Issue #022 delves into high-rising Capacit'e Infraprojects as we analyze its strong order book, revenue trajectory, margins, risk management, financials, clientele and urbanization driven growth story
Yes, the current multiple of 14 seems a bit low for this business. If we ignore the Covid years, Capacit'e was averaging a PE multiple of 18 in the 2017-19 period and again in the 2023-2024. They're now at a stage where the cleanup is done, the strategy is sorted, recoveries are happening, there's visible revenue growth and the orderbook is expanding
Coincidentally I have also been researching Capacite over the last few weeks post the markets falling, stock seems to have reached an attractive price.
I wanted to know your thoughts on their recent debt raise 2 days ago. They have raise 75Crs thru NCD at a rate of ~13.3% (which i found a bit high). Also not sure about the reasoning provided which is
"The proceeds will primarily be used to repay the existing debt and general corporate purposes. Further, the proposed borrowing will result in reduction of number of Promoters pledge shares."
Alongside high interest rates of 13.3% for the recent NCD's raised, their existing debt (details researched through FY24 annual report) is also at high interest rates ranging 12-14%. So they are raising debt at above normal interest rates and utilizing it to churn existing debt which is already at somewhat lower int? Your thoughts on the matter would be appreciated
I had reviewed the borrowings part when creating the newsletter but newsletters have size constraints so had to pull that part out
Very simply, Capacit'e has a borrowing of some ₹350 crores and the finance expenses are around ₹100 crores. This might seem like 30% interest but because a lot of it is bank guarantees and bank commission -- the debt they have in their books is more like 16.5% interest rate. Note: 76% of the company’s order book tied to government contracts where BGs are mandatory
The NCDs raised by Capacit'e pays a coupon of 13.3% -- which is 3-3.5% lower than the existing interest rate. Essentially, the company is trying to reduce its cost of debt
On why this % is so high -- this is aligned with the construction industry where cost of financing is on the higher side on account of long project cycles, cost/time overruns, fraud (promoter running with the money) etc.
I feel the low 10-11% ROE is keeping this one from being a great compounder over the coming years. The ROE seems to be constrained due to the high debtor days.
How do you see the debtor days reducing and how much of a role do you think this can have in improving the ROE and as a result the returns over the years?
Hello. I've been unable to find any documentation on how screener computes the free cash flow. If you have this, please share. Would like to study it first
Do you have any perspective on why the company is trading at such a cheap valuation even after a 3000 cr guidance by the management? Is it a bear market, or it might be something else?
Hello Avneesh ji - It’s a bit of a mystery actually. The price and EPS were in alignment across 2017-2019 .. and then in 2022-2024 .. mostly trading at a multiple of 18.
We’re now at a PE of 14. The cleanup is over, recoveries are available, revenue growth is visible, orderbook is expanding — so maybe the odds are in the investor’s favour now. Just my view
As I said in my note (https://substack.com/@shankarnath/note/c-98892450), these episodes show us why it’s important to find evidence for everything the management says in it’s earnings call, interviews & press releases
We've attempted to do that here by going client by client on how much is Capacit'e likely to bill in FY26. Three truths we shouldn't deny
a) we'll never have 100% information
b) we will make errors in our assumptions
c) there will always be that black swan chance
This is why having a margin of safety is important. This comes to us in the form of competitive advantages, high demand per supply, earnings visibility or valuation comfort.
Priyam & I aren't fully there but our skills are improving by the week, we are gathering more evidence now and hopefully with input from within Alpha, we'll do even better
Hello. On working capital, the management has committed to reaching 100-day level by the end of this year (March 2025). This was said in November '24 (Q2 transcript)
Hey @Shankar Nath good analysis. Could you put some light on baluforge if possible? Have seen their concalls and yearly reports.. They're doing quite good and they are expanding and a small cap..
Thanks! Balu Forge hasn’t shown up on our query screens yet. I’ll circle back once it shows up. If you have a detailed thesis on it, pls do email me at hello@beginnersbuck.com
We looked into it too and the pledged share percentage has consistently ranged between 35% and 45% for many quarters. Currently it's around 39%
The primary reason for this pledge is the promoters offering shares as collateral for renewing the company’s credit facilities with banks. As Capacit'e continues to expand, it will require more bank guarantees .. so I feel it’s reasonable to expect this pledged percentage to stay within the 35-45% range.
For context, promoters providing a guarantee (for trade receivables) or a loan to the company might be common practice in this type of industry -- the Katyals have done it in the past. Recently, the company raised ₹350 crores through a QIP and guess what, additional capital infusion by the promoters.
So, there’s a bit of everything here — pledges, loans and capital infusion :)
Just to add, over the last few years, every March quarter has been better than December quarter in revenue.
So it is quite possible they will be able to do what they have guided for
The Q4 target is ₹698 crores for them to reach their ₹2,400 crore target for FY25
January 2025 revenues were reported at ₹190 crores by the management
This means, Capacit'e needs to deliver ₹508 crores over Feb & Mar. So that's a little over ₹250 crores -- a tad difficult I would say but let's see
Hi
I feel the company projected to grow at 25% can easily command a PE of 20, considering the not so good past.
I have participated in 2 concalls and clarified some of my doubts with the management in the concalls
Yes, the current multiple of 14 seems a bit low for this business. If we ignore the Covid years, Capacit'e was averaging a PE multiple of 18 in the 2017-19 period and again in the 2023-2024. They're now at a stage where the cleanup is done, the strategy is sorted, recoveries are happening, there's visible revenue growth and the orderbook is expanding
Thank you sir ji
Most welcome
YOU ARE E GREAT INVESTOR SIR. FUNDAMENTAL GURUS. 🙏🙏🙏
Thank you!
Thanks Shankar ji, again a geat analysis.
Most welcome 🙌
Hi Shankar! Great analysis as always
Coincidentally I have also been researching Capacite over the last few weeks post the markets falling, stock seems to have reached an attractive price.
I wanted to know your thoughts on their recent debt raise 2 days ago. They have raise 75Crs thru NCD at a rate of ~13.3% (which i found a bit high). Also not sure about the reasoning provided which is
"The proceeds will primarily be used to repay the existing debt and general corporate purposes. Further, the proposed borrowing will result in reduction of number of Promoters pledge shares."
Alongside high interest rates of 13.3% for the recent NCD's raised, their existing debt (details researched through FY24 annual report) is also at high interest rates ranging 12-14%. So they are raising debt at above normal interest rates and utilizing it to churn existing debt which is already at somewhat lower int? Your thoughts on the matter would be appreciated
Hello Mr. Dsilva, thank you!
I had reviewed the borrowings part when creating the newsletter but newsletters have size constraints so had to pull that part out
Very simply, Capacit'e has a borrowing of some ₹350 crores and the finance expenses are around ₹100 crores. This might seem like 30% interest but because a lot of it is bank guarantees and bank commission -- the debt they have in their books is more like 16.5% interest rate. Note: 76% of the company’s order book tied to government contracts where BGs are mandatory
The NCDs raised by Capacit'e pays a coupon of 13.3% -- which is 3-3.5% lower than the existing interest rate. Essentially, the company is trying to reduce its cost of debt
On why this % is so high -- this is aligned with the construction industry where cost of financing is on the higher side on account of long project cycles, cost/time overruns, fraud (promoter running with the money) etc.
Thanks for quick reply Shankar!
It has surely elevated my understanding on the company/sector and I will keep researching more on my end.
Most welcome
Shankar - what are your thoughts on the low ROE?
I feel the low 10-11% ROE is keeping this one from being a great compounder over the coming years. The ROE seems to be constrained due to the high debtor days.
How do you see the debtor days reducing and how much of a role do you think this can have in improving the ROE and as a result the returns over the years?
Shankar ji please comment about GE shipping and Sanghvi movers if they’re in ur screener list
Hi Shankar sir
Your views on low and pledged promoter's holding.
Hello Bharat ji - the part on pledges have been discussed in another comment. Pls browse through the others
Hi,
What would your comments regarding the free cash flow, which is currently -176Cr?
(source: screener.in)
Hello. I've been unable to find any documentation on how screener computes the free cash flow. If you have this, please share. Would like to study it first
This was what I could find:
Free cash flow 3years
Sum of (Cash Flow from operating activities - Fixed assets purchased + Fixed assets sold) over last 3 years
Hi,
Great analysis Shankar Ji.
Waiting for Your video on the Shamless_Cloning Strategy
Thank you for the suggestion
Hi Shankar,
Do you have any perspective on why the company is trading at such a cheap valuation even after a 3000 cr guidance by the management? Is it a bear market, or it might be something else?
Hello Avneesh ji - It’s a bit of a mystery actually. The price and EPS were in alignment across 2017-2019 .. and then in 2022-2024 .. mostly trading at a multiple of 18.
We’re now at a PE of 14. The cleanup is over, recoveries are available, revenue growth is visible, orderbook is expanding — so maybe the odds are in the investor’s favour now. Just my view
After observing GENSOL Engineering issue, is is okay ??
:) .. no one knows where the skeletons are hidden
As I said in my note (https://substack.com/@shankarnath/note/c-98892450), these episodes show us why it’s important to find evidence for everything the management says in it’s earnings call, interviews & press releases
We've attempted to do that here by going client by client on how much is Capacit'e likely to bill in FY26. Three truths we shouldn't deny
a) we'll never have 100% information
b) we will make errors in our assumptions
c) there will always be that black swan chance
This is why having a margin of safety is important. This comes to us in the form of competitive advantages, high demand per supply, earnings visibility or valuation comfort.
Priyam & I aren't fully there but our skills are improving by the week, we are gathering more evidence now and hopefully with input from within Alpha, we'll do even better
Hi Shankar,
The company has negative cash conversion cycle as payable are more , but the Working capital days are rising and high . so how should we look at it
Hello. On working capital, the management has committed to reaching 100-day level by the end of this year (March 2025). This was said in November '24 (Q2 transcript)
Hey @Shankar Nath good analysis. Could you put some light on baluforge if possible? Have seen their concalls and yearly reports.. They're doing quite good and they are expanding and a small cap..
Thanks! Balu Forge hasn’t shown up on our query screens yet. I’ll circle back once it shows up. If you have a detailed thesis on it, pls do email me at hello@beginnersbuck.com
Sure,will do.. Could you share the query screen please...? It would really be helpful to look at them before they come up in the news.
Very sorry, it won't be possible to share the queries
Hello Shankar, Thanks for the Great analysis. However, What do you think about the pledged shares of promoters ?
Hello Nikhil ji, that’s a great question!
We looked into it too and the pledged share percentage has consistently ranged between 35% and 45% for many quarters. Currently it's around 39%
The primary reason for this pledge is the promoters offering shares as collateral for renewing the company’s credit facilities with banks. As Capacit'e continues to expand, it will require more bank guarantees .. so I feel it’s reasonable to expect this pledged percentage to stay within the 35-45% range.
For context, promoters providing a guarantee (for trade receivables) or a loan to the company might be common practice in this type of industry -- the Katyals have done it in the past. Recently, the company raised ₹350 crores through a QIP and guess what, additional capital infusion by the promoters.
So, there’s a bit of everything here — pledges, loans and capital infusion :)