CRISIL has assigned its IPO Grade ‘3/5’ (pronounced ‘three on five’) to the proposed initial public offering of Vascon Engineers Ltd (VEL). The grade indicates that the fundamentals of the issue are ‘average’ in relation to the other listed equity securities in India.

VEL is seen in the industry as a construction specialist with strong technical and design expertise, delivering quality work within the scheduled time. It has a strong brand in Pune, where it is an entrenched player with a business track record of more than 20 years. In 2006-07 (refers to financial year, April 1 to March 31), VEL reported a 180 per cent year-on-year jump in its consolidated operating income, thanks to the ongoing boom in the Pune realty market. The IPO will finance seven real estate projects aggregating 2.25 million sq ft of saleable area; most projects will follow the ‘build-lease-sell’ strategy.

However, VEL’s realty business is concentrated in and around Pune, exposing it to the fortunes of the IT/ITES industry. As on October 31, 2007, the company has developed about 3.36 million sq ft of saleable area; it expects to build more than 34.7 million sq ft over the next eight years. Hence, the company’s systems, processes, and people will have to be substantially scaled up for it to be able to execute its projects on time. This will be a challenging task, as most other developers are scaling up as well, leading to a possible manpower and material crunch. Also, in a scenario where real estate prices are rising, the build-lease-sell strategy works in favour of the developer; but in a downturn the same strategy of holding on to stock could seriously impair the developer’s profitability.

Sourced From: CRISIL Limited

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