PKH Ventures

Builds construction business

The food services company has successfully diversified to owning and operating hotels and construction and development

PKH Ventures (PKHV,) incorporated in 2000 by Pravin Kumar Agarwal, is primarily engaged in the business of construction and development (C&D), hospitality and management services.

The company was incorporated in 2000 and commenced business activities by offering food services at several airports and later expanded operations and was providing airport entry ticket counters. It received the first toll contract of managing the entry point of Delhi in 2008 and currently has no toll management projects. It also set up kitchens for in-flight catering near Ahmedabad airport and had tie-ups with domestic and international airlines.In CY2020, it forayed into construction and development business with acquisition of two companies, i.e., Garuda Construction and Eternal Infra.

In FY2022, 46.68% of operating revenue came from the C&D business, 38.5% from Hospitality and 14.2% from management services & others. In 9mFY2023, C&D, Hospitality and Mangement service accounted for 61.2%, 30.7% and 7.3% of revenue, respectively.

PKHV acquired Garuda Construction (a subsidiary company) on 2 April 2020. On November 20, 2020, it acquired controlling interest in Eternal Infra. By virtue of these acquisitions, construction & development has become one of the primary business segments of the company.

In the hospitality segment, it owns, manages and operates hotels, restaurants, Quick Service Restaurants (QSRs), and spas and sells food products. The company currently owns or manages three hotels including a resort, five restaurants, four banquets and two spas in Mumbai and nearby areas.

Some of the hotels/restaurants/spas/other properties are owned by promoters and group companies but managed and operated by the company under revenue sharing agreements. Of the 3 hotels, two (Golden Chariot Hotels at Andheri and Vasai in Mumbai City) are owned, managed and operated by the company and the one resort (Juvana Resort & Spa at Aamby Valley at Lonavala) is managed and operated. The three hotels it owns in Mumbai and Lonavala have total keys of 116 and has the potential to add 70 more keys. Its Mumbai hotels operate in the mid-income scale hotel segment, whereas the Juvana Resort and Spa falls within the upper scale and luxurious segment of the market.

Of the five restaurants, one is owned, managed, and operated and the balance four are managed and operated. It operates restaurants under the brand of Balaji, Golden Chariot, Casablanca, Buno & Kaffa and Oriental Bistro. Of the four banquets, 3 are owned, managed, and operated and balance one is managed and operated. The two Spas are managed and operated. About 50-51% of the hotel business revenue in 9mFY2023 and FY2022 came from corporate clients, 32% from travel agents and about 17-18% from walk-ins.

In the construction & development space, the company executes civil construction works for third party developer projects. The civil construction business is executed by its subsidiary Garuda Construction. So far it has executed 7 civil construction projects worth Rs 526.5379 crore. It largely constructs residential buildings for small developers mainly in the MMR. Garuda Construction is currently executing civil construction of six (6) residential projects for third party developers and promoter group in the MMR.

On the development side, the company has been awarded two government projects as well as threegovernment hotel development projects. These are being executed through subsidiaries/SPVs/company. Through its subsidiaries it has completed construction of its first DBFOTA project, i.e., the Delhi Police headquarters in April 2021.

The two government projects awarded to the company comprise the 16 MW Halaipani Hydro Power Project in Arunachal Pradesh (it holds 99% stake). The other government project is the development of the entertainment hub (Nagpur Project) awarded by MTDC on DBFOT basis, with a concession period of 27 years 9 months including 2 years of construction period.

The three government hotel development projects are Rajnagar Garhi Project, Pahadikhurd Project and Tara Resort Project in Madhya Pradesh on DBFOT basis by way of a letter of award each, dated November 4, 2022, from the Madhya Pradesh Tourism Board.

The entertainment hub project at Nagpur includes development of a recreational clubhouse/cottages/sports, shops, theme park, gardens, amphitheatre, banquet halls, exhibition centres and amusement activities across 42.42 acres. The company holds a 51% stake in SPV, i.e., Garuda Amusements Park (Nagpur) and the balance is held by its joint venture partner.

Further, the company is proposing to develop forthcoming development projects, which include real estate development at Amritsar, Punjab; real estate redevelopment project at Dadar-Matunga, Mumbai; agro processing cluster at Jalore, Rajasthan; cold storage park/facilities at Indore, Madhya Pradesh; and a wellness centre & resort at Chiplun, Maharashtra.

In the Management Services vertical, the company in the past managed airport entry ticket counters, retail outlets at airports and toll management services. Presently, there are no such active contracts for management services. At present in Management Services vertical, the company provides services for the annual maintenance of the Delhi Police Headquarters as per the agreement entered with the concessionaire (Eternal Building Assets Private, the stepdown subsidiary).

The company has also invested in the ownership of a cricket team (i.e., NaMo Bandra Blasters in T20 Mumbai League of MCA) as a joint venture partner, through its subsidiary, PK Sports. After a successful MPL tournament in 2019, there was no tournament conducted in 2020, 2021 and 2022.

Through its subsidiary, i.e., Makindian Township, it had acquired the immovable assets of a company at Amritsar, Punjab, through an IARC in 2014. On the land acquired prime space near IIM Amritsar, the company proposes to develop a residential and commercial complex.

Further, the company is in the process of completion of acquisition of Amar Remedies, a NSE/BSE listed FMCG company in the ayurvedic products segment, through the IBC process for Rs 31.59 crore. But the statutory period by which the company was to complete the acquisition (as per the NCLT Mumbai approved resolution plan) has expired. The company will now proceed to complete the acquisition process subject to the outcome of litigations. However, the Net Proceeds of the Offer will not be utilized for the acquisition of Amar Remedies.

The company is looking at acquiring companies that are strategic fit to its existing business or bring in new capabilities and facilitate qualification to bid for government projects or high business/value potential available at competitive price.

The development project portfolio of the company including forthcoming projects comprises Amritsar Project, Mumbai Redevelopment Project, Jalore Agro Processing Cluster, Indore Cold Storage and Wellness Centre & Resort, Chiplun.

The issue and object for the issue

The public issue of up to 2,56,32,000 Equity Shares of face value of ?5 per Equity Share comprises fresh issue of up to 1,82,58,400 Equity Shares and an Offer for Sale (OFS) up to 73,73,600 Equity Shares by its Promoter, Pravin Kumar Agarwal.

Of the net proceeds from fresh issue, Rs 124.12 crore will be used towards investment by way of equity in Halaipani Hydro Power Project, Rs 80 crore will be used towards investment by way of equity in Garuda Constructions for funding long-term working capital, Rs 40 crore will be used for in organic growth through acquisition & other strategic initiatives and balance for general corporate purposes.

Strength

Established track record in hospitality as well as the construction & development business.

Third party order book of Rs 468.28 crore as on March 15, 2023, provides strong visibility for construction business. Strong forthcoming development project portfolio executed under SPVs/Subsidiaries is also expected to boost the order inflow and order book of the company going forward.

Entitles for annuity of Rs 27.86 crore. It will get an annual maintenance fee of Rs 7.20 crore per year from Delhi Police Headquarters for next 11 years.

Weakness

Failing to obtain all mandatory approvals required for execution of Hydro Power Project in respect of which some are already obtained, and some are still in application stage. This could impact the timely implementation of Hydro Power Project. Further the company has no prior experience of developing and operating a hydro power plant and may not be successful in these endeavors.

Have no prior experience and expertise in real estate development (Amritsar & Mumbai Redevelopment project) as well as developing, managing, and operating development projects in areas such as Amusement/Entertainment Park, Agro Processing, Cold Storage. How successful the company will be in the development and operation of the development project needs to be seen.

Third party order inflow in 9mFY2022 was Rs 256.14 crore (Rs 356.56 crore in FY2022) but the company also got two contracts worth Rs 251.66 crore cancelled. The two contracts entered between Garuda Construction and one of the civil construction company and another Mumbai based developer and execution of these contracts were cancelled by these parties due to certain issues affecting the developers project. Considering the nature of the civil construction business the commencement of construction work starts once approval in place and thus timely execution of order on hand is not in the control of the company. For instance, one of third-party Developer projects “Trinity Oasis” is awaiting construction approvals from relevant Government Authorities due to which the Civil Construction activity has not yet commenced.

The Construction & Development business is exposed to various implementation risks and other uncertainties which may adversely affect its business operations as well as financial condition. Failure to achieve financial closure within the stipulated period for Government projects willbe levied penaltyand may lead to termination of the contract.

The hospitality business requires various state and central government approvals and licenses failure to obtain and renew it will impact the operations of the company. Has not yet received the Occupation Certificate (OC) for its Golden Chariot Vasai Hotel & Spa.

Rely on joint venture partners for selective government projects bids and execution of government projects and any performance failure of a JV partner will impose additional financial and performance obligation on the company.

A steady fall in revenue of management services as there are no active contracts related to airports and toll management services as on date.

Have projects in diverse geographic regions and markets which may subject it to various challenges.

Has experienced negative net cash flows from operating, investing in the past and may continue to experience such negative cash flows in the future.

The company has restructured and rescheduled one of the borrowings availed from Saraswat Bank.

The company is also managing and operating a coffee shop and a restaurant under the brand names, Buno & Kaffa and Oriental Bistro, respectively. However, these brand names are not registered in the name of the company.

Aggregate trade receivables as of December 31, 2022, were Rs 88.0471 crore with receivables outstanding for more than six months being Rs 24.3513 crore (or 27.65% of aggregate receivables).

Valuation

Consolidated (re-stated) sales for FY2022 were down by 17% to Rs 199.35 crore, hit largely by lower revenue in management services and C&D business of the company. With the operating profit margin expanding by 570 bps to 26.6%, the operating profit grow by 5% to Rs 52.97 crore. After accounting for higher other income, higher interest and lower depreciation, the PBT was up 35% to Rs 85.56 crore. The taxation was up 14% to Rs 19.15 crore and thus the PAT was up 42% to Rs 66.42 crore. With share of profit from associate being nil and minority interest being share of profit of Rs 25.90 crore (up 23%), the net profit after MI was up 33% to Rs 40.52 crore.

For the nine-month period ended Dec 2022, consolidated sales were Rs 125.46 crore, and the OP was Rs 35.09 crore with OPM stand at 28%. The net profit after MI was 28.64 crore.

The consolidated EPS (on expanded post issue equity based on the upper price) for FY2022 is Rs 9.9 and the PE works out to 14.9 times.

The company is into diversified business activity and thus there are no comparable listed companies with mirroring business to that of the company. However, some of construction and development players, i.e., B L Kashyap, Udayshivakumar, ARSS Infra and KNR Construction quotes at a PE of 19.8 times, 10.5 times, 7.8 times and 14.8 times of their FY2023 EPS. Two of the mid to small size hotel companies, i.e., Chalet Hotels and Savera Industries quote at a PE of 55.8 times and 9.2 times of their FY2023 EPS.