood and are comfortable with all the specific risks detailed in the DRHP.
- Are prepared for the potential loss of a significant portion, or even the entirety, of their investment.
- Believe in the long-term growth story of the Indian infrastructure market and the management's ability to effectively mitigate the identified challenges.
It is strongly recommended that you consult with a qualified financial advisor who can assess your individual risk appetite and financial goals before making any investment decision. They can help you understand the nuances of the infrastructure sector and the particular risks associated with this offering.
This analysis is for informational purposes only and does not constitute financial advice.
