Interarch as a proxy for the recovery of investment spending in the manufacturing sector

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

The promoter’s stake will come down from 88% to 60% post-IPO. Pre-engineered construction is similar to capital goods suppliers as it is highly customized and integrated into operations, giving an advantage to organized players. The company is positioned as a proxy player for the recovery in corporate investment, especially new factories in semiconductors, electronics manufacturing and paints.

Since Interarch is debt-free, earnings are likely to increase with increased capacity expansion. Given these factors, long-term investors may consider subscribing to the IPO.

Business Model: Founded in 1983, Delhi-based Interarch manufactures, designs and sells turnkey pre-engineered steel buildings (PEBs). The company has a total 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 profit among integrated PEB players.

Financials: Revenue grew 25% annually to reach ₹1,306 crore during FY22-FY24, while operating profit (Ebitda) grew 85% to ₹113 crore, achieving an Ebitda margin of 8.6%. Net profit grew 124% annually to ₹86.2 crore during the same period. The company posted some of the highest revenue and profit growth among its peers between FY22 and FY24.

Industrial construction accounts for 68% of total revenue. Three-quarters of the revenue came from repeat orders in fiscal 2024. The current order book is ₹1,153 crore, which is equivalent to around nine months of revenue.

Risks: The Company’s financial performance is highly dependent on the availability of raw materials, particularly steel, which accounts for 86% of total raw material costs. Significant fluctuations in steel prices may impact profitability.

Valuation: At the upper end of the price range, the company targets a price-to-earnings ratio of 17 based on fiscal 2024 earnings. Listed peers Pennar Industries and Everest Industries trade at 38 and 70 times price-to-earnings, respectively. Interarch boasts higher operating margins and a better return on equity.