Red Flags in Ceigall India IPO: Is This a Risky Bet?

Ceigall India IPO Introduction

Ceigall India Limited is a fast-growing highway construction project development company that provides Engineering, Procurement, and Construction (EPC) services across India

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Brief about 

Summary of the business of

Ceigall India are an infrastructure construction company, having completed over 34 projects across ten states in India with experience in undertaking specialized structural work such as elevated roads, flyovers, bridges, railway over bridges, tunnels, highways, metros, expressways and runways. Over the last two decades, Ceigall India Company has transitioned from a small construction company to an established engineering, procurement and construction (“EPC”) player, demonstrating expertise in the design and construction of various road and highway projects including specialized structures (Source: CARE Report) with over 20 years of experience in the industry. Ceigall India business model is broadly divided into EPC projects, Hybrid Annuity Model (“HAM”) projects and O&M. Under EPC projects and O&M, we recognise revenue based on percentage completion method or item rate basis, however, under HAM we construct the asset under public private partnership model wherein the authority initially provides part of funding for construction and remaining portion on completion of the project is by way of semi- annual annuities spread across concession period, and after the concession period, asset is transferred back to the authority. Company has completed over 34 projects, including 16 EPC, one HAM project, five O&M and 12 Item Rate Projects, in the roads and highways sector. Currently, Company has 18 ongoing projects, including 13 EPC projects and five HAM projects.

History

Ceigall India Company was originally incorporated as “Ceigall Builders Private Limited” at Ludhiana, Punjab, India under the provisions of the Companies Act, 1956 pursuant to a certificate of incorporation dated July 8, 2002, as a private limited company issued by the Registrar of Companies, Punjab, Himachal Pradesh & Chandigarh at Chandigarh. Upon the conversion of our Company into a public limited company, pursuant to a board resolution dated January 28, 2011, and a shareholders’ resolution dated January 29, 2011, the name of our Company was changed to “Ceigall India Limited” and a fresh certificate of incorporation dated February 9, 2011 was issued by the Registrar of Companies, Punjab, Himachal Pradesh & Chandigarh at Chandigarh.

Promoters & Board of Directors

• The Promoters of Ceigall India Company are Ramneek Sehgal, Ramneek Sehgal and Sons HUF and RS Family Trust.

Board of directors

Share Holding pattern

Qualitative Factors

• One of the fastest growing EPC companies with an experience in executing specialised structures:
• Healthy orderbook giving long term revenue visibility
• Demonstrated project development, execution and operational capabilities
• Efficient business model
• Experienced management team

Strategy

• Diversification by leveraging existing capabilities
• Selectively expand our geographical footprint
• Continue to explore hybrid annuity based model to optimize our project portfolio
• Continue focusing on enhancing execution efficiency
• Continue to grow and benefit from the robust future growth of India’s economy and infrastructure

Industry Outlook

The Indian infrastructure to play major role with around 3% contribution to GDP as on FY23. CareEdge estimates India’s infrastructure industry investments of Rs. 52,962 billion between FY24-FY28. India’s economic growth is fueled by a diverse range of sectors, of which infrastructure is a vital sector. In recent years, the government has taken several steps to accelerate infrastructure development, wherein, the key focus areas are transportation, energy, smart cities, water, social infrastructure, and digital infrastructure. There have also been efforts to attract foreign investors in the infrastructure sector through policy reforms.

Infrastructure projects are often expensive and have a long gestation period. To address this issue, fundraising and generating returns, the government is continuously striving to create a favorable operating environment for its players. Accordingly, national and state-level agencies like the National Highways Authority of India (NHAI), state-level bodies, and private sector companies (both domestic and international), are actively participating in infrastructure development.

With the growing population, the long-term need for robust infrastructure is necessary for economic development. This generates the need for massive investments in the development and modernization of infrastructure facilities which will not only cater to the growing demand but will also ensure competitiveness in the global market.

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Gross Fixed Capital Formation (GFCF), which is the measure of a country’s investment in fixed assets witnessed significant improvements over the years. It is a key indicator considered to assess the trend in investments in an economy. In FY23, the ratio of investment (GFCF) to GDP climbed up to its highest in the last decade at 34%.

Growth Drivers and Risk Factors in Infrastructure Investments

There are several factors that contribute to infrastructure investment drive. They mainly include the following:

• The increasing urbanization rate and population growth create a demand for better urban infrastructure, including transportation, housing, water supply, and sanitation. As of 2022, the total population and urban population are 1.4 billion and 0.5 billion, respectively. According to United Nation’s estimates, the Indian population is expected to reach ~1.6 billion by 2050 and will have added ~416 million urban dwellers. This is expected to generate more need for infrastructure investments.
• Government-led initiatives such as ‘Make in India,’ ‘Smart Cities Mission,’ and ‘Atmanirbhar Bharat’ focus on infrastructure development, attracting investments, and promoting economic growth. Such constant government support is likely to foster more investment in the infrastructural domain in the coming years.
• Foreign investments also play a crucial role in infrastructural development as they bring in innovation and foster value chains. For which, more liberalization in foreign direct investments attracts investors to participate in infrastructure projects, bringing in capital, technology, and expertise. This will also help in attracting more investments.
• Economies across the globe are now gradually putting more emphasis on renewable energy and sustainability. Compared to other countries, India has established a position as the third-largest host country for announced greenfield projects. Thus, with such an increasing focus on renewable energy and environmental concerns, investments in infrastructure are likely to grow further in the coming years. Such investments will help align with environmental goals and provide sustainable, long-term growth opportunities.
• India has actively embraced Public-Private Partnerships (PPPs) as a model for infrastructure development across various sectors. The government has recognized the potential of PPPs to leverage private sector efficiency, innovation, and investment in addressing the country’s vast infrastructure needs. Private financing reduces the burden on the government’s budget, leveraging private capital for public infrastructure development. Some of the notable PPP projects in India are Delhi Airport, Mumbai Metro, and several national and state highways. These projects have exhibited good potential to attract more private investment into the infrastructure segment which bodes well for the industry.
• Furthermore, continuous efforts by the government to make the business environment convenient to operate and streamline the regulatory process will support the growth of investments in the infrastructure segment.

On the other hand, some of the risk factors relating to infrastructure investments are:

• Regulatory and policy risks are significant considerations in infrastructure investments, as they can have a substantial impact on the feasibility, profitability, and success of projects. Moreover, investors in infrastructure projects face uncertainties related to changes in laws, regulations, and government policies. Thus, frequent changes in policies and regulatory uncertainties can deter investors and impact project viability.
• Funding challenges in infrastructure investments are common and can arise from various factors. Infrastructure projects often require significant upfront capital investment. The high initial costs can be a deterrent for both public and private investors. Also, these projects typically have long gestation periods and payback periods. Investors may be reluctant to commit funds to projects that take many years to generate returns, especially when compared to shorter-term investments with quicker returns. Furthermore, some infrastructure projects, especially those involving public-private partnerships (PPPs), rely on user fees or government payments for revenue. The uncertainty associated with revenue generation, particularly if it depends on user demand, can make investors hesitant to commit funds.
• Land acquisition and environmental clearances are two critical challenges that often pose obstacles to infrastructure development. These issues can significantly impact project timelines, costs, and overall feasibility.
• Infrastructure maintenance is a critical aspect of sustainable and effective infrastructure development. However, it often poses challenges when it comes to raising investment for new projects. Governments and private entities may face budget constraints, leading to deferred maintenance of existing infrastructure. This backlog can create a negative perception among investors, as they may be concerned about the long-term viability and reliability of the infrastructure.
• While technological advancements bring numerous benefits to infrastructural development, they also pose challenges that need to be addressed. Adopting new technologies often requires significant upfront investments in research, development, and implementation. The initial costs can be a barrier for some infrastructure projects, especially for cash-strapped governments or smaller organizations. Hence, rapid technological advancements may render certain infrastructures obsolete, necessitating ongoing updates and investments.

Key Takeaway on Infrastructure:

India stands out as the fastest-growing economy among the major economies with real gross domestic product of Rs. 160.06 trillion in Fiscal 2023 and estimated to emerge as the third-largest economy globally by 2027, infrastructure sector continues to play major role with 3.50% of gross domestic product contribution with Rs.52,962.00 billion investments in Infrastructure industry between Fiscal 2024 to Fiscal 2028. Road construction is amongst the critical sub-segments for infrastructure development, economic growth, and employment creation. Key growth drivers for infrastructure sector are rapid urbanization, higher budgetary outlay towards infrastructure, smart cities mission. The key challenges in the infrastructure sector are regulatory and policy risks, funding challenges, land acquisition and environmental clearances.

Road Infrastructure in India

The road transport sector contributed 2.5% to GVA in FY21, after been in the range of 3.2%-3.3% from FY12 to FY20. Post the pandemic effect in FY21, the sector’s growth rate has returned to pre-pandemic level of 3.2% of India’s GDP in FY22. The road transport sector has grown on a CAGR of about 5.20% against the total CAGR growth of the GVA of about 5.5% during the period FY12-FY22.

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Gross Value Added at Constant (2011-12) Basic Prices

Total Length and Break-Up into National, State, and Rural Roads

India has the second-largest road network in the world, with about 63.32 lakh km as of FY23. This comprises national highways, expressways, state highways, major district roads, other district roads, and village roads. To accelerate the country’s growth, the development of national highways has been the key focus area. On the other hand, state highways, district and rural roads continue to be a large part of the overall road network.

Road Network of Past 5 Years (In Km)

Road transportation, the most common mode of transportation in India, accounts for about 87% of passenger traffic and more than 60% of freight traffic. Despite having a network of 1,44,955 km, Indian national highways account for only 2% of total road network and 40% of total road traffic. State highways and major district roads make up the country’s secondary road transportation system, accounting for 60% of traffic and 98% of road length.

Challenges Faced by the Roads Sector

Despite the government’s continuous support by way of finance and amendments in the PPP model framework, few challenges still persist for the sector

• Delay in land acquisition and receipt of approvals for road construction:
  • Post Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2003, many land owners demand higher compensation and refuse to hand over possession of their land. With the Act coming into effect, the cost of land has increased thereby increasing higher cash outflow from the government towards land acquisition. Furthermore, delay in land acquisition and receipt of approvals for road construction leads to substantial project cost and time overruns, thereby impacting the project viability.
• Mismatches between Project Cashflows and Debt Repayment Tenure:
  • Revenue from large infrastructure projects is spread over 20-30 years whereas the loan for the same project is for 10-15 years. This results in cash flow mismatches in the initial years of operations till the project stabilizes, thereby resulting in private players funding cashflow mismatches from their own sources.
• Limited private sector participation in BOT projects due to past financial stress
  • however good participation seen in HAM projects awarded in past few years: Due to failed BOT projects on account of lower than-estimated traffic volumes or delays in project completion due to approvals/ land acquisition, private players have come under financial stress due to significantly leveraged balance sheets in anticipation of high levels of project revenue growth. However, road authority has been awarding projects under HAM wherein the risks are limited and lower funding is required because 40% of the project cost is provided by the NHAI in 10 installments based on the milestone achieved. Also in the remaining 60% of the project cost, the developer needs to finance only 20-25% and the rest can be raised on debt. Hence, decreased financial stress.
• Cautious bank lending approach to road sector, due to highly Stressed Loan Portfolio in the past:
  • With higher debt exposure to road project and many projects getting stuck or delayed resulted in loans turning into non-performing assets (NPAs), which had contracted the lending capacity of banks. With lower than anticipated revenues, the private players’ debt servicing capacity has been impacted. To mitigate the risk of failure of the company, restructuring of loans has been opted by the private players. Restructuring of loans for the first time does not impact asset classification but subsequent restructuring leads to NPA recognition in the books of financial institutions. Hence, banks have become cautious in terms of lending to road sector.
• Toll collection and willingness of users to pay toll:
  • The sector is susceptible to end users willingness to pay toll, as there have been instances of people skipping toll payments, backed by regional groups or political parties. This in turn impacts the toll collection efficiency and revenues from the road projects, thereby adversely impacting the project cashflow position.

Overview of PPP Framework and Models in Operation Overview:

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Connectivity has been the priority of the government and roads are the best and cheapest way of increasing last- mile connectivity. Construction of roads in every corner of the country by only government agencies is difficult as it will increase both time and cost. Accordingly, the government partnered with the private players under Public Private Partnership (PPP) to achieve complete connectivity by way of roads. Initially, PPP road projects broadly fell into one of the two categories of toll or annuity.

However, private sector participation gradually became subdued post-2012 due to various issues including aggressive bidding, the over-leveraged balance sheet of developers, shortcomings in project preparation activities, and land acquisition issues. To attract private participation in the road sector, the government introduced the Hybrid Annuity Model (HAM). It focused on the proper allocation of risk among partners. On the other hand, the operational asset monetization model has gained prominence recently with the advent of the TOT. Other asset monetization options like the use of InvITs and securitization of toll revenue have also been introduced.

PPP models

To boost private participation, the government has come up with various models including the PPP model.

• Build Operate and Transfer (BOT) Toll Model
  • This is a simple and conventional PPP model where the private partner is responsible for designing, building, operating (during the concession period), and transferring back the facility to the public sector. The role of the private sector partner is to bring the finance for the project and take the responsibility to construct and maintain it.
  • In return, the public sector will allow it to collect revenue from the users by way of tolls. To increase the viability of projects, a capital grant up to a maximum of 40% is provided by NHAI.
• BOT (Annuity) Model
  • In the BOT (Annuity) mode, the private partner is responsible for building, operating, and transferring the road at the end of the agreement period to the public sector. The toll collection is however undertaken by the government agency and the payment is made on a semi-annual basis to the private players.
• Hybrid Annuity Model (HAM)
  • Due to subdued private participation in the bidding process, the government opted for an advanced version of the Hybrid Annuity Model (HAM) in FY2017. It was introduced when private players were piling on debt and banks were reluctant to provide additional loans as the majority of the projects were failing. Major BOT projects had proven to be a bad choice as the main assumption for the returns was traffic. If there was not enough traffic as assumed, the whole project would turn into a fund trap for private players.
  • HAM is a mix of BOT (Annuity) and EPC models. This model safeguards the interest of both the parties, i.e., government and private entities. During the construction period, the private entity is provided a grant equivalent to 40% of the bid project cost by the government in five equal instalments depending on the physical progress of the project. The remaining 60% of the bid project cost is to be borne by a private entity through debt and equity. The government generates its revenue from the project by way of toll collection.
  • This model has been very successful as the burden of financing on private players has been reduced. In the first year of its implementation, projects worth Rs 280 billion were awarded by the NHAI of which 50% of the projects were under HAM. HAM has not only brought back private participation but has also safeguarded the banks as the funds disbursed to private players are backed by the government annuity payments, i.e., the traffic risk is taken care by the government, private players are only responsible for building the project and there is no role in road’s ownership, toll collection or maintenance.
• Engineering, Procurement and Construction (EPC)
  • In the EPC mode, the cost is completely borne by the public sector (government). The public sector invites bids for engineering knowledge from the private players. Procurement of raw materials and construction costs are met by the public player. The private sector’s participation is limited to the provision of engineering expertise.
• Service contract
  • In this approach, the private promoter performs a particular operational or maintenance function for a fee over a specified period of time. In addition, there are modes such as TOT and Operate-Maintain-Transfer (OMT) for monetizing future toll earnings of completed projects.
• Toll Collection
  • In 2009, the concept of Toll collection emerged as a distinct business model similar to outsourcing. In this arrangement, the private parties are invited by the authority to collect tolls on highways built under EPC and BOT- annuity contracts. It is often used for projects which last less than a year.
  • The project is given to the private player with the highest bid and the contracting authority determines the user fee. During the concession time, the private player has the power to collect user fees.
• OMT
  • Under the OMT model, the private party is responsible for maintenance for a set period of time. The concept of OMT was established to ensure optimum quality and safety for road travelers. An OMT project includes a contract for the right to collect tolls as well as a contract for the stretch’s management and maintenance. The OMT idea was established to ensure adequate quality and safety for travelers. An OMT project includes an agreement for the ability to collect tolls as well as a contract for the stretch’s management and maintenance.
• TOT
  • Under the TOT model, the right of collection and appropriation of fees for selected operational NH projects constructed with public funds shall be assigned to developers for a pre-determined concession period in exchange for an upfront payment to NHAI. Such rights assignment shall be based on the toll income potential of the identified NH projects. The developer will be responsible for the operation and maintenance (O&M) of such projects until the concession period expires.

Key Features

Key Initiatives and Overview of HAM

• The ham model is a type of PPP model introduced in January 2016 which is used in the building and development of roads in India.
• The National Highways Authority of India (NHAI) has developed national highways all over the nation by largely utilizing the ham model. It has aided in luring private capital into road projects, accelerating the momentum in developing road infrastructure, and improving the quality of roads.
• HAM assures better risk allocation between the government and the private developer.
• In new HAM, 40% of the bid project cost is funded by the government and is payable to the private developer in ten equal instalments and the remaining cost is arranged by the developer.
• Traffic risk is not associated with the private developer and will be borne by the government with developers earning fixed annuities.
• After completion of the project, the NHAI collects toll and the private developer is repaid in the form of annuity payments.
• All payments have been inflation-indexed using a Price Multiple Index, which is a 70:30 weighted average of WPI and CPI (IW). This mitigates the inflation risk for the developer.

Overview of Recent Changes in the Model Concession Agreement for HAM Projects

• Bidder Eligibility criteria of NH projects under Hybrid Annuity Mode:
  • The ministry has amended the Standard RFP document of HAM Mode to incorporate provisions relating to Threshold Technical capacity prescribed for similar work experience for EPC works related to Major Bridges and Tunnels. This will enable NHAI to procure concessionaires having appropriate experience in Major Bridges/ Tunnels for projects being executed under HAM mode.
• Changes have been made in the relevant clauses of the model RFP and MCA of the HAM project to allow the Lowest Quoted Bid Project Cost (BPC) as the basis for awarding the HAM Project and O&M cost to be fixed as in EPC projects. It was a much-needed demand of the industry as it will now bring out the winner immediately after the opening of financial bids in a transparent manner as in EPC mode of bidding. The earlier practice of making the award of the project in HAM after converting BPC and O&M quotes to NPV was not clear to many bidders.
• Changes have been made in the relevant clauses of the Model Concession Agreement of the BOT (Toll) project permitting the change of ownership from existing 2 years to 1 year after the Commercial Operation Date (COD). This move will free the equity/funds of construction companies for taking up other projects.

Business Data

Verticals

• HAM Projects
• EPC Projects
• O&M

Order Book

Product wise break-up

Revenue contribution from Geography presence

Customer dependency

• Ceigall India business is primarily dependent on contracts awarded by governmental authorities. As on June 30, 2024, the NHAI projects awarded to us constituted 80.31% of our Order Book, while the remaining 19.69% of Ceigall India Order Book was from contracts with other central, state governmental and local departments. Any adverse changes in the central, state or local government policies may lead to our contracts being foreclosed, terminated, restructured or renegotiated, which may have a material affect on our business, profitability and results of operations.

Customers

Competition

The road construction industry in India is very competitive. Ceigall India competition depends on various factors, such as the type of project, total contract value, potential margins, complexity, location of the project and risks relating to revenue generation. While service quality, technical ability, performance record, experience, health and safety records and the availability of skilled personnel are key factors in client decisions among competitors, price often is the deciding factor in most tender awards.

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Ceigall India believe main competitors are J. Kumar Infraprojects, ITD Cementation India Limited, PNC Infratech Limited, H.G. Infra Engineering Limited, KNR Constructions Limited and G R Infraprojects Limited

Peer companies comparison

Subsidiary companies

• Direct Subsidiaries
  • Ceigall Infra Projects Private Limited (“CIPPL”) (99.99% Holding)
  • Ceigall Southern Ludhiana Bypass Private Limited (“CSLBPL”) (74% Holding)
  • Ceigall Jalbehra Shahbad Greenfield Highway Private Limited (“CJSGHPL”) (74.89% Holding)
  • Ceigall VRK 11 Private Limited (“Ceigall VRK 11”) (74% Holding)
  • Ceigall VRK 12 Private Limited (“Ceigall VRK 12”) (74% Holding)
• Indirect Subsidiaries
  • Ceigall Bathinda Dabwali Highways Private Limited (“CBDHPL”)
  • Ceigall Ludhiana Bathinda Greenfield Highway Private Limited (“CLBGHPL”)
  • Ceigall Ludhiana Rupnagar Greenfield Highway Private Limited (“CLRGHPL”)
  • Ceigall Malout Abohar Sadhuwali Highway Private Limited (“CMASHPL”)
• Joint Ventures
  • Ceigall-Shiva Buildtech Private Limited (“CIL-SBPL”)
  • Ceigall-PEL (“CIL-PEL”)
  • Ceigall-Inderjeet Mehta Private Constructions Limited (“CIL-IMCPL”)
  • Ceigall-Rajinder Infrastructure Private Limited (“CIL-RIPL”)
  • VRC Constructions-Varindera Construction-Ceigall (“CIL – VRC”)
  • Ceigall-Shiv Build India Private Limited (“CIL-SBIPL”)
  • Ceigall Infra Projects (“CIP”)
  • Ceigall-Jiangxi Construction-Shiv Build India Private Limited (“CIL-JC-SBIPL”)
  • M/s. R.K. Infra

Business risk factors

• Ceigall India have sustained negative cash flows from operating activities in the past and may experience earnings declines or operating losses or negative cash flows from operating activities in the future.
• Ceigall India operate in a very competitive industry and our failure to successfully compete could result in the loss of one or more of our significant customers and may adversely affect our business.
• Ceigall India revenue from execution of projects in the roads and highways sector including specialized structures constituted approximately 92.71%, 96.57% and 97.46% of our total revenue for the Financial Years ended March 31, 2024, 2023 and 2022, respectively. Our business and our financial condition would be materially and adversely affected if we fail to obtain new contracts or our current contracts are terminated.

• All projects Ceigall India operate have been awarded primarily through competitive bidding process. Ceigall India bids may not always be accepted. We may not be able to qualify for, compete and win projects or identify and acquire new projects, which could adversely affect our business and results of operations.

• Ceigall India business is primarily dependent on contracts awarded by governmental authorities. As on June 30, 2024, the NHAI projects awarded to us constituted 80.31% of our Order Book, while the remaining 19.69% of Ceigall India Order Book was from contracts with other central, state governmental and local departments. Any adverse changes in the central, state or local government policies may lead to our contracts being foreclosed, terminated, restructured or renegotiated, which may have a material affect on our business, profitability and results of operations.

Financials

Key Financial Ratios

Key Performance Indicators

(₹ in million)

Balance Sheet

(in ₹ million, unless stated otherwise)

Profit & Loss

(in ₹ million, unless stated otherwise)

Cash Flow

(in ₹ million)

Capital structure

SWOT ANALYSIS

• Strengths
  • Expertise in Infrastructure: Ceigall India has a strong track record in highway construction and EPC services, which positions it well in the infrastructure sector.
  • Growing Revenue: The company’s consistent revenue growth indicates its ability to secure projects and execute them effectively.
  • Experienced Leadership: A skilled management team with industry expertise contributes to Ceigall India’s success.
• Weaknesses
  • Dependency on Government Projects: Ceigall India’s business heavily relies on government contracts, making it vulnerable to policy changes and delays.
  • Debt Burden: High debt levels could impact the company’s financial stability and cash flow.
• Opportunities
  • Infrastructure Investment: India’s focus on infrastructure development presents growth opportunities for Ceigall India.
  • Urbanization and Connectivity: As cities expand, demand for better roads, bridges, and flyovers will increase.
  • Diversification: Exploring new geographies or expanding into related sectors can mitigate risks.
• Threats
  • Regulatory Challenges: Changes in regulations or government policies can affect project timelines and profitability.
  • Competition: Intense competition from other EPC companies may impact Ceigall India’s market share.
  • Economic Volatility: Economic downturns can reduce infrastructure spending.

IPO Details

Ceigall India IPO Details

Litigation involved

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