Infrastructure (Roads) On the comeback trail
April 2019 Jiten Rushi [email protected]
BOB Capital Markets Ltd is a wholly owned subsidiary of Bank of Baroda
SECTOR REPORT
INFRASTRUCTURE (ROADS) 11 April 2019
On the comeback trail
We believe the tide is turning for India’s roads sector as (i ) developers have begun Jiten Rushi receiving appointed dates for awarded projects (in place for 49% of our coverage [email protected] contracts), implying steady revenue growth ahead; (ii) 91% of HAM projects for our coverage have financial closure; (iii) beneficial policy reforms continue to play out; and (iv) NHAI’s bid pipeline looks robust at ~Rs 1tn pa over FY20-FY24E. We prefer asset-light companies and select asset-owners with sound financials and strong operational BOT portfolios – BUY PNCL, HGIEL, ASBL and KNRC.
Execution to gather pace: Despite tepid road orders in FY19, most infrastructure KEY RECOMMENDATIONS companies in our coverage universe are well placed, with robust order backlogs and Ticker Price Target Rating revenue visibility for ~2.5years. Financial closure for HAM projects is largely in ASBL IN 129 210 BUY DBL IN 621 750 BUY place (only 4 of 45 pending) and likely receipt of pending appointed dates by HGINFRA IN 261 390 BUY Q1/Q2FY20 (for 23 projects) should make the current order backlog near-100% KNRC IN 247 295 BUY executable by end-Sep’19 – we thus forecast a brisk revenue CAGR of 23% for PNCL IN 150 210 BUY our coverage universe over FY18-FY21, with PNC Infratech in the lead at 47%. SADE IN 246 295 BUY Price & Target in Rupees | HGINFRA = HGIEL Strong bid pipeline: NHAI’s current bid pipeline remains strong, with 92 projects *As on 10 Apr 2019 worth Rs 789bn under various stages of bidding (46% EPC, 54% HAM by km).
While order slowdown in the runup to elections could see the roads authority PROJECT AWARD PIPELINE Length Value Awarding authority missing its FY19 award target of 4,000km by ~40%, we expect ordering to revive (km) (Rs bn) in FY20, with NHAI estimated to bid out 30,000km (worth ~Rs 5tn) for NHAI -Bharatmala 18,763 3,095 development over FY20-FY24 under Bharatmala, NHDP and other programs. -NHDP 4,667 770 Most of these could be in EPC mode (~60% by value) to expedite execution. -Others 6,570 1,084 Central & State authorities 1,236 347 Policy reforms rejuvenating the sector: The government has undertaken Total 31,236 5,296 numerous policy reforms to scale up project award and execution, including key Source: NHAI, Industry Documents, BOBCAPS Research amendments to the model concession agreement (MCA) aimed at lowering developer risk. Consequently, ordering/execution grew at 29%/31% CAGR ORDER BACKLOG AS ON MAR'19E Order backlog Book-to- Executable over FY15-FY18 vs. –7%/–4% over FY12-FY15. Company (Rs bn) bill ratio (x) (%) Valuations attractive: Our infrastructure universe is at attractive valuations of ASBL 101 3.0 65 DBL 209 2.3 60 9.7x/8.3x FY20E/FY21E EPS (net of value of assets). We prefer PNC Infratech HGIEL 61 3.0 42 (PNCL), HG Infra Engineering (HGIEL), Ashoka Buildcon (ASBL) and KNR KNRC 59 2.9 36
Constructions (KNRC), in that order – all boast sound financials along with key PNCL 129 4.4 70 competitive moats either in the form of asset-light models (HGIEL & KNRC) or SADE 116 3.0 68 Total 675 2.9 60 strong operational BOT portfolios (PNCL & ASBL). We also launch coverage on Source: Company, BOBCAPS Research Dilip Buildcon (DBL, B UY) and Sadbhav Engineering (SADE, BUY).
BOB Capital Markets Ltd is a wholly owned subsidiary of Bank of Baroda Important disclosures, including any required research certifications, are provided at the end of this report.
INFRASTRUCTURE (ROADS)
Contents Executive summary ...... 3 Turnaround ahead after a weak year ...... 9 Organised players achieving timely HAM financial closure ...... 10 Delays in appointed date issuance being ironed out ...... 11 Land acquisition gathering pace as reforms kick in ...... 12 Elections a temporary blip in ordering process...... 12 Evaluation matrix for our coverage universe ...... 14 Picking the winners ...... 14 Key performance metrics ...... 15 Key financial metrics ...... 18 Concrete opportunities in sight ...... 19 Bharatmala: Ambitious scope of >66,000km in ten years ...... 19 NHAI pipeline of ~30,000km worth Rs 5tn by FY24E ...... 21 NHAI’s funding position comfortable ...... 23 Policy reforms to facilitate growth ...... 26 Retailored MCA, HAM and InvIT among key measures ...... 26 New EPC contract revisions to unclog execution bottlenecks ...... 28 InvIT to deleverage balance sheet and enable capital recycling ...... 30 Our top picks ...... 31 Prefer PNCL, HGIEL, ASBL and KNRC ...... 31 Annexures ...... 33 Annexure A: NHAI’s current bid pipeline ...... 33 Annexure B: Central & State authorities’ current bid pipeline ...... 36 Annexure C: Major highway project awards by Central & State authorities in FY19 .... 38 Annexure D: Land acquisition process under National Highways Act...... 40 Glossary of abbreviations ...... 41
Companies Ashoka Buildcon ...... 43 Dilip Buildcon ...... 66 HG Infra Engineering ...... 95 KNR Constructions ...... 118 PNC Infratech ...... 139 Sadbhav Engineering ...... 162
EQUITY RESEARCH 2 11 April 2019
INFRASTRUCTURE (ROADS)
Executive summary Weak ordering in FY19…
. After peak order activity in India’s roads sector for FY18 at 7,396km, NHAI awarding slowed in FY19 to ~2,500km (–66% YoY) mainly due to land acquisition hurdles
MORTH’S FY19 HIGHWAY PROJECT AWARD TARGET …AND HIGHWAY CONSTRUCTION TARGET CUT 33% CUT 20% TO 16,000KM – EXPECT ~65% MISS TO 10,000KM – EXPECT ~8% BEAT
Source: MORTH, NHAI, BOBCAPS Research I *Based on channel checks Source: MORTH, NHAI, BOBCAPS Research I *Based on channel checks
OF THE ABOVE, NHAI AWARD TARGET REVISED …AND NHAI PROJECT EXECUTION TARGET RESET DOWN 50% TO 4,000KM – EXPECT ~40% MISS… DOWN TO 11 KM/DAY, FLAT Y OY – EXPECT~20% MISS
Source: NHAI, BOBCAPS Research I *Based on channel checks Source: NHAI, BOBCAPS Research I *Based on channel checks …but expect pickup in project awards post-elections with mix shift towards EPC
. Channel checks with developers suggest land-related issues largely stand addressed as follows –
AWARDING ROBUST IN ELECTION YEARS SHARE OF EPC IN NHAI AWARD MIX LIKELY AT 60% IN FY19-FY21 IRRESPECTIVE OF ELECTED PARTY VS. 35% IN FY18 (BY VALUE) EPC BOT (%) (Rs bn) . Post elections in May’09/May’14, NHAI HAM Total (R) NHAI likely to award more 100 1,500 awarding jumped 5.2x/ 114% YoY in highway projects under 80 1,250 60 1,000 FY10/FY15 EPC mode due to lack of 750 40 500 stakeholder investment in . Expect awarding of 6,000km in FY20, up 20 250 HAM and also to expedite 0 0 2.4x YoY FY17 FY15 FY16 FY18 execution FY14 FY21E FY19E FY20E Source: NHAI, BOBCAPS Research
EQUITY RESEARCH 3 11 April 2019
INFRASTRUCTURE (ROADS)
Key reforms clearing bottlenecks in project award/execution
. Barring the slump in FY19, contract awards had rebounded from the lows of FY13-FY14 to 17,055km in FY18 backed by key reforms in the roads sector. Introduction of the HAM mode further fuelled award activity over FY17-FY18
. Execution also picked up pace, rising to 9,829km in FY18 KEYREFORMS
Massive pipeline of opportunities over next five years NHAI Non-NHAI NHAI
Total 31,236 km Rs 5. 3tn
CURRENT NHAI BID PIPELINE OF 92 PROJECTS NHAI PROJECTS WORTH ~30,000KM (RS 5TN) LIKELY WORTH RS 789BN; 46:54 EPC: HAM MIX (IN KM)* TO BE AWARDED OVER FY20E-FY24E*
Source: NHAI, BOBCAPS Research I *Bid pipeline as on 04 -Apr -19 Source: NHAI, BOBCAPS Research I *Opportunity identified as on 30-Sep-18 based on NHAI’s MIS report
EQUITY RESEARCH 4 11 April 2019
INFRASTRUCTURE (ROADS)
NHAI TO AWARD ~6,000KM OR RS 1TN P.A. OVER FY20E-FY24E Awards in next 5 years Length (km) FY20-24E Awards mix 30,000 Rs bn EPC awards - 60% 18,000 2,969 HAM awards - 40% 12,000 1,979 Funding mechanism 4,949 (A) HAM projects (i) Equity by developers 297 (ii) Debt from bank 891 (iii) NHAI Grant 792 (B) EPC projects 2,969 (I) Funding from NHAI {A (iii) + B} 3,761 (II) Land acquisition costs (90,000 Ha) 3,197 NHAI Expenditure (I+II) 6,958 Source of funds for NHAI 6,958 Central Road Fund earmarked for National Highways 2,370 Gross Budgetary Support (GBS) –SARDP-NE, Externally Aided 600 Projects (EAP) , Counterpart Funds, etc. Expected monetisation of National Highways 340 Plough Back Funds (PBF) –Toll Collections of NHAI 460 Market Borrowings 3,188 Source: NHAI, BOBCAPS Research
UPCOMING KEY OPPORTUNITY OF RS 347BN FROM CENTRAL & STATE AUTHORITIES (SEE ANNEXURE B ON PG 36) No. of Last day of bid Length Value Authority State Mode projects submission (km ) (Rs bn) West Bengal Highway Development Corporation Ltd. 1 West Bengal 25-Apr-2019 31 EPC 13.0 Public Works Department, Rajasthan 2 Rajasthan 15-Apr-2019 35 EPC 3.6 Pune Municipal Corporation 1 Pune 23-Apr-2019 - HAM 51.9 UPEIDA 8 Uttar Pradesh 29-May-2019 387 EPC 117.7 NHIDCL 1 Jammu & Kashmir 08-Apr-2019 23 EPC 49.0 Karnataka Road Devp. Corpn. Ltd 3 Karnataka 03-May-2019 - HAM 46.1 MORTH 17 Multiple states Apr'19-Jun'19 760 EPC 65.9 Total 33 1,236 347.2 Source: Company, Industry documents, Projects Today, BOBCAPS Research Favourable opportunity of Rs 118bn for PNC Infratech
BOBCAPS Infrastructure Universe: Evaluation matrix Parameters ASBL DBL HGIEL KNRC PNCL SADE Comments Prefer PNCL, HGIEL and KNRC based on quantitative Quantitative parameters such as leverage, cash conversion, working capital
cycle, return ratios, FCFF, pledge d shares and executable order
Prefer DBL based on qualitative parameters such as execution Qualitative track record, quality of assets and business diversification
Final evaluation Top picks – PNCL, HGIEL, ASBL and KNRC
Source: BOBCAPS Research
EQUITY RESEARCH 5 11 April 2019
INFRASTRUCTURE (ROADS)
BOBCAPS Infrastructure Universe: Investment thesis snapshot
Company Investment thesis Ashoka Buildcon . Potent blend of robust order backlog, stable margins, strong pre-tax earnings, comfortable leverage and attractive valuations (ASBL) | Top Pick . Order backlog of Rs 101bn (incl. L1) as of Mar’19E translates to 3x FY19E revenue, lending healthy growth visibility BUY | TP: Rs 210 | ▲62% . Standalone EBITDA margin to remain in historical range of 12-13% led by higher share of revenue from captive road projects FY18-FY21E (%) 32 33 . Two of five HAM contracts won in Q4FY18 have appointed dates with balance dates likely by Q1FY20; should propel execution 20 . Excluding the value of assets (Rs 73/sh) from the CMP, the stock is trading at 5.5x/4.8x FY20E/FY21E standalone earnings . Key catalysts: Pick-up in execution (current executable order backlog at 65% incl. L1); continued traffic growth for toll road projects Revenue EBITDA PBT
Dilip Buildcon (DBL) . 100% backward integration business model generates higher EBITDA margin and higher returns BUY | TP: Rs 750 | ▲21% . Expect gearing to improve (0.7x as on Mar’21E vs. 1.2x as on Dec’18) led by better working capital cycle and capex moderation
FY18-FY21E (%) . Divestment of BOT portfolio a key catalyst over the last year, though recent HAM project awards may offset these gains to some 18 16 14 extent due to pending equity commitment of ~Rs 13bn . Excluding the value of assets (Rs 89/sh) from the CMP, the stock is trading at 11.9x/9.7x FY20E/FY21E standalone earnings . Key catalysts: Continued improvement in working capital levels; receipt of pending appointed dates for remaining eight HAM projects Revenue EBITDA PBT
. Evolution from road project subcontractor to main contractor lends benefits of stronger margin profile HG Infra (HGIEL) | Top Pick . Healthy balance sheet to fund growth (D/E at 0.2x as on Mar’21E vs. 0.4x as on Dec’18), with return ratios set to rise (ROCE: BUY | TP: Rs 390 | ▲49% 29.5% in FY21E vs. 23.4% in FY18)
FY18-FY21E (%) . EPC prequalification up 4.5x over FY14-FY18 to Rs 11.2bn, showcasing strong execution credentials 38 31 31 . Selective diversification into HAM segment where equity requirements are limited and toll collection risks borne by government; currently has three HAM projects . Excluding the value of assets (Rs 16/sh) from the CMP, the stock is trading at 9.3x/7.9x FY20E/FY21E standalone earnings Revenue EBITDA PBT . Key catalysts: Improvement in executable order backlog (currently low at 42%; includes L1 projects)
KNR Constructions (KNRC) | Top Pick . Robust financials with positive cash from operations, strong balance sheet, comfortable working capital and best-in-class margins BUY | TP: Rs 295 | ▲19% . Share purchase agreement (SPA) in place with Cube Highways to sell stake in three HAM projects – improves cash flow visibility
FY18-FY21E (%) . 16 Strong order backlog of Rs 59bn (incl. L1) as of Mar’19E or 2.9x FY19E revenue lends healthy revenue visibility
8 . Excluding the value of assets (Rs 67/sh) from the CMP, the stock is trading at 12.6x/11.1x FY20E/FY21E standalone earnings 6 . Key catalysts: Improvement in executable order backlog (currently low at 36%; includes L1 projects)
Revenue EBITDA PBT PNC Infratech . Highest revenue visibility in the sector with over 70% executable order backlog (incl. L1) (PNCL) | Top Pick . BUY | TP: Rs 210 | ▲40% Fully funded BOT portfolio of seven operational projects (mix of toll + annuity + OMT) offers high cash flow visibility . Strong near-term bid pipeline worth Rs 118bn from UPEIDA (Uttar Pradesh Expressways Industrial Development Authority) FY18-FY21E (%) 47 could benefit the company significantly as UP is its home state 44 42 . Excluding the value of assets (Rs 44/sh) from the CMP, the stock is trading at 9.0x/7.7x FY20E/FY21E standalone earnings . Key catalysts: Stake sale in BOT portfolio which would release cash to support future equity commitments in HAM projects Revenue EBITDA PBT . One of the highest executable order backlog positions in our coverage universe at ~68% Sadbhav Engineering (SADE) . Revenue share from captive projects estimated to rise to 54.5% on average over FY19-FY21, leading to 20bps EBITDA margin BUY | TP: Rs 295 | ▲20% expansion to 12% in FY21 . Subsidiary SINP’s operational BOT portfolio self-sustaining on a combined basis, obviating the need for additional equity support FY18-FY21E (%) from SADE 25 15 16 . Excluding the value of assets (Rs 101/sh) from the CMP, the stock is trading at 10.1x/8.7x FY20E/FY21E standalone earnings . Key catalysts: Repayment of loans & advances (L&A) of ~Rs 4.5bn from subsidiary SINP via potential asset sale – proceeds to Revenue EBITDA PBT be used to pare debt
Source: Company, BOBCAPS Research
EQUITY RESEARCH 6 11 April 2019
INFRASTRUCTURE (ROADS)
Financial and Valuation snapshot
FIG 1 – FINANCIAL SUMMARY (STANDALONE) Variance of EBITDA margin Company Revenue (Rs bn) CAGR (%) EBITDA (Rs bn) CAGR (%) PBT (Rs bn) CAGR (%) EPS (Rs) earnings from EPS CAGR (%) consensus (%) Y/E Mar FY20E FY21E FY15-18 FY18-21E FY20E FY21E FY15-18 FY18-21E FY20E FY21E FY15-18 FY18-21E FY20E FY21E FY20E FY21E FY15-18 FY18-21E FY20E FY21E
ASBL 47.0 56.0 7.6 31.8 5.9 7.0 5.5 33.4 4.4 5.0 14.3 20.3 11.1 12.6 9.7 8.4 12.2 14.3 12.5 12.4
DBL 104.8 119.7 43.4 15.6 18.4 21.0 35.4 14.3 9.0 11.1 51.6 17.7 44.7 55.0 (20.3) (8.0) 41.1 5.8 17.5 17.5
HGIEL 26.5 31.0 60.8 30.6 4.0 4.7 67.9 30.8 2.6 3.1 106.5 37.5 26.3 31.3 1.6 0.2 28.8 34.2 15.0 15.0
KNRC 24.3 30.3 30.2 16.2 3.8 4.9 45.2 8.2 2.4 3.2 54.8 6.4 14.3 16.3 (6.5) (1.5) 55.0 (5.6) 15.5 16.1
PNCL 46.3 57.3 4.8 47.2 6.3 7.8 6.4 43.9 4.2 5.1 5.8 42.2 11.8 13.8 2.5 (2.9) 7.2 30.1 13.5 13.5
SADE 45.5 54.0 5.7 15.5 5.5 6.5 11.4 16.1 3.3 4.2 14.0 24.7 14.4 16.6 (6.3) (3.7) 22.3 8.9 12.0 12.0 Source: Company, BOBCAPS Research
FIG 2 – KEY RATIOS (STANDALONE) ROIC Gross asset Interest coverage Cash conversion Net working Company ROE (%) ROCE (%) Net D/E (x) CFO/EBITDA (x) FCFF/EV** (%) net of tax (%) turnover ratio (x) ratio (x) cycle (days) capital * (days) Y/E Mar FY20E FY21E FY20E FY21E FY20E FY21E FY20E FY21E FY20E FY21E FY20E FY21E FY20E FY21E FY20E FY21E FY20E FY21E FY20E FY21E
ASBL 13.9 13.9 17.4 17.3 41.2 39.9 6.4 6.4 2.6 2.5 140 140 43 47 0.5 0.5 0.4 0.5 (12.2) 3.0
DBL 17.6 18.2 21.3 23.1 20.0 22.3 3.0 3.2 2.5 2.8 125 124 126 124 0.8 0.7 0.8 0.4 8.4 3.9
HGIEL 23.0 21.9 29.6 29.5 22.3 24.0 4.2 4.4 5.7 5.8 61 61 75 75 0.3 0.2 0.6 0.6 0.4 3.5
KNRC 13.6 13.6 14.2 17.5 21.7 25.2 2.2 2.5 6.5 8.3 54 53 49 48 0.1 0.1 0.8 0.7 (4.1) 2.2
PNCL 13.9 14.2 17.7 18.2 23.4 24.3 4.4 4.9 4.1 3.7 97 97 95 95 0.4 0.4 0.06 0.4 (9.5) (4.1)
SADE 11.2 11.7 12.4 14.5 13.9 14.5 5.2 5.6 2.3 2.7 120 118 159 144 0.6 0.4 0.5 0.5 4.1 4.6 Source: Company, BOBCAPS Research I *Net of loans and advances to subsidiaries/associates I **Net of investments in assets
EQUITY RESEARCH 7 11 April 2019
INFRASTRUCTURE (ROADS)
FIG 3 – VALUATION SUMMARY (STANDALONE)
Company M Cap Target P/E (x) Value of Implied P/E (x)** EV/EBITDA (x) P/BV (x) Price* Rating Upside (%) Y/E Mar (Rs bn) Price (Rs) FY20E FY21E assets (Rs) FY20E FY21E FY20E FY21E FY20E FY21E ASBL 36.3 129 210 BUY 62.4 11.6 10.2 73 5.5 4.8 4.6 3.7 1.5 1.3 DBL 84.9 621 750 BUY 20.9 13.9 11.3 89 11.9 9.7 6.0 5.2 2.3 1.9 HGIEL 17.0 261 390 BUY 49.2 9.9 8.4 16 9.3 7.9 4.6 3.7 2.1 1.7 KNRC 34.8 247 295 BUY 19.2 17.3 15.2 67 12.6 11.1 7.6 5.4 2.2 1.9 PNCL 38.4 150 210 BUY 40.1 12.7 10.9 44 9.0 7.7 6.0 4.7 1.7 1.4
SADE 42.2 246 295 BUY 19.9 17.1 14.8 101 10.1 8.7 9.1 7.4 1.8 1.6
Average - - - - - 13.8 11.8 9.7 8.3 6.3 5.0 1.9 1.7 Source: Company, BOBCAPS Research I *As on 9 Apr 2019 | **Net of investment in assets
FIG 4 – CONSENSUS ESTIMATES (STANDALONE) Value of EBITDA margin Company Revenue (Rs bn) EBITDA (Rs bn) EPS (Rs) ROE (%) P/E (x) Implied P/E (x)** EV/EBITDA (x) P/BV (x) (%) assets (Rs ) Y/E Mar FY20E FY21E FY20E FY21E FY20E FY21E FY20E FY21E FY20E FY21E FY20E FY21E FY20E FY21E FY20E FY21E FY20E FY21E ASBL 43.7 50.4 5.5 6.2 12.6 12.4 10.1 11.6 15.0 14.5 12.8 11.1 73 5.5 4.8 7.3 6.4 1.6 1.4 DBL 110.8 118.9 19.6 20.9 17.7 17.6 56.1 59.8 21.2 18.9 11.1 10.4 89 9.5 8.9 4.8 4.5 2.2 1.8 HGIEL 25.1 29.7 3.7 4.5 15.0 15.1 25.9 31.2 22.1 21.8 10.1 8.4 16 9.5 7.9 5.4 4.5 2.0 1.6 KNRC 25.0 29.6 4.1 4.8 16.2 16.0 15.3 16.5 14.6 13.8 16.2 15.0 67 11.8 10.9 8.7 7.4 2.2 2.0 PNCL 41.4 51.1 5.8 7.1 13.9 13.9 11.5 14.2 13.3 14.3 13.0 10.6 44 9.2 7.5 7.0 5.7 1.7 1.4 SADE 45.9 53.3 5.5 6.3 11.9 11.8 15.4 17.3 11.8 12.2 16.0 14.3 101 9.4 8.4 10.3 8.9 1.8 1.6 GAYP* 44.6 48.3 7.0 7.6 15.7 15.7 14.6 15.3 17.7 15.7 11.8 11.2 54 7.4 7.1 6.6 6.1 1.8 1.6 JMCP * 37.3 41.6 3.9 4.3 10.5 10.4 8.6 9.8 15.2 14.8 13.7 12.1 44 6.5 5.8 6.4 5.8 2.0 1.7 Industry Average ------13.1 11.6 - 8.6 7.7 7.1 6.2 1.9 1.6 Source: Company, Bloomberg, BOBCAPS Research I *Stocks outside our coverage universe – Not Rated | **Net of investment in assets
EQUITY RESEARCH 8 11 April 2019
INFRASTRUCTURE (ROADS)
Turnaround ahead after a weak year
FY18 marked a stellar year for India’s roads sector, in terms of order awarding (17,055km) and execution (9,829km) by the Ministry of Road Transport and Highways (MORTH). In contrast, FY19 saw the sector slipping into a downturn on the award front (5,543km) as –
Land acquisition hurdles . peak awarding of hybrid annuity model (HAM) projects by NHAI in FY18 was delayed project execution and followed by sluggish land acquisition– this delayed the award of appointed new awards in FY19 dates to developers which pushed back execution timelines;
. the pipeline of yet-to-be awarded projects also saw right-of-way (ROW) issues as local impediments, state elections and regulatory constraints hindered land acquisition;
. changes in NHAI’s senior management further disrupted the award process; and . developers faced challenges tying up financial closure for HAM contracts due to a tighter lending environment. As per NHAI, awarding for FY19 stood at ~2,500km vs. the original/revised targets of 8,000km/4,000km, and construction stood at ~3,300km vs. 6,000km/4,000km.
FIG 5 – MORTH’S FY19 PROJECT AWARD TARGET CUT FIG 6 – NHAI’S FY19 PROJECT AWARD TARGET CUT 20% TO 16,000KM BUT ONLY 5,543KM ACHIEVED 50% TO 4,000KM BUT ONLY 2,500KM ACHIEVED
Source: MORTH, NHAI, BOBCAPS Research | *Based on channel checks | Source: NHAI, BOBCAPS Research I *Based on channel checks FY19Tgt = FY19 Target FIG 7 – MORTH’S FY19 PROJECT COMPLETION TARGET FIG 8 – NHAI’S FY19 EXECUTION TARGET CUT TO CUT 33% TO 10,000KM – 10,800KM ACHIEVED 11KM/DAY (FLAT Y OY) BUT ONLY 9KM/DAY ACHIEVED
Source: MORTH, NHAI, BOBCAPS Research | *Based on channel checks Source: NHAI, BOBCAPS Research | *Based on channel checks
EQUITY RESEARCH 9 11 April 2019
INFRASTRUCTURE (ROADS)
Outlook improving as Despite the decline in FY19 ordering, we believe our infrastructure coverage financial closure/appointed companies can comfortably tide over this slowdown given healthy order backlogs date concerns abate averaging 2.9x FY19E revenues, which lend revenue visibility for ~2.5years. We expect these backlogs to become nearly 100% executable by end-Sep’19 as (i) financial closure has been achieved for 91% of HAM projects, and (ii) our industry checks point to receipt of the pending appointed dates for 21 projects latest by end-Q1FY20 and for 2 projects by end-Q2FY20
COVERAGE UNIVERSE BOOK - In addition, we estimate a ~Rs 5tn project pipeline under the government’s TO-BILL RATIO AT 2.9X FY19E REVENUE Bharatmala and NHDP programmes over FY20E-FY24E, which should drive a Order backlog as on Mar'19E revival in ordering activity post-elections. Of this pipeline, we expect NHAI to bid (Rs bn) (incl. L1 projects) (x) Book-to-bill (R) out ~6,000km (worth Rs 1tn) for development during FY20, representing 2.4x 300 5 4 growth YoY, followed by similar levels in FY21. We thus forecast a revenue CAGR 200 3 100 2 of 23% for our coverage universe over FY18-FY21, with PNC Infratech (PNCL) in 1 0 0 the lead at 47%. DBL ASBL SADE PNCL KNRC HGIEL Organised players achieving timely HAM financial closure Source: Company, BOBCAPS Research Road developers have faced multiple challenges to tying up funds for awarded projects over the past year. Rising interest rates coupled with a systemic liquidity crunch saw banks (especially PSUs under the Prompt Corrective Action framework) and NBFCs (post the IL&FS imbroglio) turn cautious on lending, especially to the roads sector.
Only 4 of 45 HAM projects Consequently, the mix of lenders for HAM projects has changed significantly, awaiting financial tie-up with a shift towards private banks followed by NBFCs and lastly select public sector banks (mainly SBI). Lending policies have also been tightened, with banks requiring road developers to make an upfront equity contribution (prior to first disbursement) of 50% towards HAM projects from 25-30% earlier, and also insisting that the 80% ROW condition for project land acquisition be met by the roads authority prior to disbursement.
Despite the stricter lending norms, developers with sound credentials are managing to procure financing for HAM works. Of the 45 HAM projects awarded to our coverage universe since inception of the hybrid model in FY16 (up to Q1FY19), financial closure for only 4 are pending – industry checks suggest likely closure by end-May’19. We further believe that the impact of higher interest rates would be mitigated by linkage to inflation during the construction period and to the RBI bank rate during the operating and maintenance period.
Going forward, we expect NHAI to award more road projects under the EPC mode (fully funded by it), due to low interest from developers and banks in the HAM model, which should help expedite execution.
EQUITY RESEARCH 10 11 April 2019
INFRASTRUCTURE (ROADS)
FIG 9 – HIGH FUNDING REQUIREMENTS FOR HAM PROJECTS – BALANCE EQUITY COMMITMENT OF RS 36.2BN FOR OUR COVERAGE UNIVERSE TO BE INVESTED OVER 2.5 YEARS** Total equity Equity invested Balance equity to FCFF (b) Excess / Total number of FC Pending/AD Company (Rs bn) commitment so far be invested (a) (FY19E -21E) (Shortfall) (a -b) HAM projects Pending ASBL 7.8 4.1 3.7 0.2 -3.5 7 0/3 DBL 15.6 4.3 11.3 17.0 5.6 12 1/8 HGIEL 0.7 0.2 0.5 2.7 2.2 1 0/0 KNRC 4.4 0.7 3.7 4.8 1.1 5 1/4 PNCL 8.3 2.4 5.9 -0.9 -6.9 7 0/3 SADE 1.1 - 1.1 6.0 4.9 1 1/1 SINP* 13.3 3.4 9.9 - - 12 1/4 Total 51.2 15.0 36.2 45 4/23 Source: Company, BOBCAPS Research I *Not in our coverage universe – Not Rated; **For projects won up to Q1FY19 | AD – Appointed Date; FC – Financial Closure
FIG 10 – SHARE OF NHAI PROJECT AWARDS (BY KM) FIG 11 – …HENCE SHARE OF EPC IN THE MIX (BY ON EPC BASIS LIKELY TO RISE… VALUE) LIKELY AT 60% IN FY19-FY21 VS. 35% IN FY18
(%) EPC BOT HAM Total (R) (Rs bn) 100 1,500
80 1,250 1,000 60 750 40 500 20 250 0 0 FY17 FY15 FY16 FY18 FY14 FY21E FY19E FY20E Source: NHAI, BOBCAPS Research Source: NHAI, BOBCAPS Research
Delays in appointed date issuance being ironed out
As part of the tendering process, contract placement by the road’s authority is followed by the award of a project appointed date to the developer signalling that execution can commence. The authority is to award this date only after it secures 80%/90% of the land required to construct HAM/EPC projects so as to ensure limited delays. If dates are not awarded within a year of signing the concession agreement (CA), the agreement is deemed to be terminated.
Developers expect appointed Post a surge in ordering activity by NHAI in FY18, the roads authority was unable dates for 21 projects by to meet the extensive threshold land requirements on time, not due to a shortage Q1FY20 and 2 by Q2FY20 of funds but due to internal capacity constraints, local issues, state elections and other regulatory hurdles – in turn delaying the award of appointed dates. Thus, while most contractors have achieved (or are nearing) financial closure for HAM projects won last year, they are unable to commence execution.
Of our coverage universe’s slate of 45 HAM projects, dates for 23 are pending – however, recent industry checks suggest that land acquisition momentum has increased and these dates should materialise by Q1/Q2FY20.
EQUITY RESEARCH 11 11 April 2019
INFRASTRUCTURE (ROADS)
Land acquisition gathering pace as reforms kick in
NHAI targeting land Since FY19, the roads authorities have begun strictly following a policy of awarding acquisition of 10,000ha in projects only post purchase of land as per the identified ROW threshold limit – FY19 which explains the slowdown in order placement. NHAI has acquired a total of ~8,500ha of land for road development upto Jan’19 (3H stage) and is on track to achieving its target of 10,000ha in FY19. The cost of acquisition is in the range of Rs 30mn-35mn/ha, implying a total outlay of ~Rs 300bn in FY19. For FY20, the roads authority is targeting possession of 15,000-18,000ha.
In a key move aimed at expediting land purchase and unclogging execution bottlenecks, compensation to landowners was increased during the year to 4x the area circle rates – this was further underpinned by a focus on faster disbursement. NHAI has also facilitated a faster pace of land acquisition by state governments by providing manpower resources for documentation and conducting regular meetings to track progress and clear hurdles.
FIG 12 – NHAI PLANS TO ACQUIRE 90,000HA OF FIG 13 – LAND ACQUISITION COST UP FROM RS 5MN/ LAND OVER FY20-FY24E VS. ~68,000HA IN FY12-FY19 HA IN FY12 TO RS 31MN/HA IN FY18 (37% CAGR)
Source: NHAI, BOBCAPS Research Source: NHAI, BOBCAPS Research
Elections a temporary blip in ordering process
We estimate a ~Rs 5tn project pipeline under the Bharatmala and NHDP programmes over FY20E-FY24E (see Page 21 for detailed pipeline assumptions), which should aid a revival in ordering activity post-elections. We note that ordering has remained robust in post-poll years irrespective of the elected party – for instance, NHAI awarding jumped 5.2x/2x YoY after the May’09/May’14 elections. Thus, despite the general elections in FY20, we expect NHAI to bid out ~6,000km for development during the year, representing growth of 2.4x YoY.
EQUITY RESEARCH 12 11 April 2019
INFRASTRUCTURE (ROADS)
FIG 14 – EXPECT 2.4X Y OY GROWTH IN NHAI PROJECT AWARDS POST-POLLS IN FY20
NHAI awarding in post-poll years of FY10/FY15 jumped 5.2x/114% YoY
Source: MORTH, NHAI, BOBCAPS Research I *Based on channel checks
EQUITY RESEARCH 13 11 April 2019
INFRASTRUCTURE (ROADS)
Evaluation matrix for our coverage universe Picking the winners
Top picks: PNCL, HGIEL, We have evaluated road infrastructure companies on quantitative parameters that ASBL and KNRC play a key role for sustainable growth (such as leverage, cash conversion, working capital cycle, return ratios and executable order backlog), supported by qualitative metrics (execution record, quality of operational BOT assets and business diversification). PNCL, HGIEL and KNRC look the most attractive based on our quantitative parameters (to which we accord higher weightage), while DBL appears best placed on the qualitative front. Based on our evaluation matrix, we prefer PNCL, HGIEL, ASBL and KNRC in that order.
FIG 15 – EVALUATION MATRIX Parameters Company Comments Quantitative ASBL DBL HGIEL KNRC PNCL SADE KNRC has consistently kept leverage well under control; we expect a similar trend ahead (net D/E as on Mar’21E at 0.1x). As on Leverage Dec’18, gross debt stands at Rs 2.4bn including a Rs 2.2bn promoter loan, underlining promoter’s commitment to the business Cash conversion Prudent management has seen KNRC consistently record the lowest cycle cash conversion cycle. Expect a 50-55-day cycle over FY20-FY21 Net working KNRC , ASBL and HGIEL have the lowest net working capital (ex - capital* loans & advances to subsidiaries) HGIEL has the best ROCE on the strength of high earnings ROCE growth, a well-managed balance sheet, comfortable working capital levels, and healthy gross asset turnover Cumulative FCFF generated by DBL over FY19 -FY21 is likely to be FCFF accretion the highest among peers due to a moderation in capex and balance pre-SPV investment cash inflows on stake sale Executable order PNC has the highest executable order backlog at 7 0%. Order books backlog to turn ~100% executable for most coverage stocks by end-Jun’19E SADE has the highest pledged promoter holding at 43.6% followed Pledged shares by DBL at 25.4% as on Dec’18; the other four have no pledged shares Quantitative Prefer PNCL, HGIEL and KNRC based on quantitative evaluation parameters Qualitative ASBL DBL HGIEL KNRCL PNCL SADE
Execution DBL follows a 100% backward integrated business model, leading to capabilities superior execution capabilities and early project completion Traffic growth is closely linked to economic activity and thus the BOT project performance of operational BOT assets is volatile; HGIEL has no portfolio quality exposure to BOT assets DBL has exposure to four segments : roads, irrigation, mining and Segmental urban infrastructure. Most of the other players are present in three diversification or fewer segments Over the last three years, DBL has become a major pan -India Geographical player with a presence across 17 states, as against a traditionally diversification Central India-focused company
Qualitative Prefer DBL based on qualitative parameters evaluation Final evaluation Preferred picks – PNCL, HGIEL, ASBL and KNRC
Source: BOBCAPS Research | *Ex-L&A to subsidiaries
EQUITY RESEARCH 14 11 April 2019
INFRASTRUCTURE (ROADS)
Key performance metrics
FIG 16 – DBL CONTINUES TO ENJOY THE HIGHEST FIG 17 – DBL’S ORDER BACKLOG WELL-DIVERSIFIED SHARE IN NHAI ORDERING (BY KM) ACROSS 4+ SEGMENTS Roads (EPC & HAM) Power T&D Mining (%) ASBL DBL PNCL SADE KNRC HGIEL Irrigation Railways Airport Runways 40 Urban development Water Civil 35 Total 30 HGIEL 25 KNRC 20 SADE 15 PNCL 10 DBL 5 ASBL 0 FY15 FY16 FY17 FY18 0 10 20 30 40 50 60 70 80 90 100 (%)
Source: Company, BOBCAPS Research Source: Company, BOBCAPS Research
FIG 18 – PNCL’S SURGE IN BOOK-TO-BILL LED BY FIG 19 – …DRIVING REVENUE CAGR OF 47% OVER STRONG ORDERING FROM NHAI IN Q4FY18… FY18-FY21E, BEST IN INDUSTRY
Source: Company, BOBCAPS Research Source: Company, BOBCAPS Research
FIG 20 – HGIEL’S MARGINS ON AN IMPROVING FIG 21 – …RESULTING IN EBITDA CAGR OF 31% OVER TREND LED BY FAVOURABLE REVENUE MIX… FY18-FY21E; PNCL’S CAGR IS THE HIGHEST AT 44%
Source: Company, BOBCAPS Research Source: Company, BOBCAPS Research
EQUITY RESEARCH 15 11 April 2019
INFRASTRUCTURE (ROADS)
FIG 22 – PNCL’S NWC (EX-L&A TO SUBS/ASSOC) FIG 23 – SADE’S CASH CONVERSION TO PICK UP ON LIKELY TO IMPROVE LED BY BETTER RECOVERIES BETTER RECOVERIES
Source: Company, BOBCAPS Research Source: Company, BOBCAPS Research
FIG 24 – DBL’S NET D/E LIKELY TO IMPROVE VIA FIG 25 – DBL BEST PLACED TO GENERATE THE MOST CAPEX MODERATION AND INVENTORY CONTROL FCFF* OVER FY19-FY21E
Source: Company, BOBCAPS Research Source: Company, BOBCAPS Research I * After investments in SPV ’s
FIG 26 – KNRC’S CFO/EBITDA* CONTINUES TO FIG 27 – FCFF/EV* HIGHEST FOR SADE LED BY OUTCLASS PEERS ON OPERATIONAL EFFICIENCIES MODERATION IN NWC AND CONTROLLED CAPEX
(x) ASBL DBL PNCL 2 SADE KNRC HGIEL
1
0
(1)
(2)
FY15 FY16 FY17 FY18 FY19E FY20E FY21E Source: Company, BOBCAPS Research I *Changes in working capital include Source: Company, BOBCAPS Research I * After SPV investments L&A to subsidiaries
EQUITY RESEARCH 16 11 April 2019
INFRASTRUCTURE (ROADS)
FIG 28 – PNCL HAS HEALTHY GROSS ASSET TURN FIG 29 – …WITH COMFORTABLE WORKING CAPITAL PLUS BULK OF CAPEX COMPLETED… DRIVING SUPERIOR ROCE
Source: Company, BOBCAPS Research Source: Company, BOBCAPS Research
FIG 30 – LONG-TERM CREDIT RATING UPGRADED FOR KNRC BUT DOWNGRADED FOR DBL Company Long-term rating Short-term rating Rating agency
ASBL CRISIL AA-/Stable (Reaffirmed) CRISIL A1+ (Reaffirmed) CRISIL
DBL CRISIL A/Stable (Downgraded from CRISIL A+/Stable) CRISIL A1 (Reaffirmed) CRISIL
HGIEL ICRA A/Stable (Upgraded from ICRA A-/Positive) ICRA A1 (Upgraded from ICRA A2+) ICRA
KNRC CRISIL AA-/Stable (Upgraded from CRISIL A+/Positive) CRISIL A1+ (Reaffirmed) CRISIL
PNCL CARE AA-/Stable (Reaffirmed) CARE A1+ (Reaffirmed) CARE
SADE CARE A/Stable (Reaffirmed) CARE A1 (Reaffirmed) CARE Source: Company, BOBCAPS Research
EQUITY RESEARCH 17 11 April 2019
INFRASTRUCTURE (ROADS)
Key financial metrics
FIG 31 – PNCL TOPS FY18-FY2E REVENUE GROWTH… FIG 32 – …AND EBITDA GROWTH
Source: Company, BOBCAPS Research Source: Company, BOBCAPS Research
FIG 33 – DBL TO EARN SUPERIOR EBITDA MARGINS FIG 34 – PNCL WINS ON PBT GROWTH…
Source: Company, BOBCAPS Research Source: Company, BOBCAPS Research
FIG 35 – …BUT IS BEHIND HGIEL ON PAT GROWTH FIG 36 – KNRC HAS BEST-IN-CLASS PAT MARGINS
Source: Company, BOBCAPS Research Source: Company, BOBCAPS Research
EQUITY RESEARCH 18 11 April 2019
INFRASTRUCTURE (ROADS)
Concrete opportunities in sight
We estimate a ~30,000km The government’s focus on the Indian roads sector as a means to revive capex opportunity worth Rs 5tn activity in the country has revitalised the outlook for infrastructure players. We from NHAI for next five years note that NHAI’s current bid pipeline remains strong with 92 projects worth Rs 789bn (3,249km) under various stages of bidding, while the road authority’s Sep’18 MIS report indicates an additional award opportunity of ~32,300km over the next five years. Additionally, the bid pipeline from various central and state authorities stands at a robust ~Rs 350bn (1,236km), which is targeted be awarded over the next three months (refer Annexure B).
Factoring in systemic delays in project ordering, we estimate a base opportunity of 30,000km worth Rs 5tn from NHAI spread out evenly over FY20-FY24. This includes projects under the government’s flagship highway development schemes – viz. Bharatmala phase-I (18,763km, Rs 3.1tn), NHDP (4,667km, Rs 770bn), and others (6,570km, Rs 1.1tn) from various existing programmes such as port connectivity, development of backward, religious & tourist places and NH (O).
Bharatmala: Ambitious scope of >66,000km in ten years
Bharatmala covers 66,100km Bharatmala Pariyojana, the umbrella highway development programme announced over 10 years, incl. 24,800km by the government in Oct’17, has a scope of 66,100km at an outlay of Rs 8tn over (Rs 3.9tn) in Phase I a ten-year period. Phase-I for projects worth Rs 3.9tn covering 24,800km is to be implemented over five years during FY18-FY22 and carries CCEA approval. Taken together with the targeted development of 10,000km under NHDP and 48,900km under various other existing schemes, the government’s overall highway development programme over FY18-FY22 covers ~83,700km at an outlay of Rs 6.9tn.
Bharatmala is intended to improve connectivity, particularly along economic corridors, border areas and far-flung locales in India, with the key objectives of quicker cargo movement and boosting export-import (EXIM) trade. Given the programme’s vast scope, the government hopes it will double the share of freight movement on national highways from the existing 40% to 70-80%, raise the number of highway corridors from 6 to 50, and connect ~550 districts by four- lane highways from the existing ~300.
EQUITY RESEARCH 19 11 April 2019
INFRASTRUCTURE (ROADS)
FIG 37 – BHARATMALA PROGRAMME COMPONENTS Total length Upgrade proposed Category Description identified (km) in phase -I (km) Connection of economically important production & consumption Economic Corridor Development 26,200 9,000 centres Inter-connection between economic corridors, first-mile & last-mile Inter-corridor and Feeder Route Development 15,500 6,000 connectivity National Corridor Efficiency Improvement Lane expansion, decongestion of existing national corridors 13,100 5,000 Connectivity to border areas and boosting trade with neighbouring Border and International Connectivity Roads 5,300 2,000 countries Connectivity to coastal areas to enable port-led economic Coastal and Port Connectivity Roads 4,100 2,000 development Expressways Greenfield expressways 1,900 800 Total 66,100 24,800 Source: MORTH, BOBCAPS Research
FIG 38 – BHARATMALA: TOTAL IDENTIFIED FIG 39 – BHARATMALA PHASE-I 24,800KM + NHDP OPPORTUNITY OF 66,100KM 10,000KM = 34,800KM OPPORTUNITY Coastal and Port Expressways Economic Corridor Connectivity Roads 3% National Corridors NHDP Development 6% Efficiency Improvement Border and 29% 26% 20% International Connectivity Roads Expressways 8% 2% Inter-corridors and Inter-corridor and Coastal & Port Feeder Roads Feeder routes Connectivity Roads 17% development 6% 23% Economic Corridors Border & International National Corridor development Connectivity Roads Efficiency Improvement 40% 6% 14%
Source: MORTH, BOBCAPS Research Source: MORTH, BOBCAPS Research
FIG 40 – HIGHWAY DEVELOPMENT PROGRAMME OVER FY18-FY22
Length Outlay Bharatmala, NHDP & Sr. No. Component (km) (Rs bn) existing schemes aim to A Components under Phase-I of Bharatmala develop 83,677km at a cost of 1 Economic Corridor Development 9,000 1,200 Rs 6.9tn over FY18-FY22 2 Inter-corridor and Feeder Route Development 6,000 800 3 National Corridor Efficiency Improvement 5,000 1,000 4 Border and International Connectivity Roads 2,000 250 5 Coastal and Port Connectivity Roads 2,000 200 6 Expressways 800 400 Sub-total (A) 24,800 3,850 Balance Roadworks under National Highway Development Project B 10,000 1,500 (NHDP) Sub-total (A+B) 34,800 5,350 Roads under Other Existing Schemes C 48,877 1,573 (e.g. LWM , NHIIP , SARDP -NE, Setu Bharatam, Char Dham) Grand Total 83,677 6,923 Source: MORTH, BOBCAPS Research | Note: LWM – Left-Wing Extremism; NHIIP – National Highways Interconnectivity Improvement Project; SARDP-NE – Special Accidental Road Development Programme-North East
EQUITY RESEARCH 20 11 April 2019
INFRASTRUCTURE (ROADS)
NHAI pipeline of ~30,000km worth Rs 5tn by FY24E
Current NHAI bid pipeline of We estimate a base opportunity of ~30,000km worth Rs 5tn from NHAI for the 3,249km worth Rs 789bn next five years (FY20-FY24), spread over a run-rate of ~6,000km per year for works worth ~Rs 1tn. Our estimate includes the current bid pipeline of 3,249km worth Rs 789bn (see Annexure A on Page 33 for project details) and factors in systemic delays in contract awards, as seen from the breakdown below:
. 18,763km under Bharatmala phase-I worth Rs 3.1tn (balance of FY18-FY22 target of 24,800km);
Source: NHAI . 4,667km under NHDP worth ~Rs 770bn (~50% of the FY18-FY22 target of 10,000km); and
. 6,570km worth Rs 1.1tn from various existing schemes such as port connectivity, development of backward/religious/tourist places, NH (O), and others.
FIG 41 – ESTIMATED NHAI PIPELINE OVER FY20-FY24 NHAI contract Total length No. of projects yet Estimated project Programme awards expected in % completion (km) to be awarded cost (Rs bn) next 5 years (km) NHDP 47,670 5,024 89.5 86 829 Bharatmala 20,613 20,197 2.0 332 3,331 Port connectivity 624 160 74.3 1 26 SARDP-NE 111 - 100.0 - - BRT 3,359 3,319 1.2 20 547 NH (O) 2,572 2,097 18.5 33 346 Others 3,481 1,496 57.0 28 247 Total opportunity in next 5 years as per NHAI 78,429 32,293 58.8 500 5,327 Awards in next 5 years as per our estimates 30,000 4,949 (FY20E -FY24E) Awards mix EPC – 60% 18,000 2,969 HAM – 40% 12,000 1,979 Source: NHAI, BOBCAPS Research
Other key assumptions for the NHAI pipeline are as follows:
. Cost of awarding at Rs 165mn/km based on the cost matrix for projects awarded in FY18 . Award mix of 60:40 between EPC and HAM – more projects expected to be awarded on EPC mode to avoid the execution delays seen in FY19 . Land acquisition cost of Rs 3.2tn over five years for 90,000ha; we assume a requirement of 3ha/km based on the historical average over FY12-FY18 . Similar means of funding (ex-private investment) as outlined by the road’s ministry for the Bharatmala programme (Fig 45)
EQUITY RESEARCH 21 11 April 2019
INFRASTRUCTURE (ROADS)
FIG 42 – 10 KEY STATES COMPRISE 86% OF NHAI’S FIG 43 – COMPANIES FROM OUR COVERAGE CURRENT BID PIPELINE (IN KM) UNIVERSE COULD BE KEY BENEFICIARIES CENTRAL DBL KNRC 5% ASBL SOUTH DBL 22% SADE SADE WEST ASBL 48% DBL HGIE
PNCL DBL NORTH 25% HGIEL
Source: NHAI, BOBCAPS Research Source: NHAI, BOBCAPS Research
FIG 44 – ESTIMATED RS 7TN FUNDING REQUIREMENT FOR NHAI OVER FY20-FY24 Funding mechanism (A) HAM projects (i) Equity by developers 297 (ii) Debt from bank 891 (iii) NHAI grant 792 (B) EPC projects 2,969 (I) Funding from NHAI {A (iii) + B} 3,761 (II) Land acquisition costs (90,000ha) 3,197 NHAI Expenditure (I+II) 6,958 Source of funds 6,958 Central Road Fund (CRF) earmarked for National Highways 2,370 Gross Budgetary Support (GBS) –SARDP -NE, Externally Aided Projects (EAP) , 600 Counterpart Funds, etc. Expected monetisation of National Highways 340 Plough Back Funds (PBF) –Toll collections of NHAI 460 Market borrowings 3,188 Source: MORTH, NHAI, BOBCAPS Research
FIG 45 – MEANS OF FUNDING ~RS 7TN HIGHWAY DEVELOPMENT PROGRAMME OVER FY18-FY22 (AS PER MORTH) Bharatmala Other schemes Total Source of funds phase -I (Rs bn) (Rs bn) (Rs bn) Central Road Fund earmarked for National Highways 1,397 974 2,370 Gross Budgetary Support (GBS) –SARDP-NE, Externally Aided - 600 600 Projects (EAP) , Counterpart Funds, etc. Expected monetisation of National Highways 340 340 Plough Back Funds (PBF) –Toll collections of NHAI 460 460 Market borrowings 2,093 2,093 Private investment (PPP) 1,060 1,060 Total 5,350 1,573 6,923 Source: MORTH, BOBCAPS Research
EQUITY RESEARCH 22 11 April 2019
INFRASTRUCTURE (ROADS)
NHAI’s funding position comfortable
Government-led spending on roads holds the key for sustainable growth of the sector. Gross budgetary support (GBS) to NHAI increased at a CAGR of 17% over FY15-FY18 and is estimated to grow 24% over FY18-FY20 (based on Union Budget documents).
NHAI has room for more High contract awards over FY17-FY18, a large project pipeline with a potentially leverage to support yearly higher share of EPC projects, and commissioning of HAM works (which would awards of 6,000km necessitate annuity payments) are projected to drive steady expansion in NHAI’s balance sheet. This would be offset to some extent by higher toll collections on commissioned projects, monetisation of operational toll projects under the toll- operate-transfer (TOT) model and budgetary support from the government. We assume a steady increase in NHAI’s borrowings, though its D/E ratio is likely to remain comfortable at 1x in FY20E.
FIG 46 – BUDGETARY SUPPORT TO NHAI UP 12.5% Y OY FIG 47 – BUDGETARY SUPPORT TO THE ROADS & FOR FY20 BRIDGES SECTOR UP 12.4% FOR FY20 GBS IEBR GBS IEBR (Rs bn) (%) (Rs bn) (%) Total Growth YoY (R) 1,200 200 1,750 Total Growth YoY (R) 120 1,500 1,000 150 100 1,250 800 80 100 1,000 600 60 750 50 40 400 500 200 0 250 20 0 (50) 0 0 FY15 FY16 FY17 FY18 FY19RE FY20BE FY15 FY16 FY17 FY18 FY19RE FY20BE
Source: Budget documents, BOBCAPS Research | Note: BE – Budget Source: Budget documents, BOBCAPS Research Estimates; RE – Revised Estimates; IEBR – Internal and Extra Budgetary Resources
FIG 48 – NHAI LEVERAGE WELL WITHIN THE COMFORT ZONE
(Rs tn) Borrowings Net worth D/E (R) (x)
3.0 1.0 1.2
2.5 0.9 1.0
2.0 0.7 0.8
1.5 0.5 0.6
1.0 0.3 0.4 0.2 0.2 0.2 0.5 0.2 0.2 0.2 0.9 1.10.2 1.20.5 1.4 0.8 1.5 1.3 1.8 1.9 2.1 2.6 2.5 0.0 0.0 FY13 FY14 FY15 FY16 FY17 FY18P FY19E FY20E Source: NHAI, BOBCAPS Research
EQUITY RESEARCH 23 11 April 2019
INFRASTRUCTURE (ROADS)
Success of TOT model critical to fund Bharatmala
Rs 340bn of funding for NHAI expects to monetise 75 public-funded national highways with a road length Bharatmala proposed to come of ~4,376km on toll-operate-transfer (TOT) basis for a total of Rs 400bn- from monetisation of national 500bn, providing a return on equity of ~15% to the concessionaire. The overall highways through TOT funding requirement of Rs 6.9tn for high development programme is proposed to be met through budgetary allocations, market borrowings, private sector participation and proceeds of asset monetisation (Rs 340bn) through the TOT route – making the success of this model critical.
MORTH introduced TOT as a new public-private partnership (PPP) model for the maintenance of roads. The model involves leasing out of operational national highways for tenures as long as 30 years to concessionaires who collect toll revenue in return for a one-time upfront payment to the government. Operating and maintenance (O&M) obligations of such projects lie with the concessionaire till completion of the concession period.
Successful implementation of this model is essential for the sector considering (i) the weak financial position of road developers which has resulted in most projects being executed using public funds, thereby putting stress on NHAI’s financial position; (ii) increased award of contracts on EPC mode where projects are maintained by NHAI, thereby utilising its bandwidth and funds; and (iii) weak participation of O&M players in existing PPP models for maintenance (OMT) due to problems experienced in the past.
The first set of nine TOT projects has been successfully monetised to Macquarie Investment Fund, which placed a cumulative bid of Rs 96.8bn against NHAI’s base price of Rs 62.6bn. However, the second tranche of eight projects received a weak response, with the highest bid coming in at Rs 46.1bn as against the reserve price of Rs 53.6bn. Exposure to low-growth stretches in East India may have led to the tepid response. Consequently, NHAI has cancelled these tenders and is likely to re-bid the same.
FIG 49 – TOT BUNDLE 1: NINE STRETCHES SUCCESSFULLY MONETISED Yearly toll CAGR since Stretch (TOT Bundle 1) State NH Toll Plaza Length (km) collection (Rs mn) inception (%) Siddhantham-Gundugolanu Andhra Pradesh 5 1 72.0 379 22.6 Diwancheruvu-Siddhantham Andhra Pradesh 5 1 49.0 415 22.3 Annavaram (Tuni)-Diwancheruvu Andhra Pradesh 5 1 71.0 787 11.0 Ankapalli-Annavaram (Tuni) Andhra Pradesh 5 1 88.5 1,222 13.5 Ichchapuram-Narasannapeta Andhra Pradesh 5 1 96.7 452 16.3 Puintola-Ichchapuram Andhra Pradesh/ Odisha 5 1 64.4 389 15.4 Bamanbore-Garamore Gujarat 8A 1 71.9 356 25.6 Garamore-Samakhiali Gujarat 8A 1 51.5 954 16.4 Porbandar-Jetpur Gujarat 8B 2 115.6 180 21.2 Total 10 680.6 5,134 18.3 Source: NHAI, BOBCAPS Research
EQUITY RESEARCH 24 11 April 2019
INFRASTRUCTURE (ROADS)
FIG 50 – BIDS RECEIVED FOR TOT BUNDLE 1 Bids Premium/(discount) Bidders (Rs bn) (Rs mn/km) to base price (%) NHAI’s base price 62.6 91.9 - Macquarie Group 96.8 142.2 54.7 Brookfield 75.1 110.4 20.0 IRB-Autostrade 69.3 101.8 10.7 Roadis-NIIF 66.1 97.1 5.6 Source: NHAI, BOBCAPS Research
FIG 51 – TOT BUNDLE 2: EIGHT STRETCHES RECEIVED TEPID RESPONSE AND WERE CANCELLED Yearly toll CAGR since Stretch (TOT Bundle 2) State NH Toll Plaza Length (km) collectio n (Rs mn) inception (%) Chittorgarh-Kota & Chittorgarh Bypass Rajasthan 27 3 160.5 759.2 14.4 Swaroopganj-Pindwara-Udaipur Rajasthan 27 2 120.0 380 19.9 Palanpur/Khemana-Abu Road Rajasthan/ Gujarat 27 1 45.0 555.5 16.1 Jetpur Somnath Gujarat 151 2 102.3 380.2 -4.7 Dalkhola-Islampur West Bengal 31 1 52.0 610.1 17.0 Purnea-Dalkhola Bihar 31 1 36.3 324.5 18.7 Salsalabari-West Bengal Assam Border West Bengal 31C 1 26.5 162.4 23.5 Islampur-Sonapur-Ghoshpukur West Bengal 31 1 44.0 461.6 22.7 Total 12 586.6 3,634 15.9 Source: NHAI, BOBCAPS Research
FIG 52 – BIDS RECEIVED FOR TOT BUNDLE 2 Bids Premium/(discount) Bidders (Rs bn) (Rs mn/km) to base price (%) NHAI’s base price 53.6 91.4 - Cube Highways 46.1 78.6 (14.0) Adani Group 36.8 62.6 (31.5) IRB Infra 27.2 46.3 (49.3) Source: NHAI, BOBCAPS Research
FIG 53 – PROPOSED STRETCHES UNDER TOT BUNDLES 3 & 4
NHAI has obtained approval Proposed stretches State Length (km) TOT Bundle 3 for the third and fourth TOT Jhansi-Lalitpur Uttar Pradesh 49.7 bundles (in DPR stage) Jhansi-Lakhnadon Uttar Pradesh 49.3 Lucknow-Raibareli Uttar Pradesh 70.0 Muzaffarpur Uttar Pradesh 80.0 Hazaribagh-Ranchi including Ramgarh Bypass Jharkhand 73.8 Madurai-Kanyakumari (four toll plazas) Tamil Nadu 243.1 Total 565.9 TOT Bundle 4 Chennai-Nashri Tamil Nadu 10.9 Jammu Bypass-Udhampur J&K 58.5 Hisar-Dabwali Haryana 57.0 Sangrur bypass-Tapa including Sangrur and Dhanaula Bypass Punjab 58.7 Patiala bypass-Sangrur Bypass Punjab 60.7 Baran-Shivpuri section Rajasthan 75.3 Reengus-Sikar Rajasthan 43.9 Lakhnadon-Mahgaon Maharashtra 56.9 Pimplegaon-Nashik-Gonde Maharashtra 57.2 Total 479.1 Source: NHAI, BOBCAPS Research
EQUITY RESEARCH 25 11 April 2019
INFRASTRUCTURE (ROADS)
Policy reforms to facilitate growth
Road construction in India has historically been mired by land acquisition hurdles, sluggish financial closure, delayed clearances and myriad regulatory constraints. To improve the business dynamics for developers and revive stakeholder interest in its ambitious infrastructure targets, the government has introduced a raft of key policy reforms in the roads sector in recent years.
Road project execution grew These measures along with introduction of the HAM model in FY16 have helped 30% over FY15-FY18 post resuscitate the pace of ordering/execution to a brisk 29%/31% CAGR over FY15- favourable policy measures FY18 versus –7%/–4% over FY12-FY15. The recent launch of infrastructure investment trusts (InvIT) is expected to lend a further leg-up to road developers by freeing up capital for new asset creation.
Retailored MCA, HAM and InvIT among key measures
Some of the groundbreaking reforms ushered in over the past five years include:
. amendments to the model concession agreement (MCA) aimed at lowering developer risk by way of allowances for premium rescheduling and deemed termination of stranded projects, among others;
. awarding of projects permitted only after 80%/90% of requisite land is procured by the road’s authority for HAM/EPC projects so as to avoid delays and cost overruns;
. provision of an exit option to developers after two years of project operation;
. delegation of project implementation under Bharatmala phase-I to various agencies (NHAI, NHIDCL, MORTH and state PWDs) instead of a central body, hastening the decision-making process – NHAI and MORTH to function as nodal agencies;
. introduction of the hybrid annuity model (HAM), an innovative solution to circumvent private developers’ apathy toward build-operate-transfer (BOT) projects and hasten the pace of contract award & execution; and
. launch of InvIT in 2014 which allows private asset owners to divest their stake in operational assets, thereby freeing up capital for creating new assets.
EQUITY RESEARCH 26 11 April 2019
INFRASTRUCTURE (ROADS)
FIG 54 – MAJOR POLICY MEASURES TO REVIVE INDIA’S ROADS SECTOR Addresses cash flow mismatch in Year Key measures operating projects and frees up FY13 . Mar-13: De-linking of forest and environmental clearances capital for new works FY14 . Mar-14: Premium rescheduling for stressed projects
FY15 . Jul-14: Bidding of tenders only after 80% land has been acquired Helps minimise delays and cost overruns . Aug-14: Fast-track clearances: (i) states to clear projects with up to 40 acres of forest land, (ii) increased limit for sand mining, (iii) online filing and clearing of road overbridges and underbridges . Dec-14: 5:25 scheme launched which allowed banks to refinance or sell their
long-term project loans every five years Cuts down unnecessary . Dec-14: MORTH empowered to decide on mode of award processes and expedites awards (EPC/toll/annuity). Can appraise projects up to Rs 10bn, both for PPP and
EPC, vs. Rs 5bn earlier Improves execution timelines and curbs contractual disputes FY16 . May-15: More onus on NHAI for timely execution. Regular reporting of deviations by developers to enable accurate and timely identification of Offers respite to stressed problems developers by easing exit . May-15: 100% exit for developers after two years of project completion, both process for pre-2009 and post-2009 projects
. May-15: One-time fund infusion by NHAI for projects stranded in advanced Facilitates completion of stages of completion (subject to due diligence) projects and debt servicing . Aug-15: Removal of a clause which restricted companies from investing funds received from monetisation of operational assets to other NHAI projects . Aug-15: Environment clearance waived for projects < 100km length. Also waived for projects >100km if ROW required is up to 40m/60m for existing/greenfield alignments
Significantly lowers developer . Sep-15: Key amendments to MCA including (i) premium payment to start only risk from fourth year of completion of BOT projects against first year previously, and (ii) termination of projects that do not progress even after a year of award Aims to revive developer . Nov-15: 34 stalled projects given a construction period extension interest as it spreads the risk . Jan-16: Cabinet approves HAM mode for construction of highways between the developer and the FY17 . Aug-16: Government decides to pay 75% of arbitration amount to contractors awarding authority who have won arbitration awards (against submission of bank guarantees) . Nov-16: Developers compensated for loss of toll revenue due to suspension
of collections during demonetisation phase FY18 . May-17: Launch of IRB’s InvIT Frees up capital for creating FY19 . May-18: Launch of L&T IDPL’s IndInfravit new assets . Nov-18: EPC regulatory amendments which focus on execution and financial
health of a developer Source: MORTH, NHAI, BOBCAPS Research | Note: ROW – Right of Way
EQUITY RESEARCH 27 11 April 2019
INFRASTRUCTURE (ROADS)
FIG 55 – HYBRID ANNUITY MODEL TAILORED TO MINIMISE DEVELOPER RISK BURDEN Key areas Terms as per the Model Concession Agreement . Construction period + operating period of 15 years
Bidding and . Bidders to quote construction cost as per the bid variable, called BPC. Bidders to also quote O&M costs concession period . Evaluation of bids on lifecycle cost basis considering NPV of both BPC and O&M bids . BPC to be indexed every month as per price index multiple (PIM); PIM = weighted avg. of WPI (70%) & CPI (30%) . 40% of BPC to be given as grant during construction, adjusted for PIM . Payments linked to physical progress milestones (24%, 40%, 60%, 75%, 90%), paid in 5 equal instalments of 20% each Payments during . 10% mobilisation advance (interest-bearing) to be given; will be adjusted against periodic billings construction . Early completion bonus of 0.5% of 60% of BPC for every month by which COD shall precede the scheduled completion date. Paid along with first annuity payment . 60% of BPC to be paid in biannual annuities over 15 years post COD
Payments during . Annuity payments will be ballooning in nature operations . Annuities to carry interest @ bank rate + 3% on reducing balance basis . Reimbursement of O&M expenses will be as per bids. Payments to be indexed . AD given only after availability of 80% of land (ROW should be enough to work on 80% of the project length) Appointed date . Land not handed over within 180 days can be delinked from scope of work and PCOD issued based on land handed over . If AD not given within a year of signing the concession agreement, then agreement deemed to be terminated
. Original consortium to hold minimum 51% during construction period and for two years post COD Exit norms . Exit allowed two years after COD Source: MORTH, BOBCAPS Research | Note: AD – Appointed Date; BPC – Bid Project Cost; COD – Commercial Operation Date; O&M – Operations & Maintenance; PCOD – Provisional COD
FIG 56 – DELEGATION OF POWERS FOR BHARATMALA IMPLEMENTATION Type of project Approving authority BOT (Toll) projects without grant Without VGF (viability gap funding) NHAI With VGF CCEA BOT (Annuity)/HAM projects Up to Rs 20bn (ex-land) Secretary & Minister, MORTH >Rs 20bn (ex-land) CCEA EPC projects -Of NHAI NHAI -Of MORTH through State PWDs Up to Rs 10bn (ex-land) Minister, MORTH >Rs 10bn (ex-land) CCEA Change of mode of execution (Toll/Annuity/HAM/EPC) NHAI/MORTH Source: MORTH, BOBCAPS Research
New EPC contract revisions to unclog execution bottlenecks
MORTH has recently amended the standard agreement for national highways and centrally-sponsored EPC roadworks to focus on swifter execution. Effective 28 Nov 2018, the revised agreement also increases the working capital requirement for road builders and hence will largely benefit contractors with both a strong record of timely execution and a clean balance sheet.
EQUITY RESEARCH 28 11 April 2019
INFRASTRUCTURE (ROADS)
FIG 57 – KEY AMENDMENTS TO EPC CONTRACT AGREEMENTS EFFECTIVE FOR NEW BIDS AFTER 28 NOV 2018 Clause Existing New Comments Authority should provide not less than 90% of Authority should provide not less than 90% of Positive | Improves the pace of Right of Way the total project length within 30 days from the the total project length within 30 days from execution led by adequate availability (ROW) date of agreement and ROW shall be in the date of agreement of land contiguous stretches not less than 5km of length If a contractor cannot undertake works within town limits or areas falling in reserved forest or Positive | Improves the pace of Deadline for clearances/approvals reduced from sanctuary because requisite clearances/approvals execution led by faster access to the 240 days to 180 days were not given within 240 days of AD, the work front affected works shall be deemed to be withdrawn If a contractor fails to complete the project within 90 days from scheduled completion date (ex-force majeure or reason attributable to roads Positive | Improves contractors’ focus on timely project completion. Could Disqualification of authority), he shall be ineligible to bid for any Not Applicable bring down competition from contractors future projects of the authority (both as the sole party or in JV) during the period from scheduled inefficient players, thereby completion date to issue of completion certificate benefitting larger contractors
Applicable for contract value >Rs 3bn If AD is not awarded by the authority within 90 days of signing the agreement and submission of Positive | Authority will have to be Deemed the full performance security by the contractor, proactive in awarding ADs on time. termination of Will also ensure that the order Not Applicable the agreement shall be deemed to be terminated contract upon backlog becomes executable within a delay Authority will have to pay damages to the reasonable timeframe, preserving contractor equivalent to 1% of the contract price contractor revenue/earnings (3% in case of standalone bridge projects) Neutral | Increased emphasis on maintenance with lower compensation Contractor to maintain bituminous projects Maintenance Contractor shall maintain the project for and higher tenure. Contractors will (flexible pavement) for 5 years and concrete obligation 4 years from date of completion have to bid logically for projects to roads (rigid pavements) for 10 years recover maintenance cost. Will also ensure quality construction Contractor is paid 0.5%, 1%, 1.5% and 2% of Negative | Good from the point of contract price in 1 st , 2 nd , 3 rd and 4 th year Payment for flexible pavement: 0.25% of view of the authority but a stringent respectively for such maintenance work contract price in 1 st & 2nd year; 0.5% for 3rd & 4th norm for contractors year; and 1% for 5 th year
Payment for rigid pavement: 0.25% of contract price each in 1 st , 2 nd & 3rd year; 0.5% for 4 th , 5 th , 6th , & 7th year; and 0.75% for 8 th , 9 th & 10 th year
Negative | Contractor now responsible for maintaining the Defect liability Flexible pavement: 4 years Flexible pavement: 10 years project for a longer period; this will period Rigid pavement: 4 years Rigid pavement: 10 years also block his non-fund-based limit for longer, raising finance cost Interest on Negative | Increases the finance cost mobilisation At RBI bank rate At RBI bank rate + 3% for contractors advance Repayment of Deductions commence once the total of all Negative | Early recovery of Deductions to commence in first-stage payment mobilisation certified stage payments exceed 20% of the mobilisation advance will raise statement itself advance contract price working capital needs for contractors Retention On receipt of bank guarantee, authority refunds Release of retention money against bank Negative | Raises working capital money retention money (max 5% of contract price) guarantees discontinued requirement for contractors Source: MORTH, BOBCAPS Research
EQUITY RESEARCH 29 11 April 2019
INFRASTRUCTURE (ROADS)
InvIT to deleverage balance sheet and enable capital recycling
InvITs enable infrastructure In 2014, SEBI introduced InvIT regulations for infrastructure projects keeping in developers to better monetise mind India’s massive development needs – simply put, this is a mechanism that their assets enables infrastructure developers to monetise their assets by pooling multiple projects under a single entity (trust structure).
The InvIT or infrastructure investment trust is designed as a tiered structure with the sponsor setting up the trust, which in turn invests in eligible infrastructure projects either directly or via special purpose vehicles (SPV). The assets invested in are revenue generating/operational projects that provide a steady source of income to the unit holders. In turn, the InvIT distributes this income to its investors in the form of dividends and interest (comprising 90% of its net cash flows).
The introduction of InvIT helps infrastructure asset owners (i) to free up invested capital by divesting their stake in operational assets, and (ii) to recycle this capital for creating new assets and/or deleveraging their balance sheet. InvIT has been made attractive for investors as it offers lower taxes, mandates a high payout, caps leverage, and has zero execution risk (only operational assets can form part of the InvIT). Three companies in India currently run this structure, viz. IRB InvIT Fund, India Grid Trust and IndInfravit.
FIG 58 – STRUCTURE OF IRB INVIT FUND
InvIT will distribute at least 90% of its net distributable cash flows (NDCF) to its unit holders, semi-annually, comprising: Investors In Units Of Trust . Dividend received from the SPV . Interest received from the SPV (net of witholding tax) . Cash flows from repayment of debt principal by SPVs, and proceeds from sale of assets of SPV . Buyback of units Distribution . Adjusted for: o Invest in units . Minimum 90% Expenses (including IM fees) at Trust level o Trustee of NDCF Income tax IDBI Trusteeship Services Ltd o Repayment of external debt at Trust level
Sponsor IRB Infrastructure Developers Ltd IRB InvIT Fund HoldsMinimum 15% units Investment Manager IRB Infrastructure Pvt Ltd
Each Project SPV distributes at least 90% of its net distributable cash flows (NDCF) to the InvIT, semi-annually which comprises: Project Manager . Post-tax cash generated during the year Inve stm ent Distribution Modern Road Makers Pvt Ltd . Proceeds from sale of infrastructure assets (net of tax) . Equity . Minimum 90% of Adjusted for: . Issue of Debt NDCF* o Repayment of debt to external lenders, and O&M o Any premium / negative grant payments to NHAI
Projectassets acquired from sponsor
Omallur-Salem- Pathankot- Surat-Dahisar Bharuch-Surat Talegaon-Amravati Jaipur-Deoli Tumkur-Chitradurga Namakkal Amritsar NH 8 Project NH 8 Project NH 6 Project NH 12 Project NH 4 Project NH 7 Project NH 15 Project
*Subject to applicableprovisions of Companies Act, 2013 Source: Company, BOBCAPS Research
EQUITY RESEARCH 30 11 April 2019
INFRASTRUCTURE (ROADS)
Our top picks
REVENUE MOMENTUM TO We expect a revival in road project awards in FY20 with NHAI estimated to bid SUSTAIN out 6,000km worth ~Rs 1tn annually for development over FY20-FY24 under (%) Bharatmala, NHDP and other government programmes. Additionally, financial 26 22.8 22.1 closure for most HAM projects held by our coverage universe is in place and 22 pending appointed dates are likely to be awarded by Q1-Q2FY20 – we thus 18 anticipate an uptick in execution from FY20 onwards and model for a revenue 14 CAGR of 23% for our coverage stocks over FY18-FY21. 10 FY15-FY18 FY18-FY21E Source: Company, BOBCAPS Research, Prefer PNCL, HGIEL, ASBL and KNRC CAGR for coverage stocks We recommend playing the sector through asset-light construction companies and select asset-owners with sound balance sheets and strong operational BOT portfolios. Our top picks based on these criteria and supported by our evaluation matrix (Fig 15) are PNCL, HGIEL, ASBL and KNRC, in that order.
FIG 59 – PREFER PNCL, HGIEL, ASBL AND KNRC Parameters ASBL DBL HGIEL KNRCL PNCL SADE
Quantitative
Qualitative
Final evaluation
Source: BOBCAPS Research
We have valued all our coverage stocks on a sum-of-the-parts (SOTP) basis, with their EPC businesses assessed using the P/E method (12-14x) and asset businesses valued on NPV or P/BV (1-1.2x).
FIG 60 – VALUATION SUMMARY (STANDALONE) M Cap P/E (x) Value of Implied P/E (x) Company CMP TP (Rs) Rating (Rs bn) FY20E FY21E assets (Rs/sh) FY20E FY21E ASBL 36.3 129 210 BUY 11.6 10.2 73 5.5 4.8 DBL 84.9 621 750 BUY 13.9 11.3 89 11.9 9.7 HGINFRA 17.0 261 390 BUY 9.9 8.4 16 9.3 7.9 KNRC 34.8 247 295 BUY 17.3 15.2 67 12.6 11.1 PNCL 38.4 150 210 BUY 12.7 10.9 44 9.0 7.7 SADE 42.2 246 295 BUY 17.1 14.8 101 10.1 8.7 Average - - - - 13.8 11.8 9.7 8.3 Source: Company, BOBCAPS Research
EQUITY RESEARCH 31 11 April 2019
INFRASTRUCTURE (ROADS)
FIG 61 – CONSENSUS VALUATION SUMMARY (STANDALONE) P/E (x) Value of Implied P/E (x) Company FY20E FY21E assets (Rs/sh) FY20E FY21E ASBL 12.8 11.1 73 5.5 4.8 DBL 11.1 10.4 89 9.5 8.9 HGIEL 10.1 8.4 16 9.5 7.9 KNRC 16.2 15.0 67 11.8 10.9 PNCL 13.0 10.6 44 9.2 7.5 SADE 16.0 14.3 101 9.4 8.4 GAYP 11.8 11.2 54 7.4 7.1 JMC 13.7 12.1 44 6.5 5.8 Industry Average 13.1 11.6 - 8.6 7.7 Source: Bloomberg, BOBCAPS Research
Key risks
. Delays in award of appointed dates and achievement of financial closure for road projects could lead to a high unexecutable order backlog, thereby derailing growth for our infrastructure universe.
. Lower-than-expected NHAI awarding could lead to redundancy in the high equipment base, in turn affecting return ratios.
. Traffic growth is linked to improvement in economic activity. Any slowdown in the economy could erode gross toll collections for the sector.
EQUITY RESEARCH 32 11 April 2019
INFRASTRUCTURE (ROADS)
Annexures Annexure A: NHAI’s current bid pipeline
FIG 1 – NHAI’S CURRENT BID PIPELINE TOTALS 3,249KM WORTH RS 789BN AS ON 4 APR 2019 Contract Length Value Location State Lanes Close date model (km) (Rs bn) Delhi-Vadodara (Ena-Kim Section, Pkg 6) Gujarat 8 EPC 30-Apr-19 37 15.1 Delhi-Vadodara (Karvad-Jujuwa Section, Pkg 9) Gujarat 8 EPC 30-Apr-19 27 9.9 Delhi-Vadodara (Jujuwa-Gandeva Section, Pkg 8) Gujarat 8 EPC 30-Apr-19 35 15.1 Delhi-Vadodara (Talasari-Karvad Section, Pkg 10) Multi States 8 EPC 30-Apr-19 25 11.3 Delhi-Vadodara (Gandeva-Ena Section, Pkg 7) Gujarat 8 EPC 30-Apr-19 28 11.5 Delhi-Vadodara (Bhamaiya Village-Baletiya Village, Pkg 29) Gujarat 8 EPC 29-Mar-19 23 7.8 Delhi-Vadodara (Baletiya Village-Nani Bhadol Village, Pkg 30) Gujarat 8 EPC 26-Mar-19 20 9.3 Delhi-Vadodara (Nani Bhadol Village-Dodka Village, Pkg 31) Gujarat 8 EPC 29-Mar-19 21 7.8 Akshardham NH-9 Junction-Delhi/UP Border Delhi 6 EPC 11-Apr-19 15 11.1 (Delhi -Saharanpur, Pkg I) Narenpur-Purnea Bihar 4 HAM 25-Apr-19 49 12.2 Delhi/UP Border-EPE Junction (Delhi-Saharanpur, Pkg 2) Uttar Pradesh 6 EPC 11-Apr-19 16 17.0 Dobaspet-Dodaballapur Bypass Section (Pkg I) Karnataka 6 HAM 01-May-19 42 14.5 Dodaballapur Bypass-Hoskote Section (Pkg II) Karnataka 6 HAM 01-May-19 38 11.8 Channarayanapatna-Hassan (Pkg II) Karnataka 4 EPC 25-Apr-19 10 3.4 Elevated corridor in Ranchi City Jharkhand - EPC 11-Apr-19 4 2.1 Paradip Port Project - Port Connectivity from NH 5A near Atharbanki Odisha Flyover EPC 08-May-19 - 0.9 Chowk Amritsar-Ghoman-Tanda Section Punjab 4 HAM 28-May-19 45 5.5 Paloli Palam-Moorad Kerala 4 EPC 25-Apr-19 2 0.5 Jammu & - EPC 01-Apr-19 4 1.3 Srinagar-Banihal Section Kashmir Nelamangala-Tumkur including Tumkur Bypass Karnataka 6 HAM 08-May-19 45 11.5 Delhi-Vadodara (starting near juntion with SH-37A to junction with NH- Rajasthan 8 EPC 29-May-19 29 9.4 76, Pkg 13) Madhya 4 EPC 11-Apr-19 58 6.0 Dhangaon-Borgaon, Pkg 4 Pradesh Dhillon Nagar (Moga)-Bajakhana (Lambwali) Section Punjab 8 HAM 03-Jun-19 38 4.9 Delhi-Vadodara (starting near Start of RoB near junction with NH-11A to Rajasthan 8 EPC 29-May-19 33 9.0 Junction with MDR -1, Baonli -Jhalai road, Pkg 8) Delhi-Vadodara (Start of bridge near Manoharpur-Rajasthan/MP Border, Rajasthan 8 EPC 29-May-19 26 7.1 Pkg 16) Delhi-Vadodara (from Junction with NH-12 to Start of Bridge near Rajasthan 8 EPC 29-May-19 9 9.1 Manoharpur Section , Pkg 15) Delhi-Vadodara (starting near Major Bridge on Chakan River-Major Rajasthan 8 EPC 29-May-19 22 8.8 Bridge on Mej River, Pkg 11) Delhi-Vadodara (starting near Major Bridge on Mej River to Junction with Rajasthan 8 EPC 29-May-19 28 8.9 SH -37A, Pkg 12) Delhi-Vadodara (starting near Start of RoB near Village Itawa to Major Rajasthan 8 EPC 29-May-19 29 7.6 Bridge on Chakan river Section , Pkg 10) Kaipa-Giddalur, Pkg 4 Andhra Pradesh 2 EPC 23-May-19 78 5.7 Bugga-Kaipa, Pkg 3 Andhra Pradesh 2 EPC 23-May-19 57 7.0 Himachal 4 EPC 11-Jun-19 37 10.8 Punjab/HP Border-Sihuni Pradesh Vejalka Village-Start of DSIR Zone (Pkg III) Gujarat 4 HAM 23-Apr-19 23 7.4 Durg-Raipur Bypass Section (Pkg A) Chhattisgarh 4 HAM 17-May-19 48 7.7
EQUITY RESEARCH 33 11 April 2019
INFRASTRUCTURE (ROADS)
Contract Length Value Location State Lanes Close date model (km) (Rs bn) Durg-Raipur Bypass Section (Pkg B) Chhattisgarh 4 HAM 17-May-19 45 7.0 Jagdishpur-Faizabad Section Uttar Pradesh 4 HAM 24-Apr-19 60 12.4 Ahmedabad district-Adhelai Village (Pkg IV) Gujarat 4 HAM 11-Apr-19 38 9.6 Deogarh (Dhandhaniya)-Rajasthan/Gujarat Border (Pkg 7) Rajasthan 6 EPC 30-May-19 30 4.8 Deogarh (Dhandhaniya)-Rajasthan/Gujarat Border (Pkg 6) Rajasthan 6 EPC 30-May-19 25 6.7 Deogarh (Dhandhaniya)-Rajasthan/Gujarat Border (Pkg 5) Rajasthan 6 EPC 30-May-19 28 4.1 Deogarh (Dhandhaniya)-Rajasthan/Gujarat Border (Pkg 4) Rajasthan 6 EPC 30-May-19 25 4.2 Deogarh (Dhandhaniya)-Rajasthan/Gujarat Border (Pkg 8) Rajasthan 6 EPC 30-May-19 27 5.4 Sankha-Khajuri (Garhwa-UP Border Section-IV) Jharkhand 4 HAM 11-Apr-19 23 5.5 Ghogargaon-Ahmednagar-Solapur District Border (Pkg 2) Maharashtra 4 HAM 30-Apr-19 42 7.8 Ahmednagar-Mirajgaon-Karmala-Tembhurni Section (Pkg 1) Maharashtra 4 HAM 30-Apr-19 39 8.2 Palkhi Marg from Indapur-Tondle (Pkg II) Maharashtra 4 EPC 30-Apr-19 47 9.7 Bhandara-Nagpur Section Maharashtra 6 HAM 29-Apr-19 45 10.5 Thalapady-Chengala Section Kerala 4 HAM 23-Apr-19 40 16.7 Sindhrej Village-Vejalka Village (Pkg II) Gujarat 4 HAM 23-Apr-19 27 8.9 Rewari Bypass Haryana 4 HAM 06-Jun-19 14 4.2 Muzaffarnagar-Miranpur (Pkg 3) Uttar Pradesh 4 EPC 15-Apr-19 31 5.6 Garhmukteshwar-Meerut Uttar Pradesh 4 EPC 16-Apr-19 73 9.4 Meerut-After bridge over river Yamuna, Haryana via Shamli Uttar Pradesh 4 EPC 24-Apr-19 88 5.0 Bijnor-Kotawali (Pkg 4) Uttar Pradesh 4 EPC 15-Apr-19 22 2.1 Aligarh-Kanpur Section (Mitrasen-Kanpur, Pkg 5) Uttar Pradesh 4 HAM 26-Apr-19 58 16.1 Aligarh-Kanpur Section (Naviganj-Mitrasen, Pkg 4) Uttar Pradesh 4 HAM 26-Apr-19 71 19.5 Meerut-Nazibabad Section Uttar Pradesh 4 HAM 03-May-19 54 12.0 Kagal-Satara Section (Pkg I) Maharashtra 6 HAM 26-Apr-19 43 8.7 Patas-Vasunde Phata-Baramati Maharashtra 4 EPC 30-Apr-19 56 12.1 Palkhi Marg from Baramati-Indapur (PKg I) Maharashtra 4 EPC 30-Apr-19 49 8.9 Kagal-Satara Section (Pkg II) Maharashtra 6 HAM 26-Apr-19 40 5.8 Kagal-Satara Section (Pkg III) Maharashtra 6 HAM 26-Apr-19 47 10.2 Ratnagiri-Kolhapur Section from Paijarwadi-Kerle (Pkg III) Maharashtra 4 HAM 26-Apr-19 12 8.4 Ratnagiri-Kolhapur Section from Mirya-Hatkhamba (Pkg I) Maharashtra 4 HAM 26-Apr-19 48 10.7 Ratnagiri-Kolhapur Section from Kerle-Paijarwadi (Pkg II) Maharashtra 4 HAM 26-Apr-19 37 8.5 Chengala- Kalikadevu Kerala 4 HAM 23-Apr-19 44 20.7 4 laning of NH-98 Jharkhand 4 HAM 01-May-19 34 5.4 Akola-Medshi Maharashtra 4 EPC 30-Apr-19 48 7.3 Nagpur-Katol Maharashtra 4 EPC 30-Apr-19 60 9.9 Sinnar-Shirdi-Ahmednagar Maharashtra 4 HAM 29-Apr-19 65 7.6 Sardar Patel ring road-Sindhrej Village (Pkg 1) Gujarat 4 HAM 23-Apr-19 22 7.9 Khammam-Devarapalle secton (Thallampadu-Ramanujavaram, Pkg I - Telangana 4 HAM 23-May-19 45 10.2 Greenfield) Khammam-Devarapalle secton (Ramanujavaram-TS/AP border, Pkg II - Telangana 4 HAM 23-May-19 45 9.0 Greenfield) Khammam-Devarapalle secton (TS/AP border-Borrampalem Village, Pkg Andhra Pradesh 4 HAM 23-May-19 36 6.7 III - Greenfield) Khammam-Devarapalle secton (Borrampalem Village-Devarapalle Village, Andhra Pradesh 4 HAM 23-May-19 36 8.5 Pkg IV - Greenfield) Hyderabad (ODR Appa Junction) - Manneguda Telangana 4 HAM 23-May-19 46 7.8 DND Maharani Bagh-Junction with Jaitpur-Pushta Road Delhi 6 HAM 30-Apr-19 9 18.4
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Contract Length Value Location State Lanes Close date model (km) (Rs bn) Unnao-Lalganj Uttar Pradesh 4 HAM 16-Apr-19 70 14.4 Development of Road Link between Bawana Industrial Area, Delhi till Haryana HAM 24-Apr-19 29 7.6 bypass of NH -352A at Village Barwasani, Sonipat (Pkg IV) Faridabad-Ballabhgarh Bypass-Junction near KMP Expressway (Pkg-3) Haryana 6 HAM 28-Jun-19 26 9.1 Jaitpur-Pushta Road-Junction with Sector-62-65 dividing road on Haryana 6 HAM 28-Jun-19 24 15.5 Faridabad -Ballabhgarh Bypass (Pkg -2) Rohtak-Jind Section (balance work) Haryana 4 EPC 22-Apr-19 41 4.1 Additional structures under Delhi-Agra Section of NH-2 Haryana 6 EPC 22-Apr-19 - 1.6 Amritsar-Jamnagar: Sangariya (Near Chautala)-Rasisar (Near Bikaner), Rajasthan 6 EPC 22-Apr-19 28 5.0 Pkg 9 Amritsar-Jamnagar: Sangariya (Near Chautala)-Rasisar (Near Bikaner), Rajasthan 6 EPC 11-Apr-19 35 5.2 Pkg 3 Lucknow Ring Road (connecting NH-56 and terminating near Behta Uttar Pradesh 4 EPC 22-Apr-19 32 9.0 Village Road bypass, Pkg I) Neraluru-Thorapalli-Agraharam (Pkg I) Karnataka 4 HAM 22-Apr-19 23 4.3 Thorapalli Agraharam-Jittandahalli (Hosur-Dharamapuri Section, Pkg II) Tamil Nadu 4 HAM 22-Apr-19 37 7.0 Mugaiyur - Marakkanam (Pkg I) Tamil Nadu 4 HAM 11-Apr-19 31 6.0 Mugaiyur - Marakkanam (Pkg II) Tamil Nadu 4 HAM 11-Apr-19 31 6.0 Madhya Nanasa-Pidgaon (Indore-Harda, Pkg III) 4 EPC 11-Apr-19 47 6.0 Pradesh Madhya Delhi-Vadodara (Bawadi Village-Ratlam, Pkg 22) 8 EPC 10-May-19 25 10.4 Pradesh Total 3,249 788.8 Source: NHAI, BOBCAPS Research
EQUITY RESEARCH 35 11 April 2019
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Annexure B: Central & State authorities’ current bid pipeline
FIG 2 – CURRENT BID PIPELINE FROM CENTRAL & STATE AUTHORITIES TOTALS 1,236KM WORTH RS 347BN AS ON 4 APR 2019 Length Bid submission Value Project Authority State Mode (km) date (Rs bn) West Bengal Highway Upgradation of Kalyani Expressway to 4/6 lane configuration Development West Bengal EPC 31 25-Apr-19 13.0 from Muragacha (ch. 4.564) to Kampa (Ch-35.340) (Phase-II) Corporation Ltd. Upgradation of 2 lane / 4 lane from km 92.400 to 127.350 of Public Works Rajasthan EPC 35 15-Apr-19 1.2 NH -248A in Alwar -Nuh section Department, Rajasthan Development & maintenance of Bidasar-Dungargarh-Kalu & Public Works Sadulshahar-Sangaria-Chaiya section (Package No.RSHIP- Rajasthan EPC - 15-Apr-19 2.3 Department, Rajasthan ADB -TRANCHE -II/EPC/02) [Rev] High capacity mass transit route (HCMTR) project an elevated six lane inner ring road connecting Bopodi-Pune University Pune Municipal Maharashtra HAM - 23-Apr-19 51.9 Junction-Paud Road-Satara Road-Kondhwa Road-Solapur Corporation Road -Nagar Road -Vishrantwadi Bundelkhand Expressway (Package 1 to 6) UPEIDA UP EPC 296 29-May-19 88.6 Gorakhpur Link Expressway Project (Package 1 & 2) UPEIDA UP EPC 91 29-May-19 29.1 Construction of 2-lane Bi-Directional Zojila Tunnel with parallel Jammu & NHIDCL EPC 23 08-Apr-19 49.0 escape tunnel on Srinagar-Leh Section connecting NH-1A at km Kashmir 95.00 & 118.00 Construction of 4 lane elevated north-south corridor from Karnataka Road Devp. Shanti Nagar bus station to Central Silk Board Junction via BTS Karnataka EPC - 03-May-19 15.4 Corpn. Ltd Road in Karnataka (Pkg -3) Construction of 2/3/4/6 lane including multilevel elevated north- Karnataka Road Devp. south corridor from JC Nagar to Shanti Nagar bus station in Karnataka EPC - 03-May-19 18.5 Corpn. Ltd Karnataka (Pkg -2) Construction of 4/6 lane elevated north-south corridor from Karnataka Road Devp. Baptist Hospital to JC Nagar on Jayamahal Road via Mekhri Karnataka EPC - 03-May-19 12.2 Corpn. Ltd Circle in Karnataka (Pkg -1) Rehabilitation & upgradation of NH-516D from Ch.0.00 to Andhra MORTH EPC 30 11-Jun-19 1.4 29.50 (Devarapalli to Jangareddigudem section) Pradesh Upgradation of Sakoli-Lakhandur-Wadsa-Armori-Ashti- Alapalli--Sironcha Road NH-353C (Section Gadchiroli to MORTH Maharashtra EPC 69 08-Apr-19 2.9 Ashti ) from km 113.650 to 182.350 Rehabilitation & upgradation to two lanes with paved shoulders Andhra MORTH EPC 46 12-Jun-19 1.6 from km 57.700 to 103.200 (Madakasira to AP/Karnataka Pradesh Border/of NH -544E) Rehabilitation & upgradation of Renapur-Ashtamode-Udgir- Deglur-Bodhan-Nizamabad [Section from Astamode to Tivatyal] MORTH Maharashtra EPC 38 23-Apr-19 2.0 from km 24.030 to 62.000 Rehabilitation & upgradation of Sikri-Satana-Deval-Chandwad- Yevala-Shirapur-Beed [Section from Chandwad to Manmad] MORTH Maharashtra EPC 24 23-Apr-19 1.4 from km 104.600 to 128.650 Rehabilitation & upgradation of Sikri-Satana-Deval-Chandwad- Yevala-Shirapur-Beed [Section from Pimpalner to Satana] from MORTH Maharashtra EPC 43 23-Apr-19 2.4 km 21.427 to 64.00 Upgradation of two lane on Nhavra-Inamgaon-Jamkhed MORTH Maharashtra EPC 49 23-Apr-19 2.7 (Section -1 Nhavra to Adhalgaon from km 83.550 to 132.600)
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Length Bid submission Value Project Authority State Mode (km) date (Rs bn) Widening to two lanes with paved shoulder of Vijayapur to MORTH Karnataka EPC 40 12-Apr-19 1.2 Sankeshwar from km 0.00 to 40.00 (NH -548B) (Package -I) Upgradation to 2-lane road with paved shoulder configuration of Rampur-Chiplun-Helwak Road from km 26 230 to 40 000 & MORTH Maharashtra EPC 47 22-Apr-19 2.9 km 53 600 to 86 400 Rehabilitation & upgradation to 2 lane/2 lane with paved shoulder from existing km 195.175 to 220.00 on Dharasu-Yamunotri MORTH Uttarakhand EPC 25 19-Apr-19 3.9 Road Construction of major bridge across Sharavathi Backwaters and MORTH Karnataka EPC - 23-Apr-19 3.6 approaches between Ambargo du & Kalasavalli Construction of 2-lane road of Potin to Pangin section of NH-13 Arunachal MORTH EPC 129 15-Apr-19 12.7 from km 117.56 to 247.05 (Package -B) Pradesh Construction of 2-lane road of Potin to Pangin section of NH-13 Arunachal MORTH EPC 118 15-Apr-19 10.0 from km 0.00 to 117.56 (Package -A) Pradesh Construction of flyover, rotary and under pass at Tribune Chowk MORTH Chandigarh EPC - 16-Apr-19 1.6 on NH -05 Upgradation & construction to two lanes with paved shoulders Madhya MORTH EPC - 16-Apr-19 2.0 with flexible pavement on Jirapur -Pachore Road Pradesh Upgradation & construction to two lanes with paved shoulders Madhya MORTH EPC - 16-Apr-19 2.5 with Flexible Pavement on Kurwai -Mungaoli -Chanderi Road Pradesh Construction of 2-lane road of Potin to Pangin section of NH-13 Arunachal MORTH EPC 104 15-Apr-19 11.2 from km 247.05 to 351.38 (Package -C) Pradesh Total 1,236 347.2 Source: Projects Today, BOBCAPS Research
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Annexure C: Major highway project awards by Central & State authorities in FY19
FIG 3 – CENTRAL/STATE AUTHORITIES AWARDED MAJOR HIGHWAY PROJECTS WORTH RS 750BN IN FY19 – 72%/16% FROM MAHARASHTRA/UTTAR PRADESH Awarding authority Contractor/Developer State Mode Value (Rs bn) Amaravati Devp Corp Larsen & Toubro Andhra Pradesh EPC 13.9 Bihar State Road Devp Corp BSCPL Infrastructure Bihar EPC 2.5 Bihar State Road Devp Corp BSCPL Infrastructure Bihar EPC 2.9 Bihar State Road Devp Corp BSCPL Infrastructure Bihar EPC 3.9 KSHIP KNR Constructions Karnataka HAM 11.4 KSHIP Sadbhav Engineering Karnataka HAM 10.0 KRDCL KNR Constructions Karnataka EPC 1.4 PWD, MP Ranjit Buildcon Madhya Pradesh EPC 5.5 MORTH Reliance Infrastructure Maharashtra EPC 4.4 MORTH Ashoka Buildcon Maharashtra EPC 2.1 MORTH Ashoka Buildcon Maharashtra EPC 2.4 PWD, Maharashtra Valecha Engineering Maharashtra EPC 2.4 MORTH Ajaydeep Construction Maharashtra EPC 2.3 MORTH RNS Infrastructure Maharashtra EPC 2.1 MSRDC Reliance Infrastructure Maharashtra EPC 69.9 PWD, Maharashtra RPP Infra Projects Maharashtra EPC 2.2 MSRDC Dilip Buildcon Maharashtra EPC 17.0 MSRDC PNC Infratech Maharashtra EPC 20.0 MSRDC Reliance Infrastructure Maharashtra EPC 19.1 MSRDC Sadbhav Engineering Maharashtra EPC 16.2 MSRDC Larsen & Toubro Maharashtra EPC 5.6 MSRDC Larsen & Toubro Maharashtra EPC 21.0 MCGM Larsen & Toubro Maharashtra EPC 74.9 MSRDC Gayatri Projects Maharashtra EPC 13.1 MCGM Hindustan Construction Maharashtra EPC 21.3 MMRDA J Kumar Infraprojects Maharashtra EPC 2.8 MSRDC Navayuga Engineering Maharashtra EPC 28.1 MSRDC Navayuga Engineering Maharashtra EPC 19.1 MSRDC Afcons Infrastructure Maharashtra EPC 27.5 MSRDC BSCPL Infrastructure Maharashtra EPC 15.5 MSRDC Megha Engineering Maharashtra EPC 15.9 MSRDC Afcons Infrastructure Maharashtra EPC 28.7 MSRDC NCC Maharashtra EPC 30.1 MSRDC APCO Infratech Maharashtra EPC 12.5 MSRDC Montel Carlo Maharashtra EPC 13.8 MSRDC Megha Engineering Maharashtra EPC 19.2 PWD, Maharashtra Welspun Enterprises Maharashtra HAM 14.6 PWD, Maharashtra Oberoi Constructions Maharashtra HAM 3.7 PWD, Maharashtra SRK Constructions Projects Maharashtra HAM 2.3 PWD, Maharashtra SRK Constructions Projects Maharashtra HAM 2.2 PWD, Maharashtra SRK Constructions Projects Maharashtra HAM 2.2 PWD, Maharashtra Patil Construction & Infrastructure Maharashtra HAM 2.1 PWD, Maharashtra Prathmesh Constructions Maharashtra HAM 2.1
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Awarding authority Contractor/Developer State Mode Value (Rs bn) NHIDCL G R Infraprojects Manipur EPC 4.6 NHIDCL Bhartia Infra Projects Mizoram EPC 4.5 NHIDCL ABCI Infrastructures Mizoram EPC 4.4 NHIDCL ABCI Infrastructures Mizoram EPC 4.4 NHIDCL ABCI Infrastructures Mizoram EPC 4.0 NHIDCL ARSS Infrastructure Projects Mizoram EPC 4.3 PWD, Odisha UMSL Odisha EPC 2.2 PWD, Punjab Ceigall India Punjab EPC 2.5 PWD, Rajasthan Dineshchandra R Agarwal Infracon Rajasthan EPC 2.8 PWD, Tamil Nadu KNR Constructions Tamil Nadu EPC 2.3 MORTH Gayatri Projects Telangana EPC 4.3 UPEIDA PNC Infratech Uttar Pradesh EPC 9.5 UPEIDA PNC Infratech Uttar Pradesh EPC 15.7 UPEIDA APCO Uttar Pradesh EPC 13.8 UPEIDA GR Infra Uttar Pradesh EPC 15.0 UPEIDA GR Infra Uttar Pradesh EPC 14.4 UPEIDA Oriental Structural Engineers Uttar Pradesh EPC 16.2 UPEIDA Gayatri Projects Uttar Pradesh EPC 12.8 UPEIDA Gayatri Projects Uttar Pradesh EPC 14.8 PWD, UP Gawar Constructions Uttar Pradesh EPC 2.2 PWD, UP RCC Developers Uttar Pradesh EPC 2.5 PWD, UP Vijai Construction (India) Uttar Pradesh EPC 3.2 Total 749.8 Source: Industry documents, Projects Today, BOBCAPS Research
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Annexure D: Land acquisition process under National Highways Act
Land required by MORTH for national highway projects is acquired under the provisions contained in Section 3 of the National Highways (NH) Act 1956, as outlined below. The Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement (RFCTLARR) Act, 2013, became applicable to the NH Act, 1956 w.e.f. January 1, 2015.
FIG 4 – LAND ACQUISITION PROCESS
Source: Company, BOBCAPS Research
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Glossary of abbreviations
AD: Appointed Date LWE: Left Wing Extremism
ASBL: Ashoka Buildcon MBCPNL: Maharashtra Border Check Post Network
AUDA: Ahmedabad Urban Development Authority MCA: Model Concession Agreement
BOT: Build-Operate-Transfer MDO: Mine Developer-cum-Operator
BPC: Bid Project Cost MORTH: Ministry of Road Transport and Highways
BRT: Bus Rapid Transit MPRDC: Madhya Pradesh Road Development Corporation
CA: Concession Agreement MSRDC: Maharashtra State Road Development Corporation
CCEA: Cabinet Committee on Economic Affairs NH (O): National Highways Others
CNG: Compressed Natural Gas NHAI: National Highways Authority of India
COD: Commercial Operation Date NHDP: National Highways Development Project
CRF: Central Road Fund NHIDCL: National Highways and Infrastructure Development Corporation
DBL: Dilip Buildcon NHIIP: National Highway Interconnectivity Improvement Programme
DMRC: Delhi Metro Rail Corporation O&M: Operating and Maintenance
DPR: Detailed Project Report OMT: Operate-Maintain-Transfer
DSIIDC: Delhi State Industrial and Infrastructure Development Corporation PBF: Plough Back of Funds
EAP: Externally Aided Projects PCOD: Provisional Commercial Operation Date
EOD: Early Operation Date PNCL: PNC Infratech
EPC: Engineering, Procurement, Construction PNG: Piped Natural Gas
FC: Financial Closure PNGRB: Petroleum & Natural Gas Regulatory Board
GBS: Gross Budgetary Support PPP: Public-Private Partnership
PWD (RSHDP-II): Public Works Dept (Rajasthan State Highway Development GST: Goods and Services Tax Programme -II) HAM: Hybrid Annuity Model RoW: Right of Way
HGIEL: HG Infra Engineering RSRDC: Rajasthan State Road Development & Construction Corporation
IRCON: Ircon International SADE: Sadbhav Engineering
SARDP-NE: Special Accelerated Road Development Programme for KITCO: Kerala Industrial and Technical Consultancy Organisation North East KNRC: KNR Constructions SPV: Special Purpose Vehicle
KRDCL: Karnataka Road Development Corporation TOT: Toll-Operate-Transfer
KSHIP: Karnataka State Highways Improvement Project TPC: Total Project Cost
L1: Lowest Bidder UPEIDA: Uttar Pradesh Expressways Industrial Development Authority
LOA: Letter of Award UPSHA: UP State Highways Authority
LOI: Letter of Intent VGF: Viability Gap Funding
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Companies
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INITIATING COVERAGE
BUY TP: Rs 210 | 62% ASHOKA BUILDCON | Infrastructure | 11 April 2019
Strong execution-led growth – initiate with BUY
Ashoka Buildcon (ASBL) has a potent blend of large order book , stable margin s, Jiten Rushi high pre-tax earnings, controlled leverage and cheap valuations (5.5x/4.8x [email protected] FY20E/ FY21E EPC earnings). With a Rs 101bn order backlog as on Mar’19E (incl. L1) and a well-funded balance sheet to tap opportunities in India’s highways sector , we forecast a 32% standalone revenue CAGR over FY18-FY21. Of the five HAM contracts won in Q4FY18, two have appointed dates with the balance likely by
Q1FY20, which should propel execution. Initiate with BUY; Mar’20 TP Rs 210.
Strong executable book to drive EPC revenue: Including Rs 16.1bn in L1 projects, Ticker/ Price ASBL IN /Rs 129 ASBL has a Rs 101bn order backlog as of Mar’19E (76% in the roads segment), Market cap US$ 524.2mn which is 3x FY19E EPC revenue. With execution underway for orders worth Shares o/s 281mn 3M ADV US$ 0.5mn Rs 66bn or 65% of the backlog, we expect a robust 34% EPC revenue CAGR 52wk high/low Rs 150/Rs 93 for FY18-FY21. Led by an estimated ~Rs 1tn/pa award pipeline from NHAI over Promoter/FPI/DII 54%/4%/31%
five years, we believe ASBL can, at the very least, meet the lower end of its FY20 Source: NSE order inflow guidance of Rs 70bn-80bn – key to growth in FY21 and beyond. STOCK PERFORMANCE
Margins to remain stable and leverage low: ASBL’s standalone EBITDA margins (Rs) ASBL are forecast to remain in the historical range of 12-13%, backed by strong revenue 200 170 growth and a higher share of captive road projects (at 37%/50% in FY20E/ 140 FY21E) which carry ~100bps better margins than third-party EPC works. On 110 the debt front, ASBL has prudently infused capital at regular intervals to keep 80 Jul-17 Jul-16 leverage in check. We expect standalone leverage to remain in check, in the Jul-18 Jan-17 Jan-19 Jan-18 Apr-17 Apr-16 Apr-19 Apr-18 Oct-17 Oct-16 Oct-18
range of 0.4-05x, led by positive cash flows and limited support for BOT assets. Source: NSE
Initiate with BUY: Excluding asset value from the CMP, the stock is trading at 5.5x/4.8x FY20E/FY21E standalone earnings. We initiate with BUY and a Mar’20 SOTP-based TP of Rs 210, valuing the EPC business at Rs 138 (12x FY21E earnings) and HAM projects at Rs 73 (NPV & P/BV).
KEY FINANCIALS (STANDALONE) Y/E 31 Mar FY17A FY18A FY19E FY20E FY21E Adj. net profit (Rs mn) 1,761 2,370 3,025 3,121 3,544 Adj. EPS (Rs) 6.3 8.4 10.8 11.1 12.6 Adj. EPS growth (%) 18.7 34.6 27.6 3.1 13.6 Adj. ROAE (%) 10.7 13.0 15.0 13.9 13.9 Adj. P/E (x) 20.6 15.3 12.0 11.6 10.2 EV/EBITDA (x) 16.6 12.8 7.9 7.7 7.1
Source: Company, BOBCAPS Research
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In a nutshell
Strong execution-led growth supported by robust order backlog
FIG 1 – ORDER BACKLOG OF RS 101BN* AS OF FIG 2 – ROAD SEGMENT DOMINATES ORDER MAR’19E OFFERS STRONG GROWTH VISIBILITY BACKLOG AT 76% Railways 12%
Power T&D 12%
Roads EPC (captive) 54% Roads EPC (non-captive) 22%
Source: Company, BOBCAPS Research | *Includes L1 project s of Rs 16. 1bn Source: Company, BOBCAPS Research
Margins to remain stable and gearing low
FIG 3 – EXPECT EBITDA MARGINS TO HOLD FIRM IN FIG 4 – LOW GEARING LED BY STABLE WORKING HISTORICAL RANGE OF 12-13% CAPITAL LEVELS
Source: Company, BOBCAPS Research Source: Company, BOBCAPS Research
HAM/CGD funding to be met through internal accruals and external borrowings
FIG 5 – BORROWINGS TO SUPPORT EQUITY AND FIG 6 – EXPECT REVENUE/EBITDA CAGR OF 32%/33% CAPEX COMMITMENTS OVER FY18-FY21
Source: Company, BOBCAPS Research Source: Company, BOBCAPS Research
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Investment rationale High executable backlog cements revenue visibility
Order backlog of Rs 101bn, ASBL’s current order backlog (as of Mar’19E) remains robust at Rs 101bn, implying 3x FY19E revenue implying 3x FY19E EPC revenue. The backlog includes Rs 16.1bn of L1 projects announced in Q4FY19 and is divided into roads EPC – captive (54%) & non- captive (22%), power T&D (12%) and railways (12%). We see strong order prospects for the company led by its well-capitalised balance sheet and a large estimated ~Rs 1tn/pa bid pipeline from NHAI over the next five years (FY20- FY24; see Page 5 of our Industry section for pipeline assumptions).
Execution underway on 65% of backlog
ASBL has a portfolio of 11 operational BOT assets and 8 HAM projects. Execution has commenced for contracts worth Rs 66bn, accounting for 65% of the order backlog. Five of the HAM projects worth Rs 37.2bn were won in Q4FY18 alone, with construction work on two – the Vadodara-Kim Expressway (EPC cost Rs 11.6bn) and Khairatunda-Barwa Adda (EPC cost Rs 5.7bn) – started in Q3FY19 and Q4FY19 respectively. The delayed Rs 2.8bn Islampur Bypass project has also begun contributing to revenue from Q1FY19. For the remaining three newly won HAM contracts (EPC cost Rs 19.9bn), construction is likely to commence in Q1FY20.
Expect standalone revenue We estimate that these five hybrid annuity projects will have a revenue share of CAGR of 32% over FY18- 10%/17%/30% in FY19/FY20/FY21. We also expect execution of the Rs 16.1bn L1 FY21 projects to commence from Q3FY20, which will make the existing order backlog fully executable by end-Dec’19. Consequently, we model for a standalone revenue CAGR of 32% for the company over FY18-FY21 (see Annexure A on Page 59 for detailed revenue projections).
FIG 7 – SEGMENTAL ORDER BACKLOG* FIG 8 – CURRENT ORDER BACKLOG OF RS 101BN *
Source: Company, BOBCAPS Research I * Includes L1 project s of Rs 16.6 bn Source: Company, BOBCAPS Research I * Includes L1 project s of Rs 16. 1bn
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FIG 9 – HIGHER SHARE OF REVENUE FROM CAPTIVE EPC PROJECTS AT 34%/37%/50% IN FY19E/FY20E/FY21E Segments FY19E FY20E FY21E Standalone revenue break-up (Rs mn) Roads - EPC (non-captive) 9,349 16,830 15,111 Roads - HAM (captive) 12,217 17,466 28,089 Power T&D 12,404 8,805 3,982 Railways - 1,933 6,823 Sale of goods 1,586 1,665 1,748 BOT (Toll) 328 346 243 Total 35,884 47,044 55,996 Revenue share (%) Roads - EPC (non-captive) 26.1 35.8 27.0 Roads- HAM (captive) 34.0 37.1 50.2 Power T&D 34.6 18.7 7.1 Railways - 4.1 12.2 Sale of goods 4.4 3.5 3.1 BOT (Toll) 0.9 0.7 0.4 Total 100 100 100 Source: Company, BOBCAPS Research
Margins to remain stable in historical range of 12-13%
Captive road contracts carry We expect ASBL’s standalone EBITDA margin to remain in its historical range of ~100bps higher margins than 12-13%, supported by strong revenue growth and a higher share of captive road third-party road EPC works projects, forecast at 34%/37%/50% for FY19/FY20/FY21. Captive projects carry ~100bps higher margins than third-party EPC works. For FY19/FY20, management has guided for ~13%/12-12.5% EBITDA margins – our estimates are in line with the guidance; accordingly, over FY18-FY21, we model for a standalone EBITDA CAGR of 33%.
FIG 10 – EBITDA MARGIN TO REMAIN STABLE LED BY HIGHER SHARE OF REVENUE FROM CAPTIVE ROAD PROJECTS
Source: Company, BOBCAPS Research I *Favourable input cost such as bitumen, diesel and others led to higher margins I **Sale of land parcel in Q2FY16 led to revenue of Rs 510mn and EBITDA of Rs 440mn, resulting in higher margins I ^Revenue from claims of Rs 112mn for Chittorgarh Bypass project led to higher margins in H1FY19; improved revenue in Q3FY19 also bolstered operating leverage
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FIG 11 – EBITDA MARGIN TREND SEGMENT-WISE (%) FY16 FY17 FY18 FY19E FY20E FY21E Construction business 9.7 8.7 8.7 11.9 11.6 11.7 Sale of goods 40.6 43.0 45.6 24.0 25.0 25.0 BOT 71.7 71.6 65.3 77.8 78.1 79.2 Margin excluding BOT 12.0 11.1 11.3 12.4 12.1 12.1 Standalone margin 12.8 12.1 12.0 13.0 12.5 12.4 Source: Company, BOBCAPS Research
Sturdy balance sheet to comfortably fund projects
Leverage likely to remain in Over the years, ASBL’s standalone leverage has been better than its peer set, in the region of 0.4-0.5x the range of 0.2-0.4x (with exceptions in FY17 and FY18), led by prudent infusion of capital at regular intervals. We expect leverage to hold near these levels in future (0.4-0.5x). The company’s standalone net working capital (NWC) cycle is also forecast to remain stable at ~80 days over FY20-FY21 (85 days in FY19E) due to a higher mix of captive road projects.
Regular capital infusion helps contains leverage
Divestment of 49% stake in The company has prudently infused capital at regular intervals to keep leverage in CGD arm ensures adequate check – in 2013, it sold a 31% stake in subsidiary Ashoka Concessions (ACL) to liquidity SBI-Macquarie (SBI-M) for Rs 8bn to support equity commitments in its BOT portfolio, while in 2015, it held a Rs 5bn QIP. Most recently, in Dec’18, ASBL announced a Rs 1.5bn investment commitment in its city gas distribution (CGD) business, Unison Enviro Private Limited (UEPL), by Morgan Stanley India Infrastructure (MSII). ASBL and MSII will hold 51% and 49% respectively in UEPL with equity infusion in line with their stakes.
UEPL recently started commercial operations of its first CGD project in Ratnagiri, Maharashtra, while winning two new licenses in the recently concluded ninth CGD bidding round – the combined equity commitment for these three projects totals ~Rs 2bn. With the MSII tie-up, we believe ASBL will be able to expand its CGD business while reducing dependence on own equity, thereby mitigating business risk.
Captive projects to keep working capital cycle stable
As mentioned earlier, we forecast a higher revenue share for captive road contracts at 37%/50% in FY20/FY21. Consequently, the standalone NWC cycle is also forecast to remain stable at ~80 days over FY20-FY21. NWC days for FY19 are likely to remain a bit higher at 85 days due to delays in award of appointed dates for HAM projects and hence non-receipt of mobilisation advances. With advances failing to materialise, the company has had to spend considerable funds on preparatory works at project sites, leading to inflated
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working capital levels. We expect appointed dates for most HAM projects to come through by Q1FY20 given that NHAI’s land acquisition drive is progressing apace, in turn lowering ASBL’s working capital intensity.
FIG 12 – EXPECT NET D/E TO REMAIN IN THE FIG 13 – EXPECT STABLE WORKING CAPITAL CYCLE AT HISTORICAL RANGE OF 0.4-0.5X ~80 DAYS OVER FY20-FY21
Source: Company, BOBCAPS Research I * Net D/E remained low due to l ower Source: Company, BOBCAPS Research I * High net working capital days due equity commitments in BOT projects I **Net D/E likely to go up led by higher to rise in share of revenue from Power T&D projects equity commitments in HAM and CGD projects, but still well under control
Strong operational BOT portfolio boosts cash flow visibility
Asset mix of toll and annuity ASBL has an operational portfolio of 11 BOT (7 toll and 4 annuity) assets aggregating contracts improves future ~860km, apart from 8 HAM projects. The company houses its road projects in one of cash flow predictability three ways: (i) on the parent’s balance sheet, (ii) through an SPV directly owned by ASBL, or (iii) through an SPV owned by its subsidiary Ashoka Concessions (ASBL’s stake 61%, SBI-M 39%). Most of the larger, value-contributing assets are part of ACL, while the relatively smaller projects are owned by ASBL. Based on current and estimated toll collections, we expect ASBL’s BOT portfolio to be self-sustaining on a combined basis, needing minimal-to-nil investment from the parent.
FIG 14 – HOLDING STRUCTURE IN ROAD ASSETS
Source: Company, BOBCAPS Research
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FIG 15 – STRONG PORTFOLIO OF OPERATIONAL BOT ASSETS Length Cost of Equity NPV Stake ACL value ASBL value (Rs mn) State Authority Type TPC (km) (%) (Ma r’20 E) (%) (Mar ’20 E) (Mar ’20 E) ASBL’s projects Jaora-Nayagaon Madhya Pradesh MPRDC 80 Toll 8,350 14 - 36.3 - 4,332 Mudhol Nipani Karnataka KSHIP 108 Annuity 4,710 11 562 100.0 - 562 Nasirabad ROB Rajasthan MORTH 5 Toll 147 13 - 100.0 - Bagewadi Saundatti (WCP 1) Karnataka KRDCL 63 Annuity 3,300 11 790 100.0 - 790 Hungud Talikot (WCP 2) Karnataka KRDCL 57 Annuity 3,100 11 722 100.0 - 721 A’nagar-Aurangabad Maharashtra MSRDC 42 Toll 1,027 14 511 100.0 - 511 Total (a) 313 2,584 2,584 ACL projects (ASBL’s stake at 61%) Durg Chhattisgarh NHAI 77 Toll 6,340 14 1,140 51.0 582 355 Bhandara Maharashtra NHAI 80 Toll 5,322 14 400 51.0 204 124 Jaora-Nayagaon Madhya Pradesh MPRDC 80 Toll 8,350 14 11,946 37.7 4,504 2,747 Sambalpur Baragarh Madhya Pradesh NHAI 88 Toll 11,420 14 2,346 100.0 2,346 1,431 Chennai ORR Tamil Nadu Govt. of TN 31 Annuity 14,900 11 5,026 50.0 2,513 1,533 Dhankuni Kharagpur West Bengal NHAI 112 Toll 22,000 14 9,574 100.0 9,574 5,840 Belgaum Dharwad Karnataka NHAI 79 Toll 6,940 14 2,228 100.0 2,228 1,359 Total (b) 547 32,660 21,950 13,389 Total (a+b) 860 35,244 15,973 Source: Company, BOBCAPS Research | Note: TPC – Total Project Cost
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FIG 16 – GROSS TOLL COLLECTION FOR ACL PROJECTS EXPECTED TO GROW AT 9.6% CAGR OVER FY18-FY21 (Rs mn) Q4FY17 FY17 Q1FY18 Q2FY18 Q3FY18 Q4FY18 FY18 Q1FY19 Q2FY19 Q3FY19 Q4FY19E FY19E FY20E FY21E Belgaum Dharwad 192 744 214 208 231 224 878 230 218 233 241 922 1,022 1,130 Dhankuni Kharagpur 735 2,682 786 757 783 849 3,176 893 888 867 881 3,528 3,911 4,325 Bhandara Project 153 602 156 150 168 174 648 167 160 168 173 669 738 813 Durg 193 746 190 185 202 207 785 195 193 199 213 800 882 973 Jaora-Nayagaon 467 1,751 474 503 530 523 2,029 516 516 497 511 2,041 2,304 2,601 Sambalpur Baragarh 141 509 145 141 166 180 633 180 173 181 190 723 802 886 Total ACL projects 1,880 7,034 1,966 1,945 2,080 2,158 8,148 2,181 2,148 2,146 2,209 8,684 9,659 10,728 Ahmednagar-Aurangabad 63 268 64 64 81 69 278 94 71 78 86 328 346 243 Waiganaga Bridge 78 294 75 71 77 80 303 75 71 74 80 300 - - Katni Bypass 51 195 55 44 53 57 209 58 48 55 60 221 233 283 Total Non-ACL projects 191 757 195 179 211 205 790 227 191 206 225 848 579 526 Gross Toll collection 2,500 9,713 2,381 2,302 2,534 2,454 9,670 2,530 2,513 2,358 2,441 9,841 10,238 11,254 YoY growth (%) Belgaum Dharwad 7.3 6.8 15.3 17.0 23.0 16.6 18.0 7.2 4.7 1.0 7.5 5.1 10.9 10.6 Dhankuni Kharagpur 9.8 11.1 19.3 16.3 22.8 15.6 18.4 13.6 17.2 10.7 3.7 11.1 10.9 10.6 Bhandara Project (5.7) 1.6 0.8 2.9 13.2 13.9 7.7 6.8 7.0 0.3 (0.5) 3.2 10.2 10.2 Durg (2.1) 1.6 0.5 3.3 9.8 7.2 5.2 2.5 4.0 (1.5) 3.0 2.0 10.2 10.2 Jaora-Nayagaon 14.9 6.9 16.3 18.2 17.2 12.1 15.9 9.1 2.7 (6.1) (2.4) 0.6 12.9 12.9 Sambalpur Baragarh 12.6 18.3 23.8 15.1 28.7 28.2 24.2 23.8 22.3 9.2 5.1 14.3 10.9 10.6 Total ACL projects (5.8) (5.5) 14.7 14.3 19.6 14.8 15.8 10.9 10.5 3.2 2.3 6.6 11.2 11.1 Ahmednagar-Aurangabad 18.8 29.9 2.5 (12.6) 17.3 10.2 4.0 45.5 10.1 (3.7) 24.1 17.7 5.5 NM Waiganaga Bridge (2.9) 1.8 (0.6) 2.9 7.5 2.4 3.0 (0.9) 1.1 (4.8) 0.6 (1.0) NM NM Katni Bypass (4.3) (0.4) 1.6 3.6 12.1 11.2 7.1 4.8 11.0 2.8 5.3 5.7 5.5 21.3 Total Non-ACL projects (69.1) (69.3) 3.9 (3.1) 12.2 7.3 4.4 16.0 6.8 (2.5) 9.8 7.4 NM NM Gross Toll Collection (5.8) (3.9) (2.0) (5.3) 8.1 0.6 (0.4) 6.3 9.2 (7.0) (0.5) 1.8 4.0 9.9 Source: Company, BOBCAPS Research
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FIG 17 – EXPECTED GROSS TOLL COLLECTION CAGR ON LIKE-TO-LIKE BASIS AT 9.5% OVER FY18-FY21
Source: Company, BOBCAPS Research
Lower cash burn led by refinancing and premium deferment
ASBL refinances its operational assets to bring down borrowing costs and also defers premium payment liability on projects that incur losses due to lower traffic volumes. With these measures the company ensures that projects remain viable and that it is able to service debt with minimal support from the parent.
FIG 18 – REFINANCED RATES LEAD TO SAVINGS ON INTEREST COST Earlier average Current average Projects (%) Change (bps) interest rate interest rate Jaora-Nayagaon 9.65 8.50 115 Belgaum 11.10 9.00 210 Bhandara 10.23 9.88 35 Durg 9.61 9.27 34 Source: Company, BOBCAPS Research
FIG 19 – REDUCTION IN CASH BURN LED BY DEFERMENT OF PREMIUM; SAVINGS OF RS 13.1BN OVER FY15-FY25E
(Rs bn) Belgaum Dhankumi
20 18.4
15 10.9 10 7.5 5.1 5 2.9 2.2
0 Premium payment as originally Deferment of premium granted Revised premium payable under contracted new scheme Source: Company, BOBCAPS Research
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Strong portfolio of eight HAM projects
ASBL has eight HAM projects, of which four are under construction and the remaining are in various stages of development (awaiting financial closure or appointed dates). The HAM portfolio is 100% owned by subsidiary ACL and carries a pending equity commitment of ~Rs 4.8bn to be invested over the next 2.5-3 years. We estimate revenue share of 34%/37%/50% from these HAM contracts in FY19/FY20/FY21.
FIG 20 – HAM PROJECTS WON BY ASBL IN FY17 (UNDER CONSTRUCTION) HAM projects Length Internal Financially State TPC Grant Debt Equity EPC cost (Rs mn) (km) accruals closed cost (%) Kharar-Ludhiana Punjab 76 14,500 6,400 6,100 1,800 500 12,355 10.1
Ranastalam - Andhra 47 10,648 4,748 4,150 1,200 500 8,924 9.1 Anandpuram (Pkg II) Pradesh Source: Company, BOBCAPS Research | Note: TPC – Total Project Cost
FIG 21 – HAM PROJECT WON IN MAR’19 HAM Projects Equity (incl. Land acquisition State BPC TPC EPC Grant Debt Equity FC/AD (Rs mn) estimated PMI) status Bettadahalli- LOA: 11-Mar-19; Karnataka 13,820 11,000 10,000 5,528 3,932 1,117 1,540 Pending Shivamogga FC/AD - Pending Source: Company, BOBCAPS Research | Note: AD – Appointed Date; BPC – Bid Project Cost; FC – Financial Closure; TPC – Total Project Cost
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FIG 22 – FIVE HAM PROJECTS AWARDED IN Q4FY18 BY NHAI – SO FAR RS 1.9BN OF EQUITY INVESTED; BALANCE COMMITMENT AT RS 2.9BN (EX-PMI) HAM Projects Equity (including State BPC TPC EPC Grant Debt Equity FC/AD* Land acquisition status (Rs mn) estimated PMI)
Mallasandra Karadi Rs 2.75bn debt tied-up; financing documents submitted to Karnataka 9,170 7,406 5,933 3,668 2,750 752 988 60-65% land in 3H stage Road NHAI; lender – Aditya Birla Finance; AD likely by May’19
Rs 3.85bn debt tied-up; financing documents submitted to Karadi Banwara Road Karnataka 12,185 10,064 8,076 4,874 3,850 1,021 1,340 60-65% land in 3H stage NHAI; lender – HDFC Bank; AD likely by May’19
Belgaum Khanapur Rs 2.95bn debt tied-up; financing documents submitted to Karnataka 8,562 7,457 5,891 3,425 2,950 757 1,082 Over 80% land in 3H stage Road NHAI; lender – ICICI Bank; AD likely by Apr’19
Khairatunda Barwa Jharkhand 8,601 7,117 5,737 3,440 2,700 722 976 AD: 8-Jan-19; under construction Over 80% ROW available Adda Road
Vadodara-Kim Expressway Gujarat 16,870 14,831 11,571 6,748 6,000 1,505 2,083 AD: 10-Dec-18; under construction Over 90% ROW available (Ankleshwar Manubar)
Total 55,388 46,875 37,208 22,155 18,250 4,758 6,469
Source: Company, BOBCAPS Research I *Projects financially closed at interest cost of 9.5-9.6% | Note: AD – Appointed Date; BPC – Bid Project Cost; FC – Financial Closure; ROW – Right of Way; TPC – Total Project Cost
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SBI-Macquarie contemplating exit from BOT
ASBL/SBI-M hold 61%/39% ASBL set up ACL in Nov’11 as a 100% subsidiary to house its BOT portfolio and stake in ACL initially transferred six BOT projects to this arm. All the HAM projects awarded to the company have also been housed under ACL. In 2012-13, SBI-M infused Rs 8bn through compulsory convertible debentures (CCD) into the subsidiary through 31% stake dilution. As per the agreement, SBI-M’s stake could increase to 39% over a period of time subject to performance of a single BOT (toll) asset at Sambalpur with a committed IRR of 12%.
The asset underperformed and couldn’t meet the committed IRR requirement, which triggered an increase in SBI-M’s stake in ACL to 39% based on a fair value assessment done by an independent valuer (investment of Rs 8bn valued at Rs 13.5bn as on Mar’18; according to management, the revised value stands at ~Rs 14.5bn as on Mar’19). As a result, the company has provided for a liability of Rs 1.7bn in FY18 at the standalone level.
Likely monetisation of stake ACL’s committed IRR of 12% to SBI-M in Sambalpur is due to end this calendar in ACL’s BOT assets an ideal year (Jul’19). SBI-M was to exit its investment in ACL by the end of Mar’19; even exit for both ASBL & SBI-M though it has received an extension of two years, it is still evaluating various exit options. While a number of options are available such as an IPO/InvIT, stake sale to a financial investor or asset swaps, management believes a stake sale or swap of assets looks the most feasible at this point in time.
We believe monetisation of stake in the BOT portfolio is ideal, since the proceeds can be utilised to fund the balance equity commitment on HAM projects (ASBL’s investment in ACL stands at ~Rs 16bn as on Mar’19), which would bring down the debt burden on the standalone entity.
Diversification of business risk via CGD foray
In Q2FY17, ASBL bagged its first CGD project in Ratnagiri, Maharashtra. ASBL, through its than 100% subsidiary UEPL, emerged as sole bidder, winning the 25- year licence and thereafter launching commercial operations in Q3FY19. In Aug’18, the company secured letters of intent for two more CGD projects at Latur & Osmanabad in Maharashtra and Chitradurga & Davangere in Karnataka. We believe the recent equity tie-up with MSII would enable the company to comfortably fund business expansion and create value for investors.
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Ratnagiri CGD project rolled out
Ratnagiri project started in In FY17, ASBL won the bid to build and operate a CGD network in Ratnagiri for a Q3FY19; two more CGD bids 25-year licence period. UEPL is to be the sole authorised distributor for won in Aug’18 compressed natural gas (CNG) and piped natural gas (PNG) in the district. CNG will be supplied to vehicles and PNG to domestic as well as industrial users.
The basic pipeline network is being developed at an overall investment of ~Rs 1.5bn (total project cost ~Rs 5bn) for the first five years, of which 30-35% is likely to be via equity. The project started commercial operations in Q3FY19 and ASBL expects an equity IRR of ~20%. So far, UEPL has set up three fueling stations for CNG and plans to add to this tally over the next few years. It has also set up pumping stations to supply PNG to both commercial and domestic consumers.
New wins in Maharashtra and Karnataka
In Aug’18, UEPL bagged letters of intent (LOI) from Petroleum & Natural Gas Regulatory Board (PNGRB) for laying, building, operating or expanding city or local natural gas distribution networks in the geographical areas (GA) of Latur & Osmanabad, Maharashtra and Chitradurga & Davangere, Karnataka. The authorisation is for a period of 25 years. Apart from this, UEPL is also planning to bid for CGD tenders worth Rs 4bn-6bn in the next annual round of bidding.
Divestment of 49% stake in CGD arm to fund growth
ASBL & MSII have already ASBL in Dec’18 announced a Rs 1.5bn investment commitment into its CGD put Rs 350mn each in UEPL business by MSII. ASBL and MSII will hold 51:49 stake in UEPL with equity infusion in line with their respective stakes. This partnership with a reputed financial investor would not only reduce the burden of equity funding on ASBL, but also enable it to grow the CGD business and unlock value for investors.
FIG 23 – CGD PROJECTS WITH TOTAL EQUITY COMMITMENT OF ~RS 2BN Licence Investment Region (Rs bn) State Debt Equity Status period for 5 years Ratnagiri Maharashtra 25 years 1.5 1.0 0.5 Commercial operations commenced in Q3FY19 Latur & Osmanabad Maharashtra 25 years 2.0 1.8 0.8 Awarded in Aug’18 and licence agreement signed Chitradurga & Davangere Karnataka 25 years 2.0 1.8 0.8 Awarded in Aug’18 and licence agreement signed Total 6.5 4.6 2.0 Source: Company, BOBCAPS Research
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Financial review Pre-tax earnings CAGR of 20% over FY18-FY21E
With a strong revenue and EBITDA CAGR of 32%/33% estimated over FY18- FY21, we expect an 20%/14% pre-tax earnings/EPS CAGR on a standalone basis. Post-tax growth looks lower as the FY18 base was inflated by a lower effective tax rate of 18% due to section 80IA benefits on road EPC works that commenced by Mar’17. We expect the effective tax rate to rise to 27%/29%/30% respectively in FY19/FY20/FY21 as the proportion of revenue from eligible projects diminishes.
FIG 24 – EXPECT FY18-FY21 PBT CAGR OF 20% FIG 25 – EXPECT FY18-FY21 EPS CAGR OF 14%
Source: Company, BOBCAPS Research Source: Company, BOBCAPS Research
ROE and ROCE steady
ROE and ROCE are likely to remain largely stable over FY19-FY21, averaging 14.3% and 18.1% respectively, mainly due to steady operating margins led by a change in revenue mix in favour of captive road contracts.
FIG 26 – EXPECT AVERAGE ROE/ROCE OF 14.3%/18.1% OVER FY19-FY21
Source: Company, BOBCAPS Research
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Valuation methodology
Initiate coverage with BUY ASBL offers an attractive combination of strong earnings growth, low leverage and and SOTP-based Mar’20 TP compelling valuations. We believe an uptick in traffic movement along its toll-road of Rs 210 stretches will improve predictability of cash flows from operational assets. Further, with a well-capitalised balance sheet and core focus on the roads segment, the company is positioned to exploit upcoming growth opportunities offered by India’s roads sector, especially from the ~Rs 1tn/pa bid pipeline estimated to flow from NHAI over the next five years.
We expect ASBL to clock a 32% standalone revenue CAGR over FY18-FY21 led by its Rs 101bn order backlog as on Mar’19E. Of the five HAM contracts won in Q4FY18, two have been awarded appointed dates with the remaining dates likely to come through by Q1FY20 – this should propel execution from H2FY20.
We ascribe a 12x one-year ASBL is trading at 5.5x/4.8x FY20E/FY21E EPC earnings, adjusted for the value forward P/E multiple to the of its assets (Rs 73/sh) – this looks attractive considering a 14% pre-tax earnings standalone business CAGR expected over FY18-FY21. We initiate coverage with BUY and a Mar’20 sum-of-the-parts (SOTP) target price of Rs 210.
For our SOTP model, we value (i) the standalone business at Rs 138/sh based on 12x FY21E earnings, and (ii) operational, HAM and CGD assets (61% stake in ACL assets and pro-rata stake in own assets) at Rs 73/sh using DCF and P/BV, assuming cost of equity of 11-15% for operational assets and 1x equity invested up to Mar’20E in HAM and CGD projects. Operating assets comprise ~80% of the value assigned to the BOT portfolio, lending greater support to valuations.
FIG 27 – SOTP-BASED TARGET PRICE OF RS 210 Mar’20E Mar’20E Business Basis of valuation value (Rs mn) (Rs/share) (a) Value of ABL assets NPV of FCFE at 11-14% COE and 1x P/BV for CGD projects 7,616 27 (b) Value of ABL in ACL assets NPV of FCFE at 11-15% COE and 1x P/BV for HAM projects (pro-rata stake of 61%) 12,911 46 (I) Total value of assets (a+b) 20,527 73 (II) Value of standalone business P/E: 12x FY21E earnings 38,762 138 Total (I + II) 59,289 210 O/s shares (mn) 281 Source: Company, BOBCAPS Research I Note: Target price rounded off
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FIG 28 – FORWARD P/E BAND (5 YEAR MEAN AT 10X)
Source: Bloomberg
FIG 29 – RELATIVE STOCK PERFORMANCE
ASBL NSE Nifty 200
170
140
110
80 Jul-17 Jul-16 Jul-18 Jan-17 Jan-19 Jan-18 Apr-17 Apr-16 Apr-19 Apr-18 Oct-17 Oct-16 Oct-18 Source: NSE
Key risks
. Slowdown in road sector capex: Capex in the roads sector has witnessed some revival over the last two years. Any slowdown in project awarding would impact the company’s growth and our estimates.
. Delayed execution of projects in hand: Delays in execution of projects in hand due to hurdles in land acquisition or delay in appointed dates or other regulatory bottlenecks could adversely affect ASBL’s revenue. In addition, its IRR for under-construction projects can be dampened by execution delays.
. Slowdown in traffic: Slowdown in economic activity in areas where ASBL’s toll BOT projects are based may lead to below-expected revenue collection, resulting in negative free cash flows. This may cause the company to infuse further equity from its standalone balance sheet to support its BOT SPVs.
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Annexure A: Revenue projections
FIG 1 – 65% OF CURRENT ORDER BACKLOG EXECUTABLE; STANDALONE REVENUE EXPECTED TO CLOCK 32% CAGR OVER FY18-FY21 Revenue Original Revenue for Order backlog Segments (Rs mn) Q4FY19 FY19E FY20E FY21E Comments contract value 9MFY19 as on Dec'18 (i) Road Annuity/HAM (old projects) 6,146 14,027 2,336 8,482 9,094 3,593 AD: 15-Mar-17; ~50% of work completed up to 9MFY19; Execution progressing well and pending work likely to be completed by Jun'20. Work Khrar - Ludhiana, Punjab 12,355 2,509 6,432 1,000 3,509 4,374 865 likely to be descoped by ~3% due to non-handover of portions of land by NHAI - we thus lower original contract value by ~3% AD: 16-Nov-17; ~30% of work completed up to 9MFY19; Execution Ranastalam - Anandpuram (Pkg II), progressing well and pending work likely to be completed by Dec'20. Work 8,740 1,632 6,396 700 2,332 4,157 2,727 Andhra Pradesh likely to be descoped by ~5% due to non-handover of portions of land by NHAI - we accordingly lower original contract value by ~5% Bagewadi to Saundatti 2,779 688 58 58 746 - - Pending works expected to get completed in Q4FY19 Hungud to Talikot 2,489 808 280 280 1,088 - - Pending works expected to get completed in Q4FY19 Dhankuni 2,825 157 583 20 177 563 - Pending works expected to get completed in Q4FY19 Others 353 278 278 631 - - Pending works expected to get completed in H1FY20 (ii) Road HAM (new projects) 2,302 34,907 1,433 3,735 7,772 16,744 Vadodara Kim, Gujarat (Ankleshwar to Manubar, AD: 10-Dec-18; >90% ROW available; construction period of 2.5-year 11,571 1,411 10,160 1,157 2,569 3,471 5,207 Pkg IV) from AD CA: 24-Apr-18; Sanction letter submitted to NHAI FC on 17-Sep-18; 60-65% land available under 3H stage; Stage 1 forest clearance from the state is available and likely stage 2 clearance from the central is expected in Tumkur - Shivamoga I (Mallasandra-Karadi), 5,933 241 5,692 - 241 593 2,670 30 days; Challenges in acquiring the balance land was also due to change Karnataka of government in Karnataka (disbursal of payment for land acquisition occurs through state government authorities); AD likely by May'19; 2-year construction period and 15 -year concession period CA: 24-Apr-18; Sanction letter from bank submitted to NHAI for financial closure on 17-Sep-18; 60-65% land available under 3H stage; Tumkur - Shivamoga II (Karadi-Banwara), Stage 1 forest clearance from the state is available and likely stage 2 8,076 355 7,721 - 355 808 3,634 Karnataka clearance from the central is expected in 30 days; Challenges in acquiring the balance land was also due to change of government in Karnataka (disbursal of payment for land acq uisition occurs through state government
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Revenue Original Revenue for Order backlog Segments (Rs mn) Q4FY19 FY19E FY20E FY21E Comments contract value 9MFY19 as on Dec'18 authorities); AD likely by May'19; 2-year construction period and 15-year concession period CA: 24-Apr-18; Sanction letter from bank submitted to NHAI for financial closure; >80% land available in 3H stage; Delay in AD due to Belgaum - Khanapur, Karnataka 5,891 84 5,807 - 84 1,178 2,651 ongoing project cost negotiation with the authority; AD likely by Apr'19; 2.5 -year construction period and 15 -year concess ion period AD: 8-Jan-19; over 80% ROW available; AD likely by Apr'19; 2-year Khairatunda - Barwa Adda, Jharkhand 5,737 210 5,527 276 486 1,721 2,582 construction period and 15 -year concession period (iii) Road EPC projects 6,186 25,420 3,164 9,349 16,330 6,389 Delayed due to land acquisition hurdles but execution has commenced Jharkhand - Chaas (NH-32, Rajgunj) 5,003 927 3,632 350 1,277 1,816 1,466 from Q2FY18 and is showing good progress Delayed for over a year due to land acquisition hurdles but execution has Islampur Bypass, West Bengal 2,752 585 1,996 350 935 1,646 - commenced from Q4FY18 and is showing good progress Execution delayed due to land acquisition issue hurdles, but ramped up Mumbai-JNPT Port 4,129 875 1,022 350 1,225 672 - from Q1FY18 and is progressing well Execution began in Q1FY17 and was showing good progress ; have picked Jharkhand - Govindpur 1,901 445 554 110 555 444 - up pace and scheduled for completion in H1FY20 Execution began in Q1FY17 and was showing good progress; have picked Jharkhand - Dumka 2,113 703 176 75 778 101 - up pace and scheduled for completion in H1FY20 Project is progressing slowly due to challenges such as land acquisition, Bomjur - Arunachal Pradesh 763 184 579 120 304 459 - difficult terrain and also seasonality (heavy monsoon, landslides) Pasighat - Arunachal Pradesh 917 724 141 141 865 - - Pending work expected to get completed in Q4FY19 MoRTH - Badami 1,043 503 23 23 526 - - Pending work expected to get completed in Q4FY19 MoRTH - Madhugiri 2,190 120 - - 120 - - Completed in H1FY19 City Gas Distribution 1,126 - 1,126 - - 282 676 Pending work expected to get completed in Q1FY22 Jalgaon Bhadgaon 2,373 433 1,940 175 608 1,047 1,047 LOA: 2-April-2018 Bhadgaon Chalisgaon 2,102 545 1,557 200 745 877 877 LOA: 2-April-2018 So far, the company has booked revenue of ~Rs 2bn; Work executable TOT EPC 10,015 - 10,109 500 500 8,012 1,503 over a period of 18 months; Pending work scheduled for completion by H1FY21 Others 140 2,565 770 910 975 821 Pending work expected to get completed in FY21 (v) Power T&D 9,055 13,568 3,349 12,404 8,551 1,669 Maharashtra 4,971 1,408 470 470 1,878 - - Pending work schedule for completion in Q4FY19
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Revenue Original Revenue for Order backlog Segments (Rs mn) Q4FY19 FY19E FY20E FY21E Comments contract value 9MFY19 as on Dec'18 Bihar 18,480 3,132 6,499 925 4,057 4,075 1,499 Pending work schedule for completion in FY21 Tamil Nadu 3,476 10 346 50 60 296 - Pending work schedule for completion in FY20 Uttar Pradesh 9,967 2,335 4,720 1,100 3,435 3,450 170 Pending work schedule for completion in FY21 Telangana 690 161 530 100 261 430 - Pending work schedule for completion in FY20 Madhya Pradesh 415 55 361 60 115 301 - Pending work schedule for completion in FY20 Jharkhand 2,827 1,955 644 644 2,598 - - Pending work schedule for completion in Q4FY19 (vi) Railways - 7,451 - - 1,490 3,725 (I) Rail Vikas Nigam Limited, Pkg 1 & 2 of 7,451 - 7,451 - - 1,490 3,725 AD awarded in Q4FY19; Construction period of 36 months Dhanbad Division of East Central Railway (a) Revenue from current order backlog 23,689 95,373 10,281 33,970 43,236 32,119 Total revenue for the existing order backlog (i+ii+iii+iv+v+vi) Order inflows in Q4FY19 (II) Jharkhand Bijli Vitran Nigam Limited 1,692 - - - - 254 1,438 LOA: 18-Mar-18; L1: 13-Dec-2018; 18 months completion LOA: 11-Mar-19; Signing of concession agreement expected in a months’ (iii) Tumkur Shivamoga time; Stage 1 forest clearance from the state is available and stage 2 10,000 - - - - 600 4,500 (Bettadahalli Shivamogga, Pkg IV; HAM) clearance from the MOEF is expected in a months’ time; AD likely by Oct'19 (iv) Rail Vikas Nigam Limited, Pkg 2 of Amabala 4,432 - - - - 443 1,773 L1: 5-Mar-19; Construction period of 36 months Division of Northern Railway, Punjab Order inflows in FY20E and FY21E FY20E H1FY20E 10,000 - - - 500 4,000 -Roads 10,000 - - - 500 4,000 EPC 10,000 - - - 500 4,000 5%/40% execution expected in FY20E/FY21E H2FY20E 62,000 - - - - 9,300 -Roads 49,000 - - - - 7,350 EPC 29,400 - - - - 4,410 15% execution expected in FY21E HAM 19,600 - - - - 2,940 15% execution expected in FY21E -Power T&D 5,000 - - - - 750 15% execution expected in FY21E -Railways 8,000 - - - - 1,200 15% execution expected in FY21E
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Revenue Original Revenue for Order backlog Segments (Rs mn) Q4FY19 FY19E FY20E FY21E Comments contract value 9MFY19 as on Dec'18 (IV) Total estimated revenue from order inflows 72,000 - - - 500 13,300 in FY20 FY21E H1FY21E 30,000 - - - - 875 -Roads 25,000 - - - - 625 EPC 12,500 - - - - 313 2.5% execution expected in FY21E HAM 12,500 - - - - 313 2.5% execution expected in FY21E -Power T&D 5,000 - - - - 125 2.5% execution expected in FY21E -Railways 5,000 - - - - 125 2.5% execution expected in FY21E H2FY21E 45,000 - - - - - Nil execution expected in FY21E (V) Total estimated revenue from order inflows 75,000 - - - - 875 in FY21 (b) Revenue from new order inflows - - - 1,797 21,886 (I+II+III+IV+V) (A) Total revenue from construction business 23,689 95,373 10,281 33,970 45,034 54,005 Expect EPC revenue CAGR of 34% over FY18-21E (a+b) % growth YoY 46.4 60.5 55.6 50.1 32.6 19.9 (B) Revenue from sale of goods (RMC business) 1,202 384 1,586 1,665 1,748 (C) Revenue from BOT projects (Toll revenue) 242 86 328 346 243 Total standalone revenue (A+B+C) 25,133 10,751 35,884 47,044 55,996 Expect standalone revenue CAGR of 32% over FY18-21E % growth YoY 43.9 53.1 46.6 31.1 19.0 Source: Company, BOBCAPS Research | Note: AD – Appointed Date; CA – Concession Agreement; L1 -Lowest Bidder; LOA – Letter of Authorisation; ROW – Right of Way
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FINANCIALS (STANDALONE)
Income Statement Y/E 31 Mar (Rs mn) FY17A FY18A FY19E FY20E FY21E Total revenue 20,133 24,483 35,884 47,044 55,996 EBITDA 2,427 2,934 4,665 5,901 6,963 EBIT 1,445 1,917 3,146 3,543 4,151 Net interest income/(expenses) (474) (485) (796) (1,388) (1,633) Other income/(expenses) 719 978 974 876 884 Exceptional items 0 0 0 0 0 EBT 2,164 2,895 4,120 4,419 5,035 Income taxes (403) (524) (1,094) (1,298) (1,491) Extraordinary items 0 0 (398) 0 0 Min. int./Inc. from associates 0 0 0 0 0 Reported net profit 1,761 2,370 2,628 3,121 3,544 Adjustments 0 0 0 0 0 Adjusted net profit 1,761 2,370 3,025 3,121 3,544
Balance Sheet Y/E 31 Mar (Rs mn) FY17A FY18A FY19E FY20E FY21E Accounts payables 5,854 6,097 8,767 10,875 12,984 Other current liabilities 5,319 6,727 5,845 8,316 9,623 Provisions 628 604 755 843 905 Debt funds 2,005 1,599 9,199 13,349 13,474 Other liabilities 3,467 4,980 8,272 9,816 11,505 Equity capital 936 936 936 936 936 Reserves & surplus 16,292 18,327 20,127 22,887 26,071 Shareholders’ fund 17,228 19,263 21,063 23,823 27,007 Total liabilities and equities 34,501 39,269 53,900 67,022 75,498 Cash and cash eq. 638 1,235 331 425 443 Accounts receivables 5,875 10,117 12,664 15,993 19,094 Inventories 9,306 5,031 9,741 12,826 15,313 Other current assets 649 2,169 4,286 5,757 6,874 Investments 13,065 13,182 17,824 21,832 23,339 Net fixed assets 1,688 2,174 3,218 3,847 3,669 CWIP 158 150 182 182 182 Intangible assets 0 0 0 0 0 Deferred tax assets, net 304 349 388 388 388 Other assets 2,817 4,862 5,267 5,772 6,197 Total assets 34,501 39,269 53,900 67,022 75,498 Source: Company, BOBCAPS Research
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Cash Flows Y/E 31 Mar (Rs mn) FY17A FY18A FY19E FY20E FY21E Net income + Depreciation 2,268 2,903 3,351 4,091 4,722 Interest expenses 474 485 796 1,388 1,633 Non-cash adjustments 0 0 0 0 0 Changes in working capital 2,225 (393) (4,547) (2,178) (1,962) Other operating cash flows 0 0 0 0 0 Cash flow from operations 4,967 2,995 (400) 3,301 4,394 Capital expenditures (799) (987) (1,800) (1,600) (1,000) Change in investments (765) (117) (4,642) (4,008) (1,507) Other investing cash flows 0 0 0 0 0 Cash flow from investing (1,564) (1,104) (6,442) (5,608) (2,507) Equities issued/Others 0 0 (468) 0 0 Debt raised/repaid (2,333) (406) 7,600 4,150 125 Interest expenses (474) (485) (796) (1,388) (1,633) Dividends paid (360) (360) (360) (360) (360) Other financing cash flows 127 (43) (39) 0 0 Cash flow from financing (3,040) (1,294) 5,938 2,402 (1,869) Changes in cash and cash eq. 364 596 (904) 95 18 Closing cash and cash eq. 638 1,235 331 425 443
Per Share Y/E 31 Mar (Rs) FY17A FY18A FY19E FY20E FY21E Reported EPS 6.3 8.4 9.4 11.1 12.6 Adjusted EPS 6.3 8.4 10.8 11.1 12.6 Dividend per share 1.1 1.1 1.1 1.1 1.1 Book value per share 61.4 68.6 75.0 84.9 96.2
Valuations Ratios Y/E 31 Mar (x) FY17A FY18A FY19E FY20E FY21E EV/Sales 2.0 1.5 1.0 1.0 0.9 EV/EBITDA 16.6 12.8 7.9 7.7 7.1 Adjusted P/E 20.6 15.3 12.0 11.6 10.2 P/BV 1.9 1.8 1.2 1.0 0.9
DuPont Analysis Y/E 31 Mar (%) FY17A FY18A FY19E FY20E FY21E Tax burden (Net profit/PBT) 81.4 81.9 73.4 70.6 70.4 Interest burden (PBT/EBIT) 149.8 151.0 131.0 124.7 121.3 EBIT margin (EBIT/Revenue) 7.2 7.8 8.8 7.5 7.4 Asset turnover (Revenue/Avg TA) 61.7 66.4 77.0 77.8 78.6 Leverage (Avg TA/Avg Equity) 2.0 2.0 2.3 2.7 2.8 Adjusted ROAE 10.7 13.0 15.0 13.9 13.9 Source: Company, BOBCAPS Research | Note: TA = Total Assets
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Ratio Analysis Y/E 31 Mar FY17A FY18A FY19E FY20E FY21E YoY growth (%) Revenue 3.6 21.6 46.6 31.1 19.0 EBITDA (2.1) 20.9 59.0 26.5 18.0 Adjusted EPS 18.7 34.6 27.6 3.1 13.6 Profitability & Return ratios (%) EBITDA margin 12.1 12.0 13.0 12.5 12.4 EBIT margin 7.2 7.8 8.8 7.5 7.4 Adjusted profit margin 8.7 9.7 8.4 6.6 6.3 Adjusted ROAE 10.7 13.0 15.0 13.9 13.9 ROCE 13.7 17.1 19.5 17.4 17.3 Working capital days (days) Receivables 108 153 130 125 125 Inventory 171 76 100 100 100 Payables 108 92 90 85 85 Ratios (x) Gross asset turnover 5.7 5.6 6.3 6.4 6.4 Current ratio 1.2 1.2 1.4 1.4 1.4 Net interest coverage ratio 3.0 3.9 4.0 2.6 2.5 Adjusted debt/equity 0.1 0.0 0.4 0.5 0.5 Source: Company, BOBCAPS Research
EQUITY RESEARCH 65 11 April 2019
INITIATING COVERAGE
BUY TP: Rs 750 | 21% DILIP BUILDCON | Infrastructure | 11 April 2019
Execution par excellence – initiate with BUY
Dilip Buildcon (DBL) has a hefty order backlog (Rs 209bn as on Mar19E, 2.3x Jiten Rushi FY19E revenue), superior execution skills, and stronger margins and return ratios [email protected] than peers. A 100% backward integration model (own equipment, large employee force) has driven Rs 4.3bn in early completion bonuses over FY12-9MFY19, with
90% of projects – mainly roads – finished ahead of schedule. We expect DBL to be a key beneficiary of the expected pickup in NHAI road tenders, driving a 16%/18% revenue/PBT CAGR for FY18-FY21; initiate with BUY for a Mar’20 TP of Rs 750.
Likely uptick in order awards to catalyse growth: DBL saw a robust 42%/43% Ticker/ Price DBL IN /Rs 621 order inflow/revenue CAGR over FY15-FY18. While inflows were subdued at Market cap US$ 1.2bn ~Rs 61bn in FY19, we expect an uptick from FY20 (Rs 132bn/Rs 152bn in Shares o/s 137mn 3M ADV US$ 5.1mn FY20E/FY21E) considering the estimated ~Rs 1tn/pa project pipeline from 52wk high/low Rs 750/Rs 312 NHAI for the next five years and DBL’s strong credentials in government road Promoter/FPI/DII 76%/9%/6%
contracts. Taken in conjunction with a Rs 209bn order backlog as on Mar’19E, we Source: NSE forecast a 16% revenue CAGR over FY18-FY21, assuming award of appointed dates by NHAI in DBL’s remaining six/two HAM projects by May’19/Sep’19. STOCK PERFORMANCE (Rs) DBL Integrated EPC model a key margin lever: DBL has a large own equipment fleet 1,230 1,020 (11,300+ units) and in-house employee force (34,000+ staff), negating reliance 810 600 on subcontractors. An extensive equipment base, superior execution skills and 390 early completion bonuses have translated to an average EBITDA margin of ~20% 180 Jul-17 over FY15-FY18 vs. 11-16% for peers. Management’s guidance stands at 17-18% Jul-18 Jan-19 Sep-17 Apr-19 Apr-18 Sep-18 Mar-17 Feb-18 Dec-17 Aug-16 Oct-16 May-17 Dec-16 Nov-18
for FY19/ FY20; we assume ~17.5% margins each for Q4FY19-FY21. Source: NSE
Initiate with BUY: Excluding asset value from the CMP, the stock is trading at 11.9x/9.7x FY20E/FY21E standalone earnings. We expect a better NWC cycle and moderating capex to curb gearing (0.7x by Mar’21E). Our Mar’20 SOTP target of Rs 750 values the EPC business at Rs 660 and assets at Rs 89.
KEY FINANCIALS (STANDALONE) Y/E 31 Mar FY17A FY18A FY19E FY20E FY21E Adj. net profit (Rs mn) 3,609 6,355 7,304 6,109 7,521 Adj. EPS (Rs) 28.4 46.5 53.4 44.7 55.0 Adj. EPS growth (%) 50.8 63.4 14.9 (16.4) 23.1 Adj. ROAE (%) 24.8 29.5 26.0 17.6 18.2 Adj. P/E (x) 21.8 13.4 11.6 13.9 11.3 EV/EBITDA (x) 11.0 7.8 7.0 6.6 5.5
Source: Company, BOBCAPS Research
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In a nutshell
Strong credentials in government road contracts to drive order flows
FIG 1 – ROBUST RS 209BN ORDER BACKLOG AS ON FIG 2 – ROAD CONTRACTS DOMINATE THE ORDER MAR’19E OFFERS HIGH GROWTH VISIBILITY BACKLOG
Source: Company, BOBCAPS Research | *Includes L1 project of Rs 4.3 bn Source: Company, BOBCAPS Research
Sound financials with stable margins and low gearing
FIG 3 – EBITDA MARGINS FORECAST TO REMAIN FIG 4 – LOW GEARING TO BE LED BY NET WORKING STABLE CAPITAL IMPROVEMENT
Source: Company, BOBCAPS Research Source: Company, BOBCAPS Research
FCFF yields to rise led by better working capital cycle and capex moderation
FIG 5 – FCFF YIELDS LIKELY TO REBOUND FIG 6 – REVENUE/PBT CAGR AT 16%/18%, FY18-FY21E
Source: Company, BOBCAPS Research Source: Company, BOBCAPS Research
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Investment rationale Project ramp-up and expected order wins to underpin growth
DBL clocked a 42% order inflow CAGR over FY15-FY18 backed by robust contract wins in FY16 (Rs 74bn), FY17 (Rs 113bn) and FY18 (Rs 142bn). Its order backlog thus surged over three-fold from Rs 75bn as on Mar’15 to Rs 239bn as on Mar’18 (47% CAGR), fuelling a 43% revenue CAGR.
The order backlog as on Mar’19E stands at Rs 209bn, representing 2.3x book-to- bill on Mar’19E revenue, and is 60% executable. This together with likely receipt of appointed dates in eight HAM projects – six by Apr’19/May’19 and two by Sep’19 – and an anticipated uptick in NHAI ordering would support a 16% revenue CAGR over FY18-FY21, in our view (see Annexure A on Page 87 for detailed revenue projections).
FIG 7 – REVENUE CAGR OF 16% EXPECTED OVER FY18-FY21
Order inflow CAGR of 42% over FY15-FY18 led by dominant share of roadworks
Source: Company, BOBCAPS Research | *Includes L1 project of Rs 4.3bn
Expected pick-up in ordering activity from NHAI
Order flows for DBL’s roads During FY19, the award of appointed dates for tendered orders along with fresh segment forecast at Rs 100bn/ ordering by NHAI was muted due to land acquisition and other regulatory hurdles. Rs 115bn in FY20/FY21 With roads dominating ~80% of DBL’s order backlog, this slowdown weighed on revenue. We anticipate a rebound ahead given an estimated NHAI bid pipeline of ~Rs 1tn/pa over the next five years from FY20 to FY24 (details in our Industry section), with a likely award mix of 60% on EPC basis and 40% on HAM basis in FY20/FY21.
On average, DBL’s bid-win ratio in NHAI tenders has held strong at over 10% during the last four years (FY15-FY18), underlining the company’s strength in the roads space. In light of this track record, we are confident that the company can win highway orders of ~Rs 100bn/pa from NHAI at the very least. Management
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has guided for order inflows of Rs 140bn- Rs150bn in FY20, with ~Rs 100bn from roads and the balance from other segments. We bake in similar estimates for the roads segment in FY20, rising to ~Rs 115bn in FY21, translating to an order inflow and backlog CAGR of 2% and 4% respectively over FY18-FY21, off a high base.
FIG 8 – ROAD SEGMENT TO DOMINATE ORDER INFLOWS
Expect order backlog CAGR of 4% over FY18-FY21 on a high base
Source: Company, BOBCAPS Research
Appointed dates for 12 HAM and 7 EPC projects delayed; key for growth
Expect revenue contribution Appointed dates for most of DBL’s recently awarded HAM and EPC projects of 61%/58% from 19 projects have been delayed due to land acquisition issues and slow environmental in FY20/FY21 clearances. So far, out of its portfolio of 12 HAM projects (EPC cost of Rs 104bn as on Mar’19E), the company have received appointed dates for four, with six more expected by Apr’19/May’19 and the remainder in Sep’19 (delayed by over a quarter). Financial closure for one project is complete, the company has received sanction letters from lenders for six more and now awaits closure from NHAI, with in-principle approval from lenders for the remaining one.
For its Rs 44bn EPC portfolio (as on Mar’19E), DBL has received appointed dates for six contracts, with only one pending – we model for receipt in Q1FY20. These 19 HAM and EPC works account for 73% of the company’s order backlog as on Mar’19E, and we expect them to contribute 61%/58% revenue share in FY20/FY21. Any delay in award of appointed dates will thus significantly affect our revenue estimates. DBL’s management has guided for standalone revenue of Rs 94bn-95bn in FY19 and YoY growth of 15-20% in FY20 – we conservatively model for revenue of ~Rs 92bn and growth of 14% for these two years respectively.
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FIG 9 – APPOINTED DATES FOR 38% OF ORDER BACKLOG PENDING AS ON MAR’19E (FOR ROAD PROJECTS AWARDED IN FY18/Q1FY19) Total O/s order backlog O/s order Awarding Start date / EPC cost Scheduled COD/ Project Mode LOA date project cost as on Dec’18 backlog as on authority Appointed date (Rs bn) Expected award of AD (Rs bn) (Rs bn) Mar’19E (Rs bn) Status of road projects awarded in FY18 Mangloor-Telangana/Maharastra Border NHAI HAM 26-Mar-18 Awaited 7.5 5.8 5.8 5.8 AD expected in Apr'19 Byrapura-Challakere Pkg II NHAI HAM 27-Mar-18 31-Dec-18 6.7 5.3 5.3 4.4 Scheduled COD: 30-Dec-20 Sangli-Solapur (Mangalwedha to Solapur; Pkg IV) NHAI HAM 28-Mar-18 Awaited 9.0 7.4 7.4 7.4 AD expected in May'19 Sangli-Solaopur (Sangli to Borgaon; Pkg I) NHAI HAM 28-Mar-18 Awaited 8.8 7.2 7.2 7.2 AD expected in May'19 Sangli-Solapur (Borgaon to Watambare; Pkg II) NHAI HAM 28-Mar-18 Awaited 8.2 6.7 6.7 6.7 AD expected in Apr'19 Rewa-Siddhi NHAI HAM 28-Mar-18 14-Dec-18 8.2 6.1 5.4 5.1 Scheduled COD: 28-Nov-22 Banglore-Nindagatta NHAI HAM 01-Mar-18 Awaited 20.1 15.0 15.0 15.0 AD expected in Apr'19 Nidagatta-Mysore NHAI HAM 01-Mar-18 Awaited 21.0 15.7 15.7 15.7 AD expected in Sep'19 Gohar-Khairatunda NHAI HAM 06-Mar-18 Awaited 7.6 6.1 6.1 6.1 AD expected in Apr'19 Andapuram-Pendurthi-Anakapali NHAI HAM 28-Feb-18 04-Jan-19 17.7 13.8 13.0 12.1 Scheduled COD: 02-07-21 Chandikhole-Bhadrak NHAI HAM 25-Jan-18 16-Dec-18 15.2 10.0 9.4 9.1 Scheduled COD: 13-Jun-21 Kalmath-Zarap Section NHAI HAM 25-Nov-17 01-Feb-18 7.8 7.0 3.4 2.7 Scheduled COD: 16-Jul-19 Dagamagpur-Lalganj Pkg 2 NHAI EPC 13-Mar-18 13-Dec-18 6.9 6.9 6.9 5.9 Scheduled COD: 09-Jun-21 Lalganj-Hanumanha Pkg 3 NHAI EPC 22-Mar-18 01-Feb-19 6.0 6.0 6.0 5.3 Scheduled COD: 29-Jul-21 Varanasi-Dagamagpur NHAI EPC 27-Feb-18 Awaited 6.0 6.0 6.0 6.0 AD expected in Apr'19/May'19 Karnataka Goa Border NHAI EPC 28-Feb-18 05-Nov-18 3.4 3.4 3.4 3.0 Scheduled COD: 02-May-21 Davanagere-Haveri Pkg 1b IRCON EPC 21-Feb-18 21-Feb-18 1.4 1.4 1.1 0.7 Scheduled COD: 20-Feb-20 Karodi-Telwad NHAI EPC 31-Jan-18 09-Oct-18 5.0 5.0 4.5 3.8 Scheduled COD: 05-Apr-21 Davanagere-Haveri Pkg 2 IRCON EPC 18-Jan-18 18-Jan-18 3.2 3.2 2.8 2.1 Scheduled COD: 17-Jan-20 Seoni-MP/MH Border NHAI EPC 17-Jan-18 10-Aug-18 6.5 6.5 5.8 4.6 Scheduled COD: 08-Aug-20 Total (a) 176.2 144.4 136.9 128.7 33.5% unexecutable as on Mar’19E Status of road projects awarded in FY19 Bellary-Byrapura NHAI HAM Jul-18 Awaited 11.1 8.9 8.9 8.9 AD expected in Sep’19 Nagpur Mumbai Super Communication Expressway MSRDC EPC 30-Aug-18 15-Jan-19 17.0 17.0 17.0 14.9 Scheduled COD: 12-Jul-21 Total (b) 28.1 25.9 25.9 23.6 4.3% unexecutable as on Mar’19E Sum total (a + b) 204.3 170.3 162.8 152.3 37.8% unexecutable as on Mar’19E Source: Company, BOBCAPS Research | Note: AD: Appointed Date; COD – Commercial Operation Date; LOA – Letter of Authority
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FIG 10 – ROAD SEGMENT DOMINATES THE REVENUES Particulars FY17 FY18 FY19E FY20E FY21E Revenue breakup (Rs bn) Roads 45,714 66,694 78,069 86,331 99,489 Irrigation 2,783 1,610 1,047 2,254 4,015 Urban Development 901 315 1,375 1,945 4,119 Mining 1,399 8,411 11,381 14,071 11,889 Others 222 428 140 164 192 Total 51,019 77,458 92,011 1,04,764 1,19,703 % Growth YoY 24.9 51.8 18.8 13.9 14.3 % Share Roads 89.6 86.1 84.8 82.4 83.1 Irrigation 5.5 2.1 1.1 2.2 3.4 Urban Development 1.8 0.4 1.5 1.9 3.4 Mining 2.7 10.9 12.4 13.4 9.9 Others 0.4 0.6 0.2 0.2 0.2 Total 100.0 100.0 100.0 100.0 100.0 EBITDA margin (%) 19.5 18.1 17.6 17.5 17.5 Source: Company, BOBCAPS Research
Well-diversified order backlog with pan-India presence
88% of order backlog from DBL has steadily increased its presence across various domestic markets by Madhya Pradesh as on Mar’13 strengthening its execution capabilities and business model. This is reflected in the de-risked to 13% as on Dec’18 diversified composition of its order book wherein its home state of Madhya Pradesh (MP) contributes only 13% of project work, while Maharashtra and Karnataka command the highest share at 26% and 20% respectively. DBL is currently executing projects across 14 states, showcasing its pan-India presence.
FIG 11 – PAN-INDIA PROJECT EXECUTION CAPABILITY
Source: Company, BOBCAPS Research
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DBL has executed projects The company’s strong performance in its home state has given it the confidence across 17 states and currently to expand across geographies in a cluster fashion, thereby reaping the benefits of has work underway in 14 economies of scale. Importantly, it has been able to sustain its revenue trajectory despite progressively diversifying away from MP. Forays into different project segments further safeguards the business model from operational risk and boosts growth prospects. While the roads segment still dominates the mix, dependence on this business has come down from 100% of the order backlog as on Mar’13 to 81% as on Dec’18.
FIG 12 – ONGOING EXECUTION ACROSS 14 STATES FIG 13 – PRESENCE ACROSS 5 SEGMENTS
WB Chhattisgarh AP UP 0.9% 0.2% 6.7% Telangana 8.7% Goa 4.7% 3.9% Haryana 0.1% Rajasthan 2.3% Jharkhand 5.5% Odisha Karnataka 7.8% MP 20.3% 12.6% Maharashtra 26.2%
Source: Company, BOBCAPS Research Source: Company, BOBCAPS Research
Superior margins led by integrated business model
Expect EBITDA margins of . Aided by a self-owned equipment bank, robust in-house execution capabilities and 17.5% for Q4FY19-FY21 – receipt of early completion bonuses, DBL has maintained a superior EBITDA lower end of management margin profile of ~20% over FY15-FY18 compared with 11-16% for peers. The guidance company has guided for margins of 17-18% in FY19/FY20 – we have assumed 17.5% margins in Q4FY19, FY20 and FY21 backed by the key drivers outlined below.
FIG 14 – EBITDA CAGR OF 14% EXPECTED OVER FY18-FY21
Source: Company, BOBCAPS Research
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Key margin drivers
Strong pre-bid analysis and focus on project clustering DBL focuses on comprehensive pre-bid project evaluation – this ensures major risks to execution are recognised and costs appropriately built into estimates, in turn minimising delays and cost overruns. Additionally, the company focuses on clustering of projects in key geographies which drives efficient management of initial mobilisation costs and equipment, besides ensuring timely execution through a better understanding of the local work environment.
FIG 15 – CLUSTERING DRIVES EXECUTION EFFICIENCY
Source: Company, BOBCAPS Research
No dependence on subcontracting
In-house resources ensure DBL has its own large fleet comprising 11,381 units of equipment and an in-house equipment availability, quick strength of 34,128 employees as of Dec’18 (35,327 as of Mar’19). This negates mobilisation and control over dependence on third-party subcontractors, thereby adding 150-200bps to execution EBITDA margins, as per management. In-house resources further ensure quick mobilisation of equipment and minimal disruptions from breakdowns or non- availability. Relative to an asset-light leasing model, a self-owned construction fleet incurs depreciation rather than leasing costs, which management indicates adds another 150-200bps to operating margins.
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FIG 16 – GROSS BLOCK CAGR OF 33% OVER FIG 17 – EQUIPMENT AND EMPLOYEE STRENGTH FY13-FY18; EXPECT 11% CAGR OVER FY18-FY21 GREW 1.5X AND 1.7X RESPECTIVELY FOR FY16-9MFY19
Source: Company, BOBCAPS Research Source: Company, BOBCAPS Research
Well maintained fleet
Homogenous fleet ensures DBL has its own workshop to maintain its large fleet of equipment. Equipment is spare parts availability and procured from leading suppliers such as Schwing Stetter, Metso, Wirtgen, Vogele large cost savings and Caterpillar, leading to optimum support on aftersales service, spare parts supply and manpower training.
New equipment (average fleet age of 3.5 years) helps the company to extract high productivity and keep maintenance costs low. DBL further makes extensive use of technology, comprising GPS trackers, to check equipment usage, fuel consumption and efficiency. These measures have led to minimal breakdowns and 95% equipment availability (on average), aiding timely execution.
FIG 18 – PROMINENT EQUIPMENT SUPPLIERS
Source: Company, BOBCAPS Research
Centralised procurement of raw material
DBL follows a policy of large-scale centralised procurement of raw material, in contrast to peers who subcontract work to multiple small vendors. This helps lower raw material costs through volume discounts from suppliers.
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Early completion bonus
Earned bonus of Rs 4.3bn Over FY12-9MFY19, DBL has completed ~90% of its project book ahead of over FY12-9MFY19 schedule and earned early completion bonuses totalling Rs 4.3bn – this includes Rs 3bn for 16 own BOT works, Rs 1.2bn for 15 government EPC contracts, and Rs 144mn for 4 private-party EPC projects. On an average, early completion bonus accounts for ~2% of EPC revenue (over FY13-FY18), aiding EBITDA margin expansion.
FIG 19 – EARLY COMPLETION BONUS AVERAGED ~2% OF EPC REVENUE OVER FY13-FY18
Source: Company, BOBCAPS Research
SAP implementation
In Feb’17, DBL tied up with IT major IBM to bring in process standardisation and operational efficiency via ERP-SAP 54 HANA – this system helps leverage role-based access to critical data and applications, offers analytical tools, besides enabling effective management and utilisation of the fleet of vehicles and machinery. It also works to streamline DBL’s processes across procurement, projects, asset management, finance, and human resources.
SAP implementation has been concluded at project sites and will bring in operational efficiency via (i) real-time project management such as physical progress and financial progress tracking, (ii) cost savings through effective inventory management, (iii) better negotiations with vendors through real-time purchase information, and (iv) equipment efficiency.
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Working capital to improve; leverage under control
Likely receipt of mobilisation DBL’s backward integration business model paved the way for above-industry advances to lower NWC (ex- EBITDA margins, but resulted in balance sheet deterioration over FY11-FY16 due L&A to subsidiaries) to ~125 to massive expansion in gross block and an elongated net working capital cycle days in FY20E-FY21E (NWC, ex-loans & advances to subsidiaries). However, after weakening to 155 days and 2.3x as on Mar’16, DBL’s NWC and net D/E ratio have improved significantly to 125 days and 1.1x respectively as on Mar’18, aided by its Aug’16 IPO proceeds and monetisation of the BOT portfolio to Shrem Group in FY18.
With pending mobilisation advances of ~Rs 14bn guided by management to flow in during FY20, along with stronger recovery of receivables and lower capex needs, we expect leverage to reduce further to 0.8x by Mar’20. This together with tight control over raw material consumption should keep NWC stable at ~125 days over FY20-FY21.
FIG 20 – CURRENT PENDING MOBILISATION ADVANCES STAND AT ~RS 14BN Bid project cost Mobilisation Received Pending Mobilisation advances (Rs mn) advance (Rs mn) (Rs mn) (Rs mn) From 12 HAM projects Chandikhole-Bhadrak 15,220 1,520 1,520 - Anandpuram-Anakapalli- 20,130 2,020 1,010 1,010 Banglaore-Nidagatta 21,900 2,200 - 2,200 Nidgatta--Myosre 22,830 2,280 - 2,280 Gorhar-Khiratunda 9,170 920 - 920 Rewa-Sidhi- 10,040 1,000 500 500 Mangloor-Telangana/Maharashtra-Border 9,360 936 - 936 Byrapura-Challakere-Pkg-II 8,417 840 840 - Sangli-Borgaon-(Pkg-1) 11,024 1,100 - 1,100 Borgaon-Watambare-(Pkg-2) 10,294 1,020 - 1,020 Mangalwedha-Solapur-(Pkg-4) 11,410 1,140 - 1,140 Bellary-Byrapura 13,139 1,314 - 1,314 (a) Total HAM projects 1,62,934 16,290 3,870 12,420 From 7 EPC projects Seoni–MP/MH Border 6,519 652 652 - Karodi-Telwadi 5,045 504 504 - Karnataka Goa Border 3,393 339 170 170 Dagmagpur-Lalganj (Package 2) 6,875 688 344 344 Lalganj-Hanumana (Package 3) 6,045 605 302 302 Nagpur Mumbai Super Communication Expressway (Package 12) 16,980 1,698 1,698 - Varanasi-Dagmagpur (Package 1) 5,987 599 - 599 (b) Total EPC projects 50,844 5,084 3,670 1,414 Total mobilisation advances (a+b) 2,13,778 21,374 7,540 13,834 Source: Company, BOBCAPS Research
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Balance sheet deteriorated over FY11-FY16
DBL’s gross block surged from Rs 1.2bn as on Mar’10 to Rs 19.4bn as on Mar’16 (up 15.6x) as the backward-integrated model led to aggressive capex toward equipment procurement alongside rising order inflows. High capex, incremental working capital needs for revenue growth, a longer NWC cycle (155 days as on Mar’16), and investment of Rs 2.8bn as equity for owned BOT assets over FY11- FY16 saw interest expense as a percentage of EBITDA spiralling from 17.4% in FY11 to 47.7% in FY16. This in turn impacted profitability – PBT margins dropped from 13.5% to 6.1% – and led to negative free cash flow to firm (FCFF) of Rs 16.9bn over FY11-FY16.
FIG 21 – DECLINE IN PBT MARGIN FROM 13.5% IN FY11 FIG 22 – HIGHER CAPEX AND BLOATED NWC LED TO TO 6.1% IN FY16 LED BY HIGHER INTEREST COST NEGATIVE FCFF AND HIGH D/E
Source: Company, BOBCAPS Research I *Based on days of revenue Source: Company, BOBCAPS Research
Net working capital cycle improving
After being dented by delayed payments from private parties and a higher inventory cycle, DBL’s NWC cycle has improved significantly from 155 days (ex-loans & advances to subsidiaries) as on Mar’16 to 125 days as on Mar’18, led by a change in revenue mix towards government contracts. The company has consciously moved away from private contracts, which formed ~77% of the order book as on Mar’12, to 100% government projects, with NHAI contributing 67% of the order backlog as on Dec’18, ensuring lower receivable days.
Backed by improved recoveries and checks on raw material consumption, we model for stable NWC at ~125 days over FY20-FY21. We also model for PBT margin expansion from 8.8% in FY18 to 9.2% in FY21 led by lower interest cost- to-EBITDA at 28.7% in FY21E as capex needs moderate.
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FIG 23 – PBT MARGIN EXPANSION LED BY LOWER INTEREST COST-TO- EBITDA AT 28.7% IN FY21E VS. 33.1% IN FY18
Source: Company, BOBCAPS Research
FIG 24 – PBT MARGIN TO IMPROVE FROM 8.8% IN FY18 TO 9.2% IN FY21E
Source: Company, BOBCAPS Research
DBL has among the lowest gross asset turns in the industry, implying that its large equipment base remains unutilised. Execution of the current order backlog is thus unlikely to require major investments on equipment over FY20/FY21. Management has also indicated that it will prefer road EPC projects over road HAM projects going forward and will continue to target less capex-driven works such as micro irrigation, dams, mining and metros.
According to management, the company would incur capex of Rs 2.5bn-3bn in Q4FY19, taking the total capital outlay to Rs 5bn-5.5bn in FY19. We expect equipment-cum-maintenance capex to moderate to Rs 1.5bn in FY20 and Rs 3.5bn in FY21 – in turn reducing equipment debt and aiding cash flow generation.
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FIG 25 – LOWER CAPEX TO AID UPTICK IN CASH FLOW GENERATION OVER FY20E-FY21E
Source: Company, BOBCAPS Research
FIG 26 – MODERATION IN CAPEX AND IMPROVING NWC TO AID POSITIVE FCFF AND BETTER LEVERAGE
Source: Company, BOBCAPS Research
Leverage to reduce to 0.7x by Mar’21E
DBL’s net D/E ratio improved to 1.3x as on Mar’17 against 2.3x in Mar’16 as net proceeds of Rs 4bn from its Aug’16 IPO were largely used to meet working capital requirements. The improvement in leverage was also supported by gradual inflows of disputed receivables from private clients (further doubtful debtors of Rs 2.4bn fully provided for), the shift towards government orders and tight control on raw material use. Additionally, through monetisation of its operational BOT asset portfolio to Shrem Group in FY18, the company was further able to contain its net D/E at 1.1x as on Mar’18.
Going ahead, we expect net D/E to improve to 0.7x in FY21 supported by improvement in NWC and likely receipt of mobilisation advances. These advances have been delayed a couple of quarters beyond schedule due to slow award of
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appointed dates by NHAI. So far, the company has received mobilisation advances of Rs 7.5bn and expects the remaining sum of ~Rs 14bn in FY20, which would support working capital loans. Management has guided for net debt reduction by Rs 2bn-2.5bn in Q4FY19 to Rs 32bn-33bn by end-Mar’19 (our estimate is higher at Rs 36bn).
FIG 27 – LEVERAGE LIKELY TO IMPROVE TO 0.7X BY MAR’21E LED BY BETTER NWC
Source: Company, BOBCAPS Research
Monetisation of road assets to Shrem Group
In Aug’17, DBL entered into an agreement with Shrem Group (Chhatwal Group Trust) to monetise 24 assets – 14 operational BOT, 4 under-construction BOT and 6 under-construction HAM projects – for ~Rs 16bn, with Rs 11.8bn to be paid to the company and the balance in direct project investment. Up to 7 Feb 2019, DBL has received cash of Rs 9.2bn. The company expects to receive the remaining sum of Rs 2.7bn over the next 6-8 months, which can be used to part- fund equity requirements in new HAM projects.
FIG 28 – STAKE SALE OF 24 ASSETS TO SHREM GROUP FOR RS 16BN: DBL’S SHARE AT RS 11.8BN Total equity Amount invested by DBL Pending equity As on 30-Jun-17 (Rs bn) investment required up to Jun ’17 (Equity + sub -debt) commitment 14 BOT Operational 4.7 4.5 0.1 4 BOT Under-construction 3.2 2.2 1.0 6 HAM Under-construction 7.4 0.1 7.3 Total 15.2 6.8 8.4 Source: Company, BOBCAPS Research
FIG 29 – PENDING CONSIDERATION OF RS 2.7BN FROM SHREM GROUP LIKELY OVER 6-8 MONTHS Pending Q4FY19 (up Received Particulars (Rs mn) Total FY18 9MFY19 Q4FY19E Q1FY20E Q2FY20E consideration/ to 7-Feb-19) so far investment Money due to DBL from the 11,800 5,700 1,610 1,840 9,150 70 2,370 210 2,650 Shrem Group Direct investment in SPVs 4,220 320 90 1,300 1,710 430 1,310 770 2,510 by the Shrem Group Total consideration 16,020 6,020 1,700 3,140 10,860 500 3,680 980 5,160
Source: Company, BOBCAPS Research
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Strong portfolio of 12 HAM projects
Plans to sell stake in 12 HAM DBL has received 12 HAM orders (11 in FY18 and 1 in FY19), exclusive of the projects along the lines of the Shrem Group deal. The company is planning to sell its stake in these assets as well, Shrem deal along the lines of the Shrem deal. The total equity commitment here stands at Rs 15.6bn, of which Rs 2.7bn has been invested so far and the balance is likely to be invested over the next two years.
Out of the 12 projects, DBL has received appointed dates for 4, achieved financial closure for 1, submitted financial closure documents to NHAI for 6, and received in-principle sanction from lenders for the remaining 1. Management stated that it has closed the projects at sub-10% interest rates and is required to infuse 50% - 100% equity upfront. We have valued this portfolio at 1x P/BV based on equity invested up to Mar’20E, translating to a value of Rs 89/sh (12% of our fair value).
FIG 30 – 12 HAM PROJECTS FROM NHAI AT 100% STAKE; BALANCE EQUITY COMMITMENT OF RS 12.9BN Total Length Equity Appointed Land acquisition Project name State project cost Financial closure (km) (Rs bn) date status (3H stage) (Rs bn) DBL Chandikhole Bhadrak Highways Pvt Ltd Odisha 74.5 1.2 12.6 16-Dec-18 - ~94% ROW DBL Anandpuram Anakapalli Highways Pvt Ltd Andhra Pradesh 50.8 2.2 17.7 04-Jan-19 - ~82% ROW Documents submitted to DBL Banglaore Nidagatta Highways Pvt Ltd Karnataka 56.2 2.2 20.1 Likely by Apr’19 ~75% ROW NHAI for FC Documents submitted to DBL Nidgatta -Myosre Highways Pvt Ltd Karnataka 61.1 2.3 21.0 Likely by Sep’19 ~65% ROW NHAI for FC Received in-principle DBL Gorhar Khiratunda Highways Pvt Ltd Jharkhand 39.5 0.7 7.6 Likely by Apr’19 ~74% ROW approval from lenders DBL Rewa Sidhi Highways Pvt Ltd Madhya Pradesh 15.4 0.9 8.2 14-Dec-18 - ~95% ROW Documents submitted to DBL Mangloor Highways Pvt Ltd Telangana 49.0 0.9 7.5 Likely by Apr’19 ~70% ROW NHAI for FC DBL Byrapura Challakere Highways Pvt Ltd Karnataka 50.0 0.8 6.7 31-Dec-18 - ~82% ROW DBL Sangli-Borgaon Highways Pvt Ltd Maharashtra 41.4 1.1 8.8 Likely by May’19 14-Feb-19 70-80% ROW Documents submitted to DBL Borgaon Watambare Highways Pvt Ltd Maharashtra 52.0 1.0 8.2 Likely by Apr’19 ~80% ROW NHAI for FC Documents submitted to DBL Mangalwedha Solapur Highways Pvt Ltd Maharashtra 56.5 1.1 9.0 Likely by May’19 70-80% ROW NHAI for FC Documents submitted to DBL Bellary Byrapura Highways Pvt Ltd Karnataka 55.0 1.2 11.1 Likely by Sep’19 30-40% ROW NHAI for FC Total 601.2 15.6 138.4 Source: Company, BOBCAPS Research | Note: FC – Financial Closure; ROW – Right of Way
FIG 31 – BALANCE EQUITY COMMITMENT OF RS 12.9BN OVER NEXT 2 YEARS (Rs bn) Investment schedule in 12 new HAM projects 20 15.6 3.4 15 0.7 2.3 0.7 10 4.3 1.5 11 12 5 2.7 9 11 4 0 3 FY21E Total Q4FY19E Q1FY20E Q2FY20E Q3FY20E Q4FY20E 2-Feb-19 commitment Invested up to up Invested Source: Company, BOBCAPS Research
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Financial overview Standalone revenue CAGR of 16% over FY18-FY21E
On the back of a strong Rs 209bn order backlog as on Mar’19E, we expect DBL to post a standalone revenue CAGR of 16% over FY18-FY21. Robust execution in the recently bagged Rs 322bn Mine Developer-cum-Operator (MDO) contract could also aid growth. DBL’s foray into mining is limited to overburden removal and hence the company expects to clock better EBITDA margins in this segment. Working capital involvement in the mining business is also low, resulting in strong cash flow generation to support growth.
Appointed dates in eight recently awarded HAM contracts and one EPC project have been delayed due to land acquisition issues and sluggish environmental clearances. While we expect these dates to come through by Q1-Q2FY20, any delays beyond this timeline are a key risk to our revenue estimates.
FIG 32 – ROBUST ORDER BACKLOG OF RS 209BN (60% EXECUTABLE) TO DRIVE REVENUE GROWTH
Source: Company, BOBCAPS Research
Margins to remain steady
DBL is one of the few companies in the infrastructure space that follows a 100% backward integration business model, enabling in-house project execution versus subcontracting by peers. Given its unique business model, DBL is able to complete projects ahead of schedule and earn a steady flow of early completion bonuses, which aids margin expansion. We expect the company to maintain a superior EBITDA margin profile compared to industry peers, with stable margins of 17.5% and a 14% EBITDA CAGR over FY18-FY21.
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FIG 33 – EXPECT EBITDA MARGINS TO REMAIN STEADY AT 17.5%
Source: Company, BOBCAPS Research
FIG 34 – SUPERIOR EBITDA MARGINS AMONGST PEERS
Source: Company, BOBCAPS Research
PBT CAGR of 18% over FY18-FY21E
Strong operating profits, lower interest cost-to-EBITDA (28.7% in FY21E vs. 33.1% in FY18), declining gross debt and improving NWC levels should aid an estimated pre-tax earnings CAGR of 18% over FY18-FY21. As a result, we expect ~50bps expansion in PBT margin from 8.8% in FY18 to 9.2% in FY21.
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FIG 35 – EXPECT PBT MARGIN TO RISE TO 9.2% IN FY21
Source: Company, BOBCAPS Research
Equity commitments, full tax regime to erode ROE
Despite improving profitability at the PBT level, we expect standalone ROE to drop from 29.5% in FY18 to 18.2% in FY21 due to (i) increasing equity investments in HAM projects (balance requirement of ~Rs 13bn to be invested over the next two years) and (ii) a shift towards a full tax regime entailing an effective tax rate of 32% in FY21E from 6.4% in FY18 as projects eligible for 80IA benefits near completion.
FIG 36 – EXPECT ROE TO DECLINE FROM 29.5% IN FY18 TO 18.2% IN FY21E
Source: Company, BOBCAPS Research
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Valuation methodology
Initiate coverage with BUY DBL with its strong execution capabilities and well-funded balance sheet is well and Mar’20 SOTP-based TP placed to benefit from growth opportunities offered by India’s roads sector. We of Rs 750 expect the company to be a prime beneficiary of NHAI’s strong bid pipeline estimated at ~Rs 1tn/pa for the next five years. Led by a robust order backlog, we forecast a revenue and pre-tax earnings CAGR of 16% and 18% respectively for DBL over FY18-FY21.
12x one-year forward P/E The stock is trading at 11.9x/9.7x FY20E/FY21E standalone earnings, adjusted for multiple ascribed to core EPC Rs 89/sh of asset value. We initiate coverage with BUY and a Mar’20 SOTP-based business target price of Rs 750. For our SOTP model, we value (i) the standalone EPC business at Rs 660/sh based on 12x FY21E earnings, and (ii) HAM projects at Rs 89/sh (implied P/BV of 1x for equity investment in 12 projects as on Mar’20E).
FIG 37 – SOTP-BASED TARGET PRICE OF RS 750 Value Multiple Value Value per Business Rationale (Rs mn) (x) (Rs mn) share (Rs) Standalone business (EPC) P/E on Mar’21E earnings 7,521 12.0 90,249 660 Value of 12 HAM projects P/BV – Equity investment as on Mar’20E 12,180 1.0 12,180 89 Target price 102,429 750 O/s shares (mn) 137 Source: Company, BOBCAPS Research I Note: Target price rounded off
FIG 38 – FORWARD P/E BAND (3 YEAR MEAN AT 12X)
Source: Bloomberg
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FIG 39 – RELATIVE STOCK PERFORMANCE
DBL NSE Nifty 580 480
380
280
180
80 Jul-17 Jul-18 Jan-19 Sep-17 Apr-19 Apr-18 Sep-18 Mar-17 Feb-18 Dec-17 Aug-16 Oct-16 May-17 Dec-16 Nov-18 Source: NSE
Key risks
. Slowdown in road sector capex: Capex in the road sector has witnessed some revival over the last two years. Any slowdown in project awarding would impact the company’s growth and our estimates.
. Delay in execution of projects in hand/awards: DBL has the largest fleet of construction equipment compared to its road segment peers and, hence, is under greater obligation to have reasonably strong asset utilisation to preserve return ratios. Execution hurdles due to delays in land acquisition, delay in appointed dates, regulatory bottlenecks or sluggish award progression from the government would drive return ratios lower and lead to P/E compression.
. Slide in working capital efficiency: DBL follows a 100% backward integration business model. Thus, its NWC days are usually higher than most peers. Any further increase in NWC days would worsen return ratios for the company.
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Annexure A: Revenue projections
FIG 1 –ORDER BACKLOG OF RS 209BN IS 60% EXECUTABLE; EXPECT REVENUE CAGR OF 16% OVER FY18-FY21 Revenue Original value Order backlog Project (Rs mn) Q4FY19E FY19E FY20E FY21E Comments (Rs mn) as on Dec'18 ROADS & BRIDGES Road - EPC (non-captive; old projects) Kawardha Simga 2,808 201 201 201 - - Scheduled for completion in Q4FY19 Ambala Kaithal 4,577 246 246 246 - - Scheduled for completion in Q4FY19 Kathghora Shivnagar 3,357 193 193 193 - - scheduled for completion in Q4FY19 Sargaon Bilaspur 3,681 7 7 7 - - Scheduled for completion in Q4FY19 Shahkot Moga 3,465 21 21 21 - - Scheduled for completion in Q4FY19 Rayachoti Kadapa 1,980 60 60 60 - - Scheduled for completion in Q4FY19 Vijayawada–Machilipatnam 7,407 930 418 2,347 511 - Scheduled EOD: 21-May-19; 93% work completed upto Mar'19 Ghaghra Bridge to Varanasi 6,743 194 194 2,123 - - Scheduled EOD: 31-Jul-19 Mahulia-Baharagora 6,741 705 317 1,979 388 - Scheduled EOD: 10-Mar-19; 94% work completed upto Mar'19 Chichra To Kharagpur 6,131 2,184 655 2,462 1,529 - Scheduled EOD: 11-Sep-19; 74% work completed upto Mar'19 Zuari Bridge - (Package II) 5,454 3,252 300 1,278 1,789 1,164 Scheduled EOD: 05-Oct-20; 44% work completed upto Mar'19 Nalagampalli to AP/Karnataka Border 5,031 1,055 855 4,286 200 - Scheduled EOD: 14-Nov-19; 96% work completed upto Mar'19 Zuari Bridge - (Package I) 4,401 2,983 275 1,179 2,708 - Scheduled EOD: 19-Feb-20; 35% work completed upto Mar'19 Zuari Bridge - (Package III) 4,176 2,178 300 1,199 1,878 - Scheduled EOD: 12-Dec-19; 51% work completed upto Mar'19 Eeppurpalem - Ongole 3,500 498 250 250 248 - Scheduled EOD: 19-Jul-19; 93% work completed upto Mar'19 Davanagere – Haveri (Package 2) 3,219 2,773 645 1,091 2,128 - Scheduled EOD: 17-Jan-20 Davanagere – Haveri (Package 1B) 1,404 1,117 445 731 673 - Scheduled EOD: 20-Feb-20 (i) Total 74,076 18,597 5,382 19,652 12,052 1,164 Road - EPC (non-captive; 7 new projects) Seoni–MP/MH Border 6,519 5,764 1,173 1,928 3,585 1,006 AD: 10-Aug-18; Scheduled EOD: 8-Aug-20 Karodi to Telwadi 5,045 4,532 757 1,269 2,270 1,505 AD: 9-Oct-18; Scheduled EOD: 4-Apr-21 Varanasi to Dagmagpur (Package 1) 5,987 5,987 - - 2,395 2,993 AD likely in Apr’19 Karnataka Goa Border 3,393 3,393 424 424 1,357 1,527 AD: 5-Nov’18; Scheduled EOD: 2-May-21
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Revenue Original value Order backlog Project (Rs mn) Q4FY19E FY19E FY20E FY21E Comments (Rs mn) as on Dec'18 Dagmagpur-Lalganj (Package 2) 6,875 6,875 928 928 2,750 3,094 AD: 13-Dec-18; Scheduled EOD: 9-Jun-21 Lalganj-Hanumana (Package 3) 6,045 6,045 786 786 2,418 2,720 AD: 1-Feb-19; Scheduled EOD: 29-Jul-21 Nagpur Mumbai Super Communication AD: 15-Jan-19; Construction period of 36 months; >90% land available; Scheduled EOD: 7-Jul- 16,980 16,980 2,207 2,207 6,250 7,641 Expressway (Package 12) 21 (ii) Total 50,844 49,577 6,276 7,542 21,026 20,487 Road - EPC (captive; old HAM projects - % of work completed as on Mar 31, 2019 portfolio sold to Shrem Group) Lucknow Sultanpur 17,800 952 952 952 - - Work got completed in Feb'19 Tuljapur Ausa 6,500 1,773 345 345 1,428 - 78%; Schedule for completion in H1FY20E Wardha Butibori 8,425 2,268 1,424 1,424 844 - 90%; Schedule for completion in Q1FY20E Yavatmal Wardha 7,658 1,810 1,271 1,271 539 - 93%; Schedule for completion in Q1FY20E Mahagaon Yavatmal 8,023 3,248 1,404 1,404 1,844 - 77%: Schedule for completion in H1FY20E Kalmath Zarap 6,980 3,376 722 722 2,653 - 62%; Schedule for completion in H1FY20E (iii) Total 55,386 13,428 6,118 6,118 7,310 - Road - EPC (captive; 12 new HAM projects) AD: 16-Dec-18; ~94% ROW available; Construction period of 30 months; 8.43% work Chandikhole Bhadrak 9,957 9,445 348 860 4,912 3,673 completed upto 31 -Mar -19 AD: 4-Jan-19; ~82% ROW available; Construction period of 30 months; 11.54% work completed Anandpuram Anakapalli 13,750 13,043 894 1,601 6,783 4,660 upto 31 -Mar -19 FC Documents submitted to NHAI; ~75% ROW available; AD likely by Apr'19; Construction Banglaore Nidagatta 15,044 15,044 - - 6,770 7,522 period of 30 months FC Documents submitted to NHAI; ~65% ROW available; AD likely by Sep'19; Construction Nidgatta Myosre 15,698 15,698 - - 3,454 7,849 period of 30 months Sanctions from lenders likely by end of Apr'19; ~74% ROW available; AD likely by Apr'19; Gorhar Khiratunda 6,057 6,057 - - 2,726 3,028 Construction period of 24 months AD: 14-Dec-18; ~95% ROW available; Construction period of 48 months; 9.8%% work Rewa Sidhi 6,053 5,363 303 993 2,119 2,300 completed upto 31 -Mar -19 Mangloor-Telangana/Maharashtra Border 5,795 5,795 - - 2,608 2,897 FC Documents submitted to NHAI; ~70% ROW available; AD likely by Apr'19 AD: 31-Dec-18; ~82% ROW available; Construction period of 24 months; 15.82% work Byrapura Challakere Pkg II 5,272 5,272 843 843 2,741 1,687 completed upto 31 -Mar -19 FC: 14-Feb-19; 70%-80% ROW available; AD likely by May'19; Construction period of 24 Sangli Borgaon, Pkg I 7,190 7,190 - - 3,235 3,595 months
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Revenue Original value Order backlog Project (Rs mn) Q4FY19E FY19E FY20E FY21E Comments (Rs mn) as on Dec'18 FC Documents submitted to NHAI; ~80% ROW available; AD likely by Apr'19; Construction Borgaon Watambare, Pkg II 6,741 6,741 - - 3,033 3,370 period of 24 months FC Documents submitted to NHAI; 70%-80% ROW available; AD likely by May'19; Mangalwedha Solapur, Pkg IV 7,423 7,423 - - 3,340 3,711 Construction period of 24 months FC Documents submitted to NHAI; 30%-40% ROW available; Distribution of compensation is Bellary Byrapura 8,875 8,875 - - 1,953 4,438 taking time for land acquisition; AD likely by Sep'19; Construction period of 24 months (iv) Total 107,854 105,945 2,388 4,298 43,672 48,731 (a) TOTAL ROADS & BRIDGES 187,547 20,164 37,610 84,059 70,382 (i + ii + iii + iv) IRRIGATION Irrigation (new project) Navnera Barrage 5,366 5,366 671 671 2,254 2,415 AD: 4-Oct-18; Schedule COD: Oct'22 (b) TOTAL IRRIGATION 8,066 5,366 671 671 2,254 2,415 URBAN DEVELOPMENT Urban development (old projects) Parallel Taxi Track and associated civil & electrical 1,250 657 624 624 33 - Schedule COD: 19-May-19 works at Dabolim Airport Goa (v) Total 1,250 657 624 624 33 - Urban development (new projects) Bhopal Metro between AIIMS and Subhash 2,206 2,206 165 165 993 1,048 AD: Nov'18; Schedule COD: May'21; Construction period of 27 months Nagar Indore Metro between ISBT and Mumtaj Bag 2,044 2,044 153 153 920 971 AD: Dec'18; Schedule COD: May'21; Construction period of 27 months Colony (vi) Total 4,250 4,250 319 319 1,913 2,019 (c) TOTAL URBAN DEVELOPMENT (v + vi) 4,250 4,907 943 943 1,945 2,019 MINING Khairagura OCP, BPA area (Telangana) 9,736 5,075 1,947 3,316 1,759 - Scheduled completion date: Nov'19 Nigahi OCP of NCL 16,736 6,797 2,039 6,603 4,758 - Scheduled completion date: Jan'20 AD: Oct'18; Schedule completion date: Oct'21; Over burden removal of 78.58 MBCM Jayant OCP of NCL 7,175 6,985 699 699 2,511 2,511 for 3 years
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Revenue Original value Order backlog Project (Rs mn) Q4FY19E FY19E FY20E FY21E Comments (Rs mn) as on Dec'18 MDO contract in JV with VPR Mining Infrastructure Pvt. Ltd.; LOA: 11 Aug, 2018; Over burden Pachhwara Central Coal Block – PSPCL 321,560 5,847 - - 2,923 5,923 removal of 7 MTPA (Million Tons Per Annum) for 55 years; Management guidance of annual revenue of ~Rs 6bn; Work expected to commence from Oct'19 (post monsoon) Overburden Removal – Samaleswari OCP 8,478 8,478 - - 2,120 2,120 AD: Jan'19; Schedule COD: Jan'24 Project (d) TOTAL MINING 363,684 33,182 4,685 10,617 14,071 10,554 (I) Total revenue (a+b+c+d) 231,002 26,462 49,841 102,329 85,369 Total segmental revenue from current order backlog Revenue in 9MFY19 from core business 9MFY19 Roads/Bridges/Highways projects 57,905 Mining projects 6,696 Irrigation 376 Urban development 432 (II) Total 9MFY19 revenue 65,409 - - (A) Total Revenue (I + II) - 231,002 26,462 91,871 102,329 85,369 Total segmental revenue from current order backlog including revenue for 9MFY19 New order inflows (e) Q4FY19 4,286 1,072 2,357 Roads -Saoner-Dhapewada-Kalmeshwar-Gondkhairi 4,286 1,072 2,357 LOA: 9-Mar-19; AD likely by Sep'19/Oct'19; 24 months construction period (EPC; non -captive) (f) FY20E (viii + ix) 126,000 - - 1,200 27,150 (viii) H1FY20E 10,000 - - 1,200 5,000 Roads 10,000 - - 1,200 5,000 -EPC 10,000 - - 1,200 5,000 12%/50% execution in FY20E/21E -HAM - - - - - (ix) H2FY20E 116,000 - - - 22,150 Roads 90,000 - - - 18,000 -EPC 75,000 - - - 15,000 20% execution in FY21E -HAM 15,000 - - - 3,000 20% execution in FY21E Irrigation 6,500 - - - 1,300 20% execution in FY21E Urban Development 9,000 - - - 1,800 20% execution in FY21E
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Revenue Original value Order backlog Project (Rs mn) Q4FY19E FY19E FY20E FY21E Comments (Rs mn) as on Dec'18 Mining 10,500 - - - 1,050 10% execution in FY21E (g) FY21 (x + xi) 152,000 - - - 4,635 (x) H1FY21E 63,700 - - - 4,635 Roads 50,000 - - - 3,750 -EPC 35,000 - - - 2,625 7.5% execution in FY21E -HAM 15,000 - - - 1,125 7.5% execution in FY21E Irrigation 4,000 - - - 300 7.5% execution in FY21E Urban Development 4,000 - - - 300 7.5% execution in FY21E Mining 5,700 - - - 285 5% execution in FY21E (xi) H2FY21E 88,300 - - - - Roads 65,000 - - - - -EPC 47,500 - - - - Nil execution in FY21E -HAM 17,500 - - - - Nil execution in FY21E Irrigation 5,000 - - - - Nil execution in FY21E Urban Development 5,000 - - - - Nil execution in FY21E Mining 13,300 - - - - Nil execution in FY21E (B) Total revenue from new order inflows - - 2,272 34,142 Revenue from new order inflows (e + f + g) (C) Total revenue from EPC business (A+B) 231,002 26,462 91,871 104,601 119,511 EPC revenue CAGR of 16% over FY18-21E % growth YoY 19.3 13.9 14.3 Revenue in 9MFY19 from other operating 9MFY19 business -Others 64 (D) Misc receipts (Sale of Scrap, Revenue of 36 100 120 143 Sundry Wrks etc.) (E) Others (Sale of Construction material at 40 40 44 48 Site, etc.) Total revenue (C+D+E) 231,002 26,538 92,011 104,764 119,703 Total revenue CAGR of 16% over FY18-21E % growth YoY 18.8 13.9 14.3 Source: Company, BOBCAPS Research | Note: AD – Appointed Date; EOD – Early Operation Date; FC – Financial Closure; ROW – Right of Way
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FINANCIALS (STANDALONE)
Income Statement Y/E 31 Mar (Rs mn) FY17A FY18A FY19E FY20E FY21E Total revenue 50,976 77,459 92,011 1,04,764 1,19,703 EBITDA 9,923 14,028 16,189 18,361 20,965 EBIT 7,649 11,278 12,984 14,604 16,788 Net interest income/(expenses) (4,162) (4,644) (5,405) (5,895) (6,020) Other income/(expenses) 114 155 317 276 292 Exceptional items 0 0 0 0 0 EBT 3,601 6,789 7,896 8,984 11,060 Income taxes 9 (434) (592) (2,875) (3,539) Extraordinary items 0 (152) 0 0 0 Min. int./Inc. from associates 0 0 0 0 0 Reported net profit 3,609 6,203 7,304 6,109 7,521 Adjustments 0 0 0 0 0 Adjusted net profit 3,609 6,355 7,304 6,109 7,521
Balance Sheet Y/E 31 Mar (Rs mn) FY17A FY18A FY19E FY20E FY21E Accounts payables 8,886 15,078 13,865 17,174 19,808 Other current liabilities 0 0 0 0 0 Provisions 304 732 819 930 1,115 Debt funds 25,634 29,549 38,049 33,103 33,158 Other liabilities 12,381 19,736 13,784 19,662 21,915 Equity capital 1,368 1,368 1,368 1,368 1,368 Reserves & surplus 17,161 23,203 30,341 36,285 43,641 Shareholders’ fund 18,529 24,571 31,709 37,653 45,008 Total liabilities and equities 65,734 89,665 98,226 1,08,523 1,21,005 Cash and cash eq. 1,137 1,613 2,098 2,192 2,201 Accounts receivables 13,543 20,480 22,688 27,193 30,992 Inventories 16,639 20,262 22,688 25,619 29,352 Other current assets 0 0 0 0 0 Investments 4,695 2,415 2,132 6,097 7,792 Net fixed assets 16,825 18,319 20,658 18,401 17,724 CWIP 0 0 241 241 241 Intangible assets 0 0 0 0 0 Deferred tax assets, net (759) (1,067) 315 450 615 Other assets 13,655 27,643 27,406 28,331 32,087 Total assets 65,734 89,665 98,226 1,08,523 1,21,005 Source: Company, BOBCAPS Research
EQUITY RESEARCH 92 11 April 2019
DILIP BUILDCON
Cash Flows Y/E 31 Mar (Rs mn) FY17A FY18A FY19E FY20E FY21E Net income + Depreciation 5,883 8,953 10,509 9,867 11,697 Interest expenses 4,162 4,644 5,405 5,895 6,020 Non-cash adjustments 0 152 0 0 0 Changes in working capital (3,933) (10,268) (12,856) 803 (6,383) Other operating cash flows 0 0 0 0 0 Cash flow from operations 6,113 3,481 3,058 16,565 11,335 Capital expenditures (4,895) (4,244) (5,785) (1,500) (3,500) Change in investments (1,797) 2,280 283 (3,965) (1,695) Other investing cash flows 0 0 0 0 0 Cash flow from investing (6,692) (1,964) (5,502) (5,465) (5,195) Equities issued/Others 4,300 0 0 0 0 Debt raised/repaid 520 3,915 8,500 (4,945) 55 Interest expenses (4,162) (4,644) (5,405) (5,895) (6,020) Dividends paid (165) (165) (165) (165) (165) Other financing cash flows 165 (146) 0 0 0 Cash flow from financing 657 (1,042) 2,930 (11,006) (6,131) Changes in cash and cash eq. 78 476 485 94 9 Closing cash and cash eq. 1,137 1,613 2,098 2,192 2,201
Per Share Y/E 31 Mar (Rs) FY17A FY18A FY19E FY20E FY21E Reported EPS 28.4 45.4 53.4 44.7 55.0 Adjusted EPS 28.4 46.5 53.4 44.7 55.0 Dividend per share 1.0 1.0 1.0 1.0 1.0 Book value per share 135.5 179.6 231.8 275.3 329.1
Valuations Ratios Y/E 31 Mar (x) FY17A FY18A FY19E FY20E FY21E EV/Sales 2.1 1.4 1.2 1.2 1.0 EV/EBITDA 11.0 7.8 7.0 6.6 5.5 Adjusted P/E 21.8 13.4 11.6 13.9 11.3 P/BV 4.6 3.5 2.7 2.3 1.9
DuPont Analysis Y/E 31 Mar (%) FY17A FY18A FY19E FY20E FY21E Tax burden (Net profit/PBT) 100.2 93.6 92.5 68.0 68.0 Interest burden (PBT/EBIT) 47.1 60.2 60.8 61.5 65.9 EBIT margin (EBIT/Revenue) 15.0 14.6 14.1 13.9 14.0 Asset turnover (Revenue/Avg TA) 86.5 99.7 97.9 101.3 104.3 Leverage (Avg TA/Avg Equity) 4.0 3.6 3.3 3.0 2.8 Adjusted ROAE 24.8 29.5 26.0 17.6 18.2 Source: Company, BOBCAPS Research | Note: TA = Total Assets
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DILIP BUILDCON
Ratio Analysis Y/E 31 Mar FY17A FY18A FY19E FY20E FY21E YoY growth (%) Revenue 24.8 52.0 18.8 13.9 14.3 EBITDA 24.1 41.4 15.4 13.4 14.2 Adjusted EPS 50.8 63.4 14.9 (16.4) 23.1 Profitability & Return ratios (%) EBITDA margin 19.5 18.1 17.6 17.5 17.5 EBIT margin 15.0 14.6 14.1 13.9 14.0 Adjusted profit margin 7.1 8.2 7.9 5.8 6.3 Adjusted ROAE 24.8 29.5 26.0 17.6 18.2 ROCE 19.1 22.8 21.3 21.3 23.1 Working capital days (days) Receivables 97 97 90 95 95 Inventory 119 95 90 90 90 Payables 64 71 55 60 60 Ratios (x) Gross asset turnover 2.3 2.9 2.9 3.0 3.2 Current ratio 2.1 2.0 2.6 2.2 2.2 Net interest coverage ratio 1.8 2.4 2.4 2.5 2.8 Adjusted debt/equity 1.3 1.1 1.1 0.8 0.7 Source: Company, BOBCAPS Research
EQUITY RESEARCH 94 11 April 2019
INITIATING COVERAGE
BUY HG INFRA TP: Rs 390 | 49% ENGINEERING | Infrastructure | 11 April 2019
Moving up the value chain – initiate with BUY
We initiate coverage on HG Infra Engineering (HGIEL) with BUY and a Mar’20 Jiten Rushi SOTP-based target price of Rs 390. Our positive view is based on (1) the [email protected] company’s successful evolution from road project subcontractor to lead contractor,
(2) its sound balance sheet (net D/E at 0.4x as on Dec’18), (3) controlled working capital cycle (~75 days as on Mar’18), and (4) strong execution skills.
Entry into the HAM segment augurs well, while a strong ~Rs 61bn (incl. L1) order backlog lends visibility for a 31% revenue CAGR over FY18-FY21E.
Shifting gears to focus on primary contracts: Led by prudent investments in Ticker/ Price HGINFRA IN /Rs 261 equipment, manpower and processes, HGIEL has ramped up its execution Market cap US$ 246.0mn capabilities, driving 11-fold growth in order backlog from Rs 5.4bn as on Mar’13 to Shares o/s 65mn 3M ADV US$ 0.2mn Rs 60.7bn as on Mar’19E (3x FY19E revenue; includes L1 projects of Rs 35.1bn). 52wk high/low Rs 290/Rs 170 We thus expect a revenue CAGR of 31% for FY18-FY21. Management’s focus Promoter/FPI/DII 74%/2%/15%
ahead will be on primary contracts with no further intake of subcontracting work. Source: NSE
Exploring new opportunities: HGIEL has won three HAM projects – one in its STOCK PERFORMANCE home state of Rajasthan (BPC Rs 6.1bn) and two in Haryana (totalling Rs 15.3bn). (Rs) HGINFRA The foray into HAM bodes well as this model spreads the risk between the 360 320 developer and the awarding authority. HGIEL is also exploring the metro, 280 airport runway (won a Rs 1.9bn project), railways, earthwork and water segments. 240 200 160 Controlled leverage led by stable working capital: Dec’18 gross debt stands at Jan-19 Apr-19 Mar-18 Aug-18 Oct-18
~Rs 3.6bn and net D/E at 0.4x. With a bulk of its capex completed, HGIEL May-18
aims to reduce its debt to ~Rs 2.5bn by end-Mar’19. The net working capital Source: NSE cycle at ~75 days is forecast to stay stable despite the larger scale of operations.
Initiate with BUY: Excluding asset value from the CMP, the stock is trading at 9.3x/7.9x FY20E/FY21E EPC earnings. Our SOTP target of Rs 390 values EPC at Rs 37 5 (12 x FY21E EPS ) and HAM assets at Rs 16 (1x P/BV).
KEY FINANCIALS (STANDALONE) Y/E 31 Mar FY17A FY18A FY19E FY20E FY21E Adj. net profit (Rs mn) 534 843 1,257 1,715 2,038 Adj. EPS (Rs) 29.6 12.9 19.3 26.3 31.3 Adj. EPS growth (%) 77.0 (56.4) 49.2 36.4 18.9 Adj. ROAE (%) 35.7 23.5 20.9 23.0 21.9 Adj. P/E (x) 8.8 20.2 13.6 9.9 8.4 EV/EBITDA (x) 14.5 8.9 6.3 4.8 4.2
Source: Company, BOBCAPS Research
EQUITY RESEARCH 95 11 April 2019
HG INFRA ENGINEERING
In a nutshell Strong order backlog to drive revenue growth
FIG 1 – ORDER BACKLOG OF RS 61BN AS OF MAR’19E FIG 2 – REVENUE CAGR OF 31% OVER FY18-FY21E
Source: Company, BOBCAPS Research I *Includes L1 projects of Rs 35.1bn Source: Company, BOBCAPS Research
Margin expansion led by revenue mix in favour of lead contracts
FIG 3 – EVOLUTION INTO A PRIMARY CONTRACTOR FIG 4 – …SET TO DRIVE EBITDA CAGR OF 31% AND LED BY HEAVY INVESTMENTS IN RESOURCES… ADJ. PAT CAGR OF 34% OVER FY18-FY21E
Source: Company, BOBCAPS Research I * Revenue from current order Source: Company, BOBCAPS Research I * Margins from current executable backlog and new order inflows order backlog I ^Margins from existing order backlog and new order inflows
Sound balance sheet: Falling leverage, steady working capital cycle, healthy return ratios
FIG 5 – LEAN BALANCE SHEET (NET D/E 0.2X BY FIG 6 – HEALTHY RETURN RATIOS LED BY STRONG MAR’21E) & STABLE WORKING CAPITAL (~75 DAYS) EARNINGS GROWTH & STABLE ASSET TURNOVER
Source: Company, BOBCAPS Research I *Ex -L&A to subs idiaries /related parties Source: Company, BOBCAPS Research
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Investment rationale Successful transition from subcontractor to lead contractor
Focusing purely on primary Focused investments in equipment, manpower and processes over the past three contracts years have strengthened HGIEL’s execution capabilities manifold, enabling the company to evolve from subcontractor status to lead contractor for road projects. Subcontracting now contributes just 31% of the revenue mix (FY18) as compared to 79% in FY13. Management aims to focus purely on primary contracts with no further intake of subcontracting work. This shift in profile is already translating into big-ticket order wins and a stronger margin profile for HGIEL.
FIG 7 – RECENT BIG-TICKET ORDER WINS AS A MAIN CONTRACTOR WITH EBITDA MARGINS OF OVER 15% Awarding BPC EPC cost Date of award Project Mode authority (Rs bn) (Rs bn) 10-Jan-19 Rewari-Ateli Mandi NHAI HAM 5.8 4.4
23-Jan-19 Haryana-Rajasthan Border; part of Delhi-Vadodara greenfield section NHAI EPC 10.0 10.0 25-Feb-19 Narnaul Bypass-Ateli Mendi-Narnaul section NHAI HAM 9.5 7.2 Total 25.3 21.5 Source: Company, BOBCAPS Research | BPC – Bid Project Cost
FIG 8 – EXPECT 73% REVENUE SHARE FROM MAIN CONTRACTS IN FY21 AS AGAINST 21% IN FY13 % Revenue break-up FY13 FY14 FY15 FY16 FY17 FY18 FY19E* FY20E* FY21E* Subcontract work 79.0 55.0 48.7 45.1 29.9 30.7 21.4 44.4 26.6 Main contracts 21.0 45.0 51.3 54.9 70.1 69.3 78.6 55.6 73.4 Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Source: Company, BOBCAPS Research I *Revenue share only from the current order backlog and new order inflows
EPC PREQUALIFICATION UP HGIEL has an order book fully concentrated in the roads space. From being >4.5X OVER FY14- FY18 independently prequalified to bid for a single NHAI or MORTH (roads ministry) EPC prequalification (Rs bn) project of up to Rs 2.5bn in FY14, the company is now eligible to bid for contracts HAM prequalification worth Rs 11.2bn in EPC and Rs 16.8bn in HAM. Management has guided that by 19.8 the end of Mar’19, the company’s eligibility to place bids would scale up further to 16.8 11.2 14.2 contracts worth Rs 14.2bn in EPC and Rs 19.8bn in HAM. 8.1 2.5 Order backlog up eleven-fold in six years FY14 FY17 FY18 FY19E* Source: Company, BOBCAPS Research I HGIEL’s strategic build-up of execution capabilities has fuelled 11-fold growth in *Management guidance order backlog from Rs 5.4bn as on Mar’13 to Rs 60.7bn as on Mar’19E (3x FY19E revenue; includes L1 projects of Rs 35.1bn). Additionally, the company recently won two HAM projects with a combined bid project cost (BPC) of Rs 15.3bn in Haryana and a Rs 1.9bn airport runway contract in Goa – marking wins in markets outside its home state of Rajasthan. With key opportunities ahead in Rajasthan, a robust executable backlog and wins in new segments, we model for a 31% revenue CAGR over FY18-FY21 (see Annexure A on Page 112 for detailed revenue projections).
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High revenue visibility
Order backlog surged 11x Of the current Rs 60.7bn order backlog, 42% is under execution and expected from Rs 5.4bn in Mar’13 to receipt of appointed date on the Hapur Bypass works by end-Apr’19 (EPC cost of Rs 60.7bn in Mar’19E Rs 11.7bn) would take the executable order backlog to 62%.
In addition, HGIEL has bagged a Goa airport runway contract in Feb’19 which is a short-term project spanning 12 months. Construction, however, is expected to be delayed due to the suspension of environmental clearance by the Supreme Court until the next hearing. Management expects the project to commence in H2FY20, which should boost revenue for the year. Recent wins in the roads segment (three projects with EPC cost of Rs 21.5bn) will support revenue growth in FY21 and are likely to contribute 34% to our FY21 revenue forecast.
FIG 9 – ORDER BACKLOG OF RS 60.7BN AS ON MAR’19E (3X FY19E REVENUE)
(Rs bn) Order backlog Order inflow Book-to-bill (R) (%) 3.8 100 4.0 88 3.3 3.2 3.5 80 3.0 74 2.8 2.8 3.0 61 60 2.0 2.5 1.7 46 45 40 40 2.0 35 35 40 1.5 0.8 20 14 1.0 20 11 10 10 5 3 4 3 0.5 0 0.0 FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E FY21E Source: Company, BOBCAPS Research
FIG 10 – SEGMENTAL BREAKUP OF ORDER BACKLOG* FIG 11 – GEOGRAPHICAL BREAKUP OF BACKLOG*
Source: Company, BOBCAPS Research I * As on Mar’19E Source: Company, BOBCAPS Research I * As on Mar’19E
EQUITY RESEARCH 98 11 April 2019
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Key opportunities from home ground of Rajasthan
Targeting select packages for HGIEL is targeting select NHAI work packages for EPC work on two greenfield Delhi-Vadodara, Deogarh- expressways running through Rajasthan, viz. seven packages worth Rs 60bn along Rajasthan/Gujarat Border & the Delhi-Vadodara stretch, five worth Rs 25bn for the Deogarh-Rajasthan/ Amritsar-Jamnagar EPC Gujarat border stretch and two worth Rs 10bn for the Amritsar-Jamnagar stretch. works The projects would be up for bidding between Apr’19 and May’19. The company has Rajasthan as its base and is a key infrastructure player in the state, positioning it well to capture the large market opportunity.
FIG 12 – PACKAGES FOR TWO NHAI PROJECTS PASSING THROUGH RAJASTHAN VALUED AT RS 95BN Length Value Location Lanes Mode Close Date (km) (Rs bn) Delhi to Vadodara (Pkg 13) 8 EPC 29-May-2019 29 9.4 Delhi to Vadodara (Pkg 8) 8 EPC 29-May-2019 33 9.0 Delhi to Vadodara (Pkg 16) 8 EPC 29-May-2019 26 7.1 Delhi to Vadodara (Pkg 15) 8 EPC 29-May-2019 9 9.1 Delhi to Vadodara (Pkg 11) 8 EPC 29-May-2019 22 8.8 Delhi to Vadodara Pkg 12) 8 EPC 29-May-2019 28 8.9 Delhi to Vadodara (Pkg 10) 8 EPC 29-May-2019 29 7.6 Deogarh to Rajasthan/Gujarat Border (Pkg 7) 6 EPC 30-May-2019 30 4.8 Deogarh to Rajasthan/Gujarat Border (Pkg 6) 6 EPC 30-May-2019 25 6.7 Deogarh to Rajasthan/Gujarat Border (Pkg 5) 6 EPC 30-May-2019 28 4.1 Deogarh to Rajasthan/Gujarat Border (Pkg 4) 6 EPC 30-May-2019 25 4.2 Deogarh to Rajasthan/Gujarat Border (Pkg 8) 6 EPC 30-May-2019 27 5.4 Amritsar-Jamnagar (Pkg 9) 6 EPC 22-Apr-2019 28 5.0 Amritsar-Jamnagar (Pkg 3) 6 EPC 11-Apr-2019 35 5.2 Total (14 projects) 375 95.4 Source: NHAI, Company, BOBCAPS Research
Target order backlog of >Rs 60bn by end-FY19, up 30% YoY
Order inflow of Rs 23.4bn In view of the Rajasthan expressway opportunity, HGIEL had guided for order (EPC cost) in Q4FY19 vs. inflows of Rs 25bn-30bn in Q4FY19 and an order backlog of >Rs 60bn by end- Rs 25bn-30bn guided FY19. In Q4FY19, the company has received orders worth Rs 23.4bn (EPC cost); we accordingly model for an order backlog of Rs 60.7bn by end-FY19.
HGIEL’S BID STRIKE RATE Additionally, management has identified a near-term potential bid pipeline of REMAINS IMPRESSIVE Rs 300bn-400bn in the roads sector across the states of Gujarat, Rajasthan, Strike rate-Project cost wise (%) Punjab and Haryana. The company intends to selectively explore HAM Strike rate-No. of project wise 51 opportunities in these states, capping these at a maximum of 25% of the total 40 40 31 29 portfolio. Based on the targeted order inflows and current executable backlog of 14 ~25 projects, we expect HGIEL to clock a 31% revenue CAGR over FY18-FY21.
FY16 FY17 FY18 Source: Company, BOBCAPS Research
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FIG 13 – REVENUE CAGR OF 31% OVER FY18-FY21E (61% FOR FY15-FY18)
Source: Company, BOBCAPS Research
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FIG 14 – REVENUE CONTRIBUTION FROM TOP FIVE EXECUTABLE PROJECTS EXPECTED AT 38%/40% IN FY19/FY20 Original Outstanding order Revenue As a % of total Revenue As a % of total Appointed % of work Scheduled Project Client State contract backlog as on contribution in revenue in contribution in revenue in date outstanding completion date value (Rs bn) Mar’19E (Rs bn) FY19E (Rs bn) FY19E FY20E (Rs bn) FY20E Gulabpura-Chittorgarh Modern Road Makers Rajasthan 7.1 Nov-17 5.0 77.4 Nov-19 1.6 7.6 5.0 18.9 Tata Projects - Chittorgarh-Udaipur Rajasthan 4.8 Jul-17 1.9 51.0 Jul-19 2.3 11.1 1.9 7.0 HGIEPL JV Nagpur-Katol-Warud MORTH Maharashtra 3.1 Jun-17 1.5 58.6 Jun-19 1.3 6.2 1.5 5.6 Nandurbar-Prakasha-Sahada- MORTH Maharashtra 3.0 Jun-17 1.6 61.9 Jun-19 1.1 5.3 1.6 5.9 Khetia Amarvati-Nandgaon-Morshi- MORTH Maharashtra 2.9 Jun-17 0.7 38.2 Jun-19 1.7 8.1 0.7 2.5 warud -Pandhurna Total 21.0 10.6 29.4 7.8 38.3 10.6 40.0 Source: Company, BOBCAPS Research I Note: All projects to be completed in FY20E
FIG 15 – TOP FIVE PROJECTS BY VALUE CONSTITUTE 43.5% OF TOTAL ORDER BACKLOG AS ON MAR’19E Original Outstanding order As a % of total Project Client State contract value backlog as on Comments order backlog (Rs bn) Mar’19E (Rs bn) Hapur Bypass to Moradabad Modern Road Makers Uttar Pradesh 11.7 11.7 19.3 Appointed date (AD) awaited; likely by end of Apr ’19 Gurgaon -Soha Pkg II (HAM) NHAI Haryana 6.1 5.8 9.5 AD: 30 -Jan -19; execution in full swing Gulabpura -Chittorgarh Modern Road Makers Rajasthan 7.1 5.0 8.3 Work progressing well and scheduled for completion by Dec’19 PWD - Rajasthan State Highway Jodhpur-Marwar Junction-Jojawar Rajasthan 3.0 2.0 3.3 Mobilisation began in end-Q2FY19; AD awarded in Q3FY19 Development Program - II (RSHDP -II) Chittorgarh -Udaipur Tata Projects -HGIEPL Joint Venture Rajasthan 4.8 1.9 3.1 Work progressing well and scheduled for completion by Nov’19 Total 26.4 43.5 Total order backlog 60.7 100 Source: Company, BOBCAPS Research
FIG 16 – MAJOR ONGOING/COMPLETED JOINT VENTURES ENTERED INTO BY HGIEL OVER 2013-17 Awarding Length HGIEL’s JV Partner Project State Purpose of the project Date of JV authority (km) share (%) Tata Projects Chittorgarh -Udaipur section of NH -76 Rajasthan NHAI Six -laning work on EPC basis 93.5 26 11-Nov-16 Ranjit Buildcon Babatpur -Varanasi section of NH -56 Uttar Pradesh MORTH Four -laning work on EPC basis 17.3 30 23-Jun-15 MG Contractors Changlang District Boundary to the Khonsa section of new NH -215 Arunachal Pradesh NHIDCL Rehabilitation and augmentation of Two -laning 42.8 30 15-Feb-16 Colossal Construction Construction Activities - - - - 70 10-Jan-14 Rameshwar Prasad Sharma Bari-Baseri-Weir-Bhusawar-Chhonkarwara-Kherli-Nagar-Pahari Rajasthan RSRDC, Jaipur Development of the section 122.0 51 31-May-13 Contractor road up to Haryana Border Source: Company, BOBCAPS Research
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HG INFRA ENGINEERING
Diversification across markets and segments to mitigate risk
HGIEL operates in six states including Rajasthan and also intends to selectively expand its presence in Gujarat, Punjab and Madhya Pradesh. The current order backlog from Rajasthan stands at 39%, down from >90% as on Mar’13, showcasing the company’s smooth transition into different geographies. HGIEL has also expanded from EPC to HAM roadworks and plans to diversify into other project segments by leveraging its existing capabilities towards railways, airport runways, metros, sewerage and water treatment plants.
Expanding geographical footprint
39% of order backlog from HGIEL, based out of Jaipur – Rajasthan, was established in 2003 with a focus on Rajasthan as on Mar’19E vs. road projects, including highways, bridges and flyovers. As of Mar’13, over 90% of >90% as on Mar’13 its order backlog was from Rajasthan. In order to mitigate the market concentration risk and to target massive infrastructure opportunities in other geographies, the company gradually expanded into Uttar Pradesh (20% of order backlog as of Mar’19E), Maharashtra (12%), and Haryana (27%).
In FY18, the company won its maiden HAM project in the state of Haryana (Gurgaon Soha Pkg-II) worth Rs 6.1bn, followed by a second one (Rewari-Ateli Mandi) worth Rs 5.8bn in Jan’19 and a third (Narnaul Bypass-Ateli Mendi-Narnaul section) worth Rs 9.5bn in Feb’19. The state now contributes 27% of its order backlog (including L1 projects) and these wins also mark HGIEL’s foray into the HAM space.
FIG 17 – STRONG PRESENCE ACROSS 6 STATES WITH FIG 18 – GEOGRAPHICAL BREAKUP OF ORDER OVER 30 PROJECTS UNDER VARIOUS STAGES OF BACKLOG EXECUTION/DEVELOPMENT Rajasthan Maharashtra Haryana (%) Uttar Pradesh Uttrakhand Goa Arunachal Pradesh 100 3 12 3 90 23 14 20 80 19 70 47 35 27 60 39 22 50 40 12 30 49 20 38 47 44 39 10 0
FY15 FY16 FY17 FY18 Mar'19E Source: Company, BOBCAPS Research Source: Company, BOBCAPS Research
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HG INFRA ENGINEERING
Foray into hybrid annuity model space
Likely to maintain a balanced HGIEL’s maiden Rs 6.1bn Gurgoan Soha (Pkg-II) HAM project in Haryana was mix between EPC and HAM awarded the appointed date on 30 Jan 2019 (land availability at >85%). Execution projects at 75:25 is underway and management has guided for Rs 250-300mn in revenue for Q4FY19. Equity required for the project stands at Rs 720mn, with joint debt of Rs 2.9bn tied up with Tata Cleantech (at 9.85%) and PFS (at 10.1%), besides an NHAI grant of Rs 2.4bn in place.
According to management, the company will invest equity of Rs 180mn in FY19 (25% of initial commitment), ~Rs 360mn in FY20 and the remainder in FY21. We estimate an equity investment of Rs 180mn in FY19, in line with the guidance.
The company’s second HAM project (Rewari-Ateli Mandi) worth Rs 5.8bn has a total equity requirement of ~Rs 700mn, while the Narnaul Bypass-Ateli Mendi- Narnaul section worth Rs 9.5bn requires ~Rs 1.25bn. This amount is unlikely to put any strain on the standalone balance sheet.
FIG 19 – AWARDED HAM PROJECTS – TOTAL EQUITY REQUIREMENT OF RS 2.7BN OVER 2.5-3 YEARS Narnaul Bypass-Ateli Mendi- Particulars Gurgaon-Soha (Pkg-II) Rewari-Ateli Mandi Narnaul section State Haryana Haryana Haryana Lane 6 4 6 Project length (km) 12.7 31 40.8 Award date 06-Mar-18 10-Jan-19 25-Feb-19 Financial closure Achieved Pending Pending Appointed date 30-Jan-19 Pending Pending Scheduled construction period 910 days 730 days 910 days Concession period after COD 15 years 15 years 15 years Bid project cost (Rs mn) 6,060 5,800 9,521 Land availability status > 80% Pending Pending Current status Became operational in Q4FY19 L 1 announced L 1 announced Project financing (Rs mn) Actuals Assumptions Assumptions NHAI grant 2,430 2,320 3,808 Debt 2,870 2,780 4,570 Equity 720 700 1,250 First year O&M cost 40 60 50 Lender Tata Cleantech and PFS Pending Pending Source: Company, BOBCAPS Research
The company is also in the process of identifying a suitable equity partner for its current as well as potential HAM portfolio. This will enable it to maintain a healthy balance sheet and focus on core execution capabilities.
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HG INFRA ENGINEERING
Focused investments driving execution skills
In order to support growth and enhance execution capabilities, HGIEL has invested heavily in modern equipment, skilled resources including senior management hires, and operations/processes such as SAP. This in turn ensures (i) quick mobilisation of equipment at site, (ii) efficient control over execution, (iii) nil to minimal subcontracting, (iv) elimination of cost overruns and delays due to untimely equipment breakdown or manpower shortage, and (v) complete backward integration of resources.
Strengthening the asset and talent pool
Over Rs 4.6bn invested in The company has invested over Rs 4.6bn in plant & machinery over Mar’16 to plant & machinery over Dec’18, taking its fleet of modern construction equipment to 1,633 units, capable Mar’16 to Dec’18 of executing large projects. In addition, SAP software was implemented in Jul’18 to manage the supply chain, handle procurement and monitor projects. The company is also installing GPS tracking devices for its equipment fleet.
FIG 20 – FLEET OF >1,600 UNITS OF MODERN CONSTRUCTION EQUIPMENT FOR LARGE-SCALE EXECUTION
Source: Company, BOBCAPS Research
Large-scale recruitment, from On the people front, HGIEL has added 2,745 employees since Mar’16, reaching 1,070 as of Mar’16 to 3,815 an employee strength of 3,815 as on Dec’18, which includes 3,105 (82%) skilled staffers as on Dec’18 and highly skilled workers such as engineers and management professionals. It has also hired key managerial personnel from the industry, including:
. Mr. Raja Dutta as COO in May’18 (previously associated with L&T for ~21 years), and
. Col. George Mathew as Senior Vice President – Technicals in Nov’17 (previously associated with NHAI as General Manager, with DIAL as AVP, BRNL as Project Director, and SEW Infra as SVP).
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FIG 21 – EXPERIENCED SENIOR MANAGEMENT TEAM Name Designation Date of joining Raja Dutta COO May-18 Col. George Mathew Senior Vice President – Technicals Nov-17 Rajiv Puri Assistant Vice President – Supply Chain Management 14-Nov-17 Pardeep Kansal Deputy General Manager – IT and SAP 14-Nov-17 Chandrashekhar Prabhakar Kasture Vice President – Projects 15-May-17 Ajay Kumar Gupta AVP – Plant & Equipment 12-Dec-16 Source: Company, BOBCAPS Research
FIG 22 – 82% OF THE CURRENT EMPLOYEE SET FIG 23 – SKILLED EMPLOYEES SPREAD ACROSS COMPRISES SKILLED AND HIGH-SKILLED WORKERS FUNCTIONS FOR EFFICIENT EXECUTION* Unskilled (No.) No of employees (%) 4% Employee cost as a % of revenue (R) Highly skilled 5,000 6.5 6.3 8% 4,000 3,815 6.0 Semi-skilled 6.2 2,894 5.5 14% 3,000 5.5 5.0 2,000 1,497 1,070 4.5 690 1,000 4.0 4.2 Skilled 3.9 0 3.5 74% FY15 FY16 FY17 FY18 Dec-18
Source: Company, BOBCAPS Research Source: Company, BOBCAPS Research I * As on Dec’18
Healthy balance sheet led by stable working capital cycle
HGIEL’s current gross debt stands at ~Rs 3.6bn and net D/E at 0.4x. With a bulk of its capex completed, we factor in a reduction in gross debt to Rs 2.8bn for FY19 (vs. management’s target of ~Rs 2.5bn), translating into a net D/E ratio of 0.3x for the year. Despite the company’s growing scale of operations, the net working capital (NWC) cycle is likely to remain stable at ~75 days over FY19-FY21 due to controlled leverage and a favourable mix of projects – 70% of the current order backlog (incl. L 1) is from government authorities where payments are faster.
Debt to reduce with completion of capex cycle
As per management, Mar’19 HGIEL listed in Mar’18 and used the IPO proceeds to lower debt to Rs 3.6bn as gross debt likely at ~Rs 2.5bn; on Dec’18 (includes interest-free promoter debt of ~Rs 600mn vs. Rs 832mn in we conservatively expect gross FY18). The company expects to pare debt further to ~Rs 2.5bn by end-Mar’19, debt at Rs 2.8bn including part repayment of promoter debt, by utilising IPO proceeds and via internal accruals.
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FIG 24 – GROSS DEBT BREAKUP AS OF DEC’18 Particulars (Rs bn) Gross debt 3.6 Term loan + working capital loan (@ ~10%) 3.0 Promoters’ loan (interest-free) 0.6 Working capital limit Rs 8.5bn with cost linked to MCLR Source: Company, BOBCAPS Research
We note that HGIEL undertook significant capex of Rs 3.7bn over FY16-FY18 and has guided for additional outlays of Rs 1bn in FY19 – of this, it has already spent Rs 900mn in 9MFY19 by deploying its IPO proceeds. Consequently, the company is well-equipped for growth and management does not expect any major capex requirements for the next couple of years. We factor in a tapering of capex from Rs 1bn in FY19 to Rs 750mn each in FY20 and FY21.
With capex winding down, we assume the additional cash flows would be utilised to reduce debt, to fund the equity commitment in its three HAM projects (~Rs 2.7bn over the next 2.5-3 years) and to fund additional working capital requirements. Nonetheless, we conservatively factor in higher gross debt of Rs 2.8bn for FY19 (including promoter debt), translating into a net D/E ratio of 0.3x for the year.
FIG 25 – UTILISATION OF NET PROCEEDS FROM IPO MONEY IPO proceeds Particulars (Rs mn ) Purchasing capital equipment 900 Repayment / prepayment of certain indebtedness 1,156 General corporate purposes 721 Total 2,776 Source: Company, BOBCAPS Research
Stable working capital cycle
One of the best NWC levels HGIEL has been prudent in managing working capital levels, resulting in a in road construction space relatively better and more stable working capital cycle than industry peers. This stability has been due to a favourable portfolio mix, largely made up of road projects that are NHAI/state-funded and have a tight 45-50-day payment cycle which keeps debtors in check.
On the subcontracting side, the company is executing projects for reputed developers such as IRB Infrastructure and Tata Projects with whom it has well established relationships and is assured of timely payments. Additionally, the company has been able to balance the mix of private and government projects under execution to ensure judicious working capital levels.
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FY18, however, saw a significant increase in debtor and payable days on account of a jump in revenue to Rs 5bn in Q4FY18 as against Rs 8.9bn in 9MFY18 – this led to a working capital cycle of 76 days (43 in FY17), albeit still well under control as against peers. Given the sustained ramp-up in execution, we expect NWC days to remain at 75 days each in FY19/FY20/FY21.
FIG 26 – EXPECT STABLE NET WORKING CAPITAL LEVELS OF ~75 DAYS AND NET D/E OF 0.2X BY MAR’21
Source: Company, BOBCAPS Research
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Financial review Margins to remain stable post robust gains over FY16-FY18
Margin guidance at 15% for HGIEL’s EBITDA margins have improved from as low as 11% in FY16 to 14.9% in Q4FY19 and 15-16% for FY18 backed by multiple levers: (i) prudent investments towards building FY20 operational scale and efficiency via the addition of equipment, manpower and processes; (ii) effective backward integration; (iii) geographical clustering of projects such that smaller contracts are taken up contiguous to larger works for maximum synergies and mobilisation of cost savings; and (iv) a change in revenue mix in favour of primary contracts over subcontracts.
The company is also targeting new HAM projects that carry 100-150bps higher operating margins than direct EPC projects where margins tend to be lower at 13-14% due to high competition (usually 8-10 bidders vs. 4-5 bidders for HAM). Management has guided for EBITDA margins of ~15% in Q4FY19 and 15-16% for FY20 – we assume margins of 14.7% in Q4FY19 (14.7% in 9MFY19) and 15% each in FY20 and FY21 respectively.
FIG 27 – EXPECT STABLE EBITDA MARGINS OF 15% EACH IN FY20/FY21
Source: Company, BOBCAPS Research
Expect 34% earnings CAGR
Expect revenue/EBITDA/adj. Backed by a robust order book, the ongoing transition away from subcontracting, PAT CAGR of 31%/31%/ 34% geographic expansion, entry into the high-margin HAM space, and segmental over FY18-FY21 diversification beyond road projects, we expect HGIEL to report revenue, EBITDA and adj. PAT growth of 31%, 31% and 34% respectively over FY18-FY21.
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FIG 28 – REVENUE LIKELY TO EXPAND 2.2X FIG 29 – ADJ. PAT LIKELY TO EXPAND 2.4X THROUGH THROUGH FY18-FY21 FY18-FY21
Source: Company, BOBCAPS Research Source: Company, BOBCAPS Research
Return ratios to remain healthy
We model for healthy return ratios with average ROE/ROCE/ROIC of 21.9%/27.6%/21.1% over FY19-FY21 on the strength of high earnings growth, a well-managed balance sheet, comfortable working capital levels, and healthy gross asset turnover.
FIG 30 – NET D/E AND NET WORKING CAPITAL FIG 31 – RETURN RATIOS TO REMAIN STRONG LED BY LEVELS WELL WITHIN THE COMFORT ZONE HIGH GROSS ASSET TURNOVER
Source: Company, BOBCAPS Research Source: Company, BOBCAPS Research
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Valuation methodology
Initiate coverage with BUY HGIEL’s strong order backlog of Rs 60.7bn or 3x FY19E revenues as on Mar’19E and Mar’20 SOTP-based TP (includes L 1 projects of Rs 35.1bn) and favourable revenue mix lends visibility for a of Rs 390 31%/34% revenue/earnings CAGR over FY18-FY21. Further, led by a well- managed balance sheet, we expect net D/E to improve to 0.2x by Mar’21 as against 0.4x as on Dec’18.
12x one year forward P/E The stock is trading at 9.3x/7.9x FY20E/FY21E standalone earnings, which multiple ascribed to core EPC excludes Rs 16/sh for the value of its HAM projects. We initiate coverage with business BUY and a Mar’20 sum-of-the-parts (SOTP) target price of Rs 390. For our SOTP model, we valued the EPC business at Rs 375/sh based on 12x FY21E earnings and HAM projects at Rs 16/sh on P/BV basis.
FIG 32 – SOTP-BASED TARGET PRICE OF RS 390 Value Multiple Valuation Per share Particulars Basis of valuation (Rs mn) (x) (Rs mn) (Rs) Standalone business (EPC) P/E on FY21E earnings 2,038 12 24,462 375 Value of subsidiaries (HAM projects) Equity investment as on Mar’20E 1,028 1,028 16 -Gurgaon-Soha P/BV 540 1 540 8 -Rewari-Ateli Mandi P/BV 175 1 175 3 -Ateli Mendi to Narnaul section P/BV 313 1 313 5 Total 3,066 25,489 390 Shares outstanding (mn) 65 Source: Company, BOBCAPS Research I Note: Target price rounded off
FIG 33 – RELATIVE STOCK PERFORMANCE
HGINFRA NSE Nifty 140
120
100
80
60 Jul-18 Jan-19 Jun-18 Apr-19 Apr-18 Sep-18 Mar-19 Mar-18 Oct-18 Dec-18 Nov-18 May-18 Source: NSE I Note: Stock listed in Mar’18
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Key risks
. Political risk: HGIEL has a strong presence in its home state of Rajasthan. Any slowdown in state government spending may affect the company’s growth prospects.
. Downturn in road sector capex: Capex in the road sector has witnessed some revival over the last two years. Any slowdown in project awarding would impact the company’s growth and our estimates.
. Execution risk: While HGIEL has strong execution skills, the planned entry into new segments and geographies exposes it to execution risks. Also, as the average size and complexity of projects increases, the company faces the challenge of completing large works within the stipulated time and cost. Execution delays due to land acquisition hurdles or other regulatory bottlenecks could further affect HGIEL’s revenue.
. Profitability risk: Historically, HGIEL’s operating profit has been higher than peers due to its backward integration model and concentration in the high- growth roads space in northern and western India. Any adverse development in these regions may lead to challenges in sustaining profitability. Further, any delay in payments from private clients can materially affect working capital levels, impacting the company’s balance sheet and earnings.
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Annexure A: Revenue projections
FIG 1 – EXPECT FY20/FY21 REVENUE SHARE OF 8%/63% FROM NEW ORDER INFLOWS WITH SHARE FROM MAIN CONTRACTS AT 56%/73% Revenue Original 9MFY19 Order backlog Projects (Rs mn) Q4FY19E FY19E FY20E FY21E Comments value revenue as on Dec 2018 AD: 2-Sep-15; scheduled COD: Mar-18; Pending work scheduled for Sitarganj-Tanakpur 2,426 209 68 68 277 - - completion in Q4FY19 AD: 24-Feb-16; scheduled COD: 23-Feb-18; Pending work scheduled for Uncha-Nagla-Khanuawa-Roppas-Dholpur 2,694 287 117 117 404 - - completion in Q4FY19 AD: 20-Oct-16; scheduled COD: 17-Oct-18; Pending work scheduled for Manoharpur-Dausa 2,097 497 61 61 558 - - completion in Q4FY19 AD: 18-Jan-17; scheduled COD: 17-Jan-19; Pending work scheduled for Tonk-Sawai Madhopur 2,328 717 341 341 1,058 - - completion in Q4FY19 Amravati-Nandgaon-Morshi-Warud-Pandhurna AD: 16-Jun-17; scheduled COD: 12-Jun-19; Pending work scheduled for 2,431 942 1,083 370 1,312 713 - (Nandgaon -Morshi Pkg -1) completion in H1FY20 Amarvati-Nandgaon-Morshi-Warud-Pandhurna (Morshi- AD: 13-Jun-17; scheduled COD: 12-Jun-19. Pending work scheduled for 2,945 1,203 1,125 450 1,653 675 - Wardhariver Pkg -2) completion in H1FY20. AD: 12-Jun-17; scheduled COD: 11-Jun-19. Pending work scheduled for Nagpur-Katol-Warud (Katol-Warud Pkg-3) 3,142 913 1,841 350 1,263 1,491 - completion in H1FY20. AD: 13-Jun-17; scheduled COD: 12-Jun-19. Pending work scheduled for Morshi-Chandurbazar- Achalpur (Morshi-Achalpur Pkg-4) 2,387 825 1,469 350 1,175 1,119 - completion in H1FY20. Bhandara - Khat -Ramtek -Mansar - Mauli - Nayakund - AD: 15-Jun-17; scheduled COD: 14-Jun-19. Pending work scheduled for 2,576 1,223 763 325 1,548 438 - Parseoni - Saoner (Bhandara -Ghotitok Pkg -5) completion in H1FY20. Bhandara-Khat-Ramtek-Mansar-Mauli-Nayakund- AD: 12-Jun-17; scheduled COD: 11-Jun-19. Pending work scheduled for 2,583 986 1,220 350 1,336 870 - Parseoni -Saoner (Amdi -Saoner Pkg -6) completion in H1FY20. Nandurbar (Near Kolde)- Prakasha- Sahada-Khetia AD: 24-Jul-17; scheduled COD: 23-Jul-19. Change in scope of work which is 2,981 804 1,845 280 1,084 1,565 - (Kolde -Prakasha -Khetia Pkg -7) likely to result in additional order inflow of ~Rs1bn. Revised COD: Dec'19. AD: 20-Jul-17; scheduled COD: 19-Jul-19. Pending work scheduled for Balotra to Sanderao via Jalore (Pkg II) 1,133 618 438 300 918 138 - completion in Q2FY20. Raipur- Mundla- Garwara-Dubliya- Karodiya- Sunel- 363 164 15 15 180 - - Pending work scheduled for completion in Q4FY19. Sirpoi upto Bhawanimandi Boarder (Sunel - Jhalawar) Sunel from 20km to 35.8km 403 233 34 34 267 - - Pending work scheduled for completion in Q4FY19. Tonk 1,194 151 183 50 201 133 - Pending work scheduled for completion in H1FY20. Kaithal (MRM) 4,407 120 101 101 222 - - The project has achieved COD in Q4FY19.
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Revenue Original 9MFY19 Order backlog Projects (Rs mn) Q4FY19E FY19E FY20E FY21E Comments value revenue as on Dec 2018 AD: 3-Jul-17; scheduled COD: 2-Jul-19. There is a likely change in scope of Chittorgarh-Udaipur 4,834 1,666 2,468 600 2,266 1,868 - work resulting in additional order inflow of Rs1bn. Work progressing well and additional work is scheduled for completion by Dec'19. AD: 3-Nov-17; scheduled COD: 2-Nov-19. There is a likley descoping of work Gulabpura-Chittorgarh (Bhilwara) 7,117 1,068 5,507 495 1,563 5,012 - to the extent of ~Rs 700mn due to ROW issue. Remaining work is progressing well and is likely to complete as per schedule COD. AD: 30-Jan-19; >85% of land is available; BPC at Rs 6.1bn; first year O&M at Gurgaon-Soha Pkg II (HAM) 4,650 - 6,060 270 270 1,939 2,441 Rs 40mn; Construction period of 2.5 years and operation period of 15 years Mobilisation started in end-Q2FY19; AD awarded in Q3FY19. Project slated to Kundal to Jhadol 1,871 203 1,669 205 408 834 629 be completed by H1FY21. Mobilisation started in end-Q2FY19; AD awarded in Q3FY19. Project funded Banar - Bhopalgarh - Kuchera Highway 2,071 304 1,767 305 609 932 530 by International Bank for Reconstruction and Development (IBRD). Project slated to be completed by H1FY21. Mobilisation started in end-Q2FY19; AD awarded in Q3FY19. Project funded Bhawi - Pipar - Khimsar Highway 854 181 673 185 366 488 - by World Bank. Project slated to be completed by H2FY20. Mobilisation started in end-Q2FY19; AD awarded in Q3FY19. Includes Jodhpur-Marwar Junction-Jojawar 3,041 530 2,511 500 1,030 1,368 642 maintenance period of 5 years. Project funded by World Bank. Project slated to be completed by H1FY21. AD likely by end Apr'19; ~70% of land - 3H stage; Construction period of 24 Hapur Bypass-Moradabad 11,723 - 11,723 - - 4,103 7,034 months The project was put on hold by the airforce resulting in loss of revenue in H2 GE Airforce 1,246 254 395 - 254 395 - FY19. However, the project is likely to start from Apr'19 and pending work is slated to get completed in FY20. (A) Total revenue from current order backlog 14,202 43,479 6,123 20,325 24,083 11,276 Expected revenue from the existing order backlog (B) Revenue from operation and maintenance - 97 - 18 115 200 300 (i) Order inflows in Q4FY19 23,365 L1 announced on 10-Jan-2019; Land available - over 80% in 3D stage; Length 31km, Bid project cost (BPC) AT Rs 5.8bn; NHAI project cost at Rs 4.3bn, first -Rewari-Ateli Mandi (HAM) 4,350 - - - - 218 2,175 year O&M cost at Rs 60mn. Construction period of 2 years and operation period of 15 years -Haryana-Rajasthan Border; part of Delhi-Vadodara L1 announced on 23-Jan-2019. Length 36.9 years, NHAI BPC at Rs9.6bn and 9,970 - - - - 499 4,985 greenfield section 24 months construction. Assumed contribution to the revenue from Q4FY20. L1 announced on 25-Feb-2019. Length 41km, BPC at Rs 9.5bn, NHAI BPC at -Narnaul Bypass-Ateli Mendi to Narnaul section (HAM) 7,150 - - - - 358 3,432 Rs 7.7bn, first yr O&M cost ar Rs 50mn, construction period of 910 days and operation period of 15 yrs. Assumed contribution to the revenue from Q4FY20.
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Revenue Original 9MFY19 Order backlog Projects (Rs mn) Q4FY19E FY19E FY20E FY21E Comments value revenue as on Dec 2018 LOA: 27-Feb-2019. Awarded from Megawaide Construction DMCC; 12 months construction. Mobilisation had started but execution likely to get -Flexible & Rigid Pavement (Runway, Taxiway & Apron) at 1,895 - - - - 663 1,232 delayed due to the suspension of environmental clearance by the Supreme Greenfield International Airport at Mopa, Goa Court until the next hearing; According to the management the work is likely to commence in H2FY20 (ii) Order inflows in FY20E 40,000 250 4,625 H1FY20E (Roads) 5,000 - 250 2,000 5%/40% revenue contribution in FY20E/21E -Road EPC 5,000 - 250 2,000 5%/40% revenue contribution in FY20E/21E H2FY20E (Roads) 35,000 - - 2,625 7.5% revenue contribution in FY21E -Road HAM 10,000 - - 750 7.5% revenue contribution in FY21E -Road EPC 25,000 - - 1,875 7.5% revenue contribution in FY21E (ii) Order inflows in FY21E 45,000 - 600 H1FY21E (Roads) 22,000 - - 600 2.5% revenue contribution in FY21E -Road HAM 6,000 - - 150 2.5% revenue contribution in FY21E -Road EPC 18,000 - - 450 2.5% revenue contribution in FY21E H2FY21E (Roads) 23,000 - - - Nil revenue contribution in FY21E (C) Total - 2,256 19,470 Expected revenue from new order inflows Total revenue (A + B + C) 14,299 43,479 6,141 20,440 26,539 31,046 Revenue CAGR of 31% over FY18-FY21E % Growth YoY 46.8 29.8 17.0 Source: Company, BOBCAPS Research | Note: AD – Appointed Date; BPC – Bid Project Cost; COD – Commercial Operation Date; O&M – Operations & Maintenance; ROW – Right of Way
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FINANCIALS (STANDALONE)
Income Statement Y/E 31 Mar (Rs mn) FY17A FY18A FY19E FY20E FY21E Total revenue 10,560 13,927 20,440 26,539 31,046 EBITDA 1,244 2,081 3,005 3,984 4,658 EBIT 988 1,542 2,235 3,067 3,629 Net interest income/(expenses) (189) (401) (455) (541) (622) Other income/(expenses) 34 47 124 72 82 Exceptional items 0 0 0 0 0 EBT 834 1,188 1,904 2,598 3,089 Income taxes (300) (345) (648) (883) (1,050) Extraordinary items 0 0 0 0 0 Min. int./Inc. from associates 0 0 0 0 0 Reported net profit 534 843 1,257 1,715 2,038 Adjustments 0 0 0 0 0 Adjusted net profit 534 843 1,257 1,715 2,038
Balance Sheet Y/E 31 Mar (Rs mn) FY17A FY18A FY19E FY20E FY21E Accounts payables 1,165 3,281 3,298 4,269 4,995 Other current liabilities 377 1,556 1,232 1,818 2,126 Provisions 47 93 141 152 178 Debt funds 2,037 4,058 2,802 3,152 3,002 Other liabilities 335 447 707 839 981 Equity capital 180 652 652 652 652 Reserves & surplus 1,581 4,757 5,975 7,650 9,649 Shareholders’ fund 1,761 5,409 6,626 8,302 10,301 Total liabilities and equities 5,721 14,844 14,807 18,531 21,584 Cash and cash eq. 483 2,289 598 667 701 Accounts receivables 1,838 4,343 5,040 6,544 7,655 Inventories 492 1,068 1,649 2,134 2,497 Other current assets 291 2,033 1,648 2,252 2,761 Investments 0 0 181 1,029 2,184 Net fixed assets 2,044 4,119 4,349 4,182 3,903 CWIP 7 86 20 20 20 Intangible assets 0 0 0 0 0 Deferred tax assets, net 23 61 71 84 99 Other assets 545 846 1,251 1,619 1,763 Total assets 5,721 14,844 14,807 18,531 21,584 Source: Company, BOBCAPS Research
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Cash Flows Y/E 31 Mar (Rs mn) FY17A FY18A FY19E FY20E FY21E Net income + Depreciation 790 1,382 2,027 2,631 3,068 Interest expenses 189 401 455 541 622 Non-cash adjustments 0 0 0 0 0 Changes in working capital (289) (1,708) (1,308) (1,275) (939) Other operating cash flows 0 0 0 0 0 Cash flow from operations 690 74 1,174 1,897 2,750 Capital expenditures (1,097) (2,693) (934) (750) (750) Change in investments 0 0 (181) (848) (1,155) Other investing cash flows 0 0 0 0 0 Cash flow from investing (1,097) (2,693) (1,115) (1,598) (1,905) Equities issued/Others 0 3,166 0 0 0 Debt raised/repaid 809 2,021 (1,256) 350 (150) Interest expenses (189) (401) (455) (541) (622) Dividends paid 0 0 (39) (39) (39) Other financing cash flows (1) (361) 0 0 0 Cash flow from financing 620 4,426 (1,750) (230) (811) Changes in cash and cash eq. 214 1,807 (1,692) 69 34 Closing cash and cash eq. 483 2,289 598 667 701
Per Share Y/E 31 Mar (Rs) FY17A FY18A FY19E FY20E FY21E Reported EPS 29.6 12.9 19.3 26.3 31.3 Adjusted EPS 29.6 12.9 19.3 26.3 31.3 Dividend per share 0.0 0.0 0.5 0.5 0.5 Book value per share 97.7 83.0 101.7 127.4 158.1
Valuations Ratios Y/E 31 Mar (x) FY17A FY18A FY19E FY20E FY21E EV/Sales 1.7 1.3 0.9 0.7 0.6 EV/EBITDA 14.5 8.9 6.3 4.8 4.2 Adjusted P/E 8.8 20.2 13.6 9.9 8.4 P/BV 2.7 3.2 2.6 2.1 1.7
DuPont Analysis Y/E 31 Mar (%) FY17A FY18A FY19E FY20E FY21E Tax burden (Net profit/PBT) 64.1 71.0 66.0 66.0 66.0 Interest burden (PBT/EBIT) 84.4 77.0 85.2 84.7 85.1 EBIT margin (EBIT/Revenue) 9.4 11.1 10.9 11.6 11.7 Asset turnover (Revenue/Avg TA) 217.4 135.4 137.9 159.2 154.8 Leverage (Avg TA/Avg Equity) 3.3 2.9 2.5 2.2 2.2 Adjusted ROAE 35.7 23.5 20.9 23.0 21.9 Source: Company, BOBCAPS Research | Note: TA = Total Assets
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Ratio Analysis Y/E 31 Mar FY17A FY18A FY19E FY20E FY21E YoY growth (%) Revenue 48.2 31.9 46.8 29.8 17.0 EBITDA 59.4 67.2 44.4 32.6 16.9 Adjusted EPS 77.0 (56.4) 49.2 36.4 18.9 Profitability & Return ratios (%) EBITDA margin 11.8 14.9 14.7 15.0 15.0 EBIT margin 9.4 11.1 10.9 11.6 11.7 Adjusted profit margin 5.1 6.1 6.1 6.5 6.6 Adjusted ROAE 35.7 23.5 20.9 23.0 21.9 ROCE 31.8 23.4 23.8 29.6 29.5 Working capital days (days) Receivables 64 114 90 90 90 Inventory 19 33 35 35 35 Payables 46 102 70 70 70 Ratios (x) Gross asset turnover 6.1 3.9 3.8 4.2 4.4 Current ratio 1.9 2.0 1.9 1.9 1.9 Net interest coverage ratio 5.2 3.8 4.9 5.7 5.8 Adjusted debt/equity 0.9 0.3 0.3 0.3 0.2 Source: Company, BOBCAPS Research
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INITIATING COVERAGE
BUY TP: Rs 295 | 19% KNR CONSTRUCTIONS | Infrastructure | 11 April 2019
On a sustainable growth trajectory – initiate with BUY
We initiate coverage on KNR Constructions (KNRC) with BUY and a Mar’20 TP Jiten Rushi of Rs 295. KNRC has robust financials with (1) positive CFO, (2) a strong balance [email protected] sheet, (3) healthy working capital, and (4) best-in-class operating margins (~16% over FY09-FY18). A Mar’19E order backlog of Rs 59bn in road and irrigation works (incl. L1) offers healthy EPC revenue visibility for over two years. With appointed dates for three of five HAM projects likely by Apr-May’19 (one awarded in Q4FY18), we expect faster execution from H2FY20 – a key stock catalyst.
Strong order wins in Q4: KNRC’s order flow was muted at Rs 5.6bn in 9MFY18. Ticker/ Price KNRC IN /Rs 247 However, robust inflows in Q4FY18 at Rs 39.8bn (EPC cost of five HAM Market cap US$ 502.0mn projects) and added wins worth Rs 7.7bn in Q4FY19 (one HAM & one EPC) have Shares o/s 141mn 3M ADV US$ 0.4mn taken the Mar’19E order backlog to Rs 59bn (2.9x FY19E revenues). Executable 52wk high/low Rs 340/Rs 165 projects form 36% of this backlog, but receipt of appointed dates for three more Promoter/FPI/DII 55%/3%/30%
HAM contracts in Apr/May’19 as guided (after a quarter’s delay) would raise the Source: NSE proportion to 68%. Management has guided for FY20/FY21 revenue of Rs 24bn/ Rs 30bn, based on which we arrive at a 16% revenue CAGR over FY18-FY21. STOCK PERFORMANCE (Rs) KNRC Gearing low on prudent working capital management: KNRC has a relatively 390 330 lower net working capital cycle than peers at under 55 days (average over 270 210 FY09-FY18), whic h supports positive cash from operations and a low D/E ratio 150 (0.1-0.2x). The company has not raised additional capital post IPO in 2008, 90 Jul-17 Jul-16 Jul-18
underlining its ability to meet funding requirements through internal accruals. Jan-17 Jan-19 Jan-18 Apr-17 Apr-16 Apr-19 Apr-18 Oct-17 Oct-16 Oct-18
Source: NSE Initiate with BUY: Excluding asset value from the CMP, the stock is trading at 12.6x/11.1x FY20E/FY21E standalone earnings. Improved contract wins and a stronger order backlog have substantially raised KNRC’s EPC revenue visibility for 2-2.5 years. Our SOTP target of Rs 295 values the EPC business at Rs 228 (14x FY21E EPS) and BOT/HAM /Land assets at Rs 67/sh (1x P/BV).
KEY FINANCIALS (STANDALONE) Y/E 31 Mar FY17A FY18A FY19E FY20E FY21E Adj. net profit (Rs mn) 1,681 2,721 2,190 2,007 2,291 Adj. EPS (Rs) 12.0 19.3 15.6 14.3 16.3 Adj. EPS growth (%) 50.7 61.8 (19.5) (8.3) 14.1 Adj. ROAE (%) 20.6 26.5 17.3 13.6 13.6 Adj. P/E (x) 20.7 12.8 15.9 17.3 15.2 EV/EBITDA (x) 15.6 9.3 9.0 9.8 7.6
Source: Company, BOBCAPS Research
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KNR CONSTRUCTIONS
In a nutshell
Strong order backlog with sound execution record
FIG 1 – MAR’19E ORDER BACKLOG OF RS 59BN FIG 2 – RECENT ORDER WINS TO DRIVE REVENUES
Source: Company, BOBCAPS Research | *Includes L1 projects of Rs 39.8bn in Source: Company, BOBCAPS Research FY18 and Rs 38bn in FY19
Margins to remain best-in-class
FIG 3 – AVERAGE EBITDA MARGINS TO REMAIN FIG 4 – PAT MARGINS REDUCING DUE TO HIGHER STABLE AT ~16% OVER FY20-FY21E EFFECTIVE TAX RATE BUT STILL AHEAD OF PEERS
Source: Company, BOBCAPS Research Source: Company, BOBCAPS Research
Falling leverage and steady working capital cycle
FIG 5 – LEAN BALANCE SHEET SUPPORTED BY STABLE FIG 6 – OUR MAR’20 SOTP-BASED TARGET PRICE OF NET WORKING CAPITAL (50-55 DAYS) RS 295 HOLDS 19% UPSIDE
Source: Company, BOBCAPS Research Source: Company, BOBCAPS Research
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Investment rationale Stellar execution record
Earned early completion KNRC has extensive expertise in road construction, having completed ~6,000 bonuses for various projects lane km of roadworks across 12 states in India over the past two decades, besides diversifying into the irrigation segment. The company has earned early completion bonuses on several projects, led by management’s active involvement in driving execution, a large fleet of in-house construction equipment, and effective sourcing of raw material. A reputation for timeliness and quality execution has made KNRC a preferred EPC contractor for many developers and government authorities.
FIG 7 – PROJECTS SHOWCASING STRONG EXECUTION CAPABILITIES
(Days) Scheduled completion Actual completion
1,600 1,440 1,219 1,200 910 910 880 730 800 582 609 450 343 365364 365 364 365 364 400
0 Bijapur - Hyderabad - Karimnagar - Hyderabad - Siricilla - Narsapur - Walayar - Penchalakona - Hungud Ramagundam Kamareddy Chanda Siddipet Aswaraopet Vadakkancherry Yerpedu Source: Company, BOBCAPS Research
Strong order backlog with healthy revenue visibility
KNRC’s Mar’19E backlog stands at Rs 59bn (including L1 contracts of Rs 38bn), implying a book-to-bill ratio of 2.9x FY19E revenue. The current executable share is 36% of the total book which we expect will rise to 68% within a couple of months, as appointed dates have been awarded for one NHAI HAM project in Jan’19 and dates for three more are guided in Apr/May’19 (all from NHAI; delayed by a quarter).
Management anticipates a strong revenue recovery in FY20 led by the contribution from newer HAM projects, and has guided for revenue of over Rs 24bn/Rs 30bn in FY20/FY21. We believe the revenue guidance looks fair and hence build in similar estimates for both years, leading to an estimated revenue CAGR of 16% over FY18-FY21 (see Annexure A on Page 133 for detailed revenue projections).
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FIG 8 – HIGHEST EVER ORDER INFLOW OF RS 45.4BN IN FY18
Source: Company, BOBCAPS Research I *Includes L1 projects of Rs 39.8bn in FY18 and Rs 38bn in FY19
FIG 9 – ROAD PROJECTS DOMINATE THE ORDER FIG 10 – STRONG REGIONAL PRESENCE: SOUTH BACKLOG INDIA ACCOUNTS FOR 98% OF ORDER BACKLOG*
Order backlog of Rs 59bn as on Mar'19E Irrigation Roads: captive* 2.8% 21.5%
Roads: non-captive* 75.7%
Source: Company, BOBCAPS Research | *Includes L1 road projects Source: Company, BOBCAPS Research I *Order backlog as on Mar’19E
FIG 11 – GEOGRAPHICAL BREAK-UP OF CURRENT EXECUTABLE ORDER BACKLOG OF RS 15.4BN AS ON DEC’18
Source: Company, BOBCAPS Research
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FIG 12 – SEGMENTAL BREAKUP OF REVENUE, EBITDA AND EBITDA MARGIN
Expect order inflow from Particulars (Rs mn) FY19E FY20E FY21E high-margin irrigation Revenue projects in H2FY20 to fuel Roads 13,628 22,640 28,235 margin gains in FY21 Irrigation 6,648 1,631 2,100 Total 20,276 24,271 30,335 % share in revenue Roads 67.2 93.3 93.1 Irrigation 32.8 6.7 6.9 EBITDA Roads 2,376 3,620 4,516 Irrigation 1,662 134 378 Total EBITDA 4,038 3,754 4,894 % share in EBITDA Roads 58.8 96.4 92.3 Irrigation 41.2 3.6 7.7 EBITDA margins (%) Roads 17.4 16.0 16.0 Irrigation 25.0 8.2 18.0 Blended margins 19.9 15.5 16.1 Source: Company, BOBCAPS Research
Superior EBITDA margins vis-à-vis peers
Margins expected to return to KNRC has maintained superior operating margins of ~16% on average over historical average of ~16% FY09-FY18 as against 10-14% for peers in the EPC segment. Management has over FY20E-FY21E further guided for healthy ~15% margins for both FY19 and FY20. Our estimates are higher at 19.9% for FY19 due to a reversal of provisions, cost adjustments and contribution from high-margin irrigation projects, followed by a return to the historical ten-year average of 15.5%/16.1% for FY20/FY21.
We expect the company to sustain industry-leading EBITDA margins backed by:
. a large fleet of owned construction equipment (over 2,100 units of equipment as on Dec’18 with a large gross block of Rs 8.9bn);
. captive quarrying mines near project sites, leading to timely and cost-effective sourcing of raw material (aggregates/M-Sand);
. in-house team of skilled experts such as project engineers, site supervisors and site engineers (808 as on Dec’18 out of a team of 1,325 qualified and experienced employees);
. outsourcing of low-value, low-margin work such as earth excavation; and
. own maintenance workshop to curtail equipment breakdowns.
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FIG 13 – BEST-IN-CLASS STANDALONE EBITDA FIG 14 – STABLE EBITDA MARGINS AT ~16% OVER MARGINS FY20E-FY21E
Source: Company, BOBCAPS Research Source: Company, BOBCAPS Research
Comfortable liquidity and low leverage to support growth
KNRC’s strong balance sheet with net D/E of 0.2x as on Dec’18 stems from a lean working capital cycle of 37 days (ex-cash and loans & advances to subsidiaries/joint ventures) – among the best capital levels in the EPC space. The EPC business continues to generate strong cash from operations, averaging Rs 2.2bn over FY15-FY18, largely due to management’s decision to stay away from the capital-intensive BOT toll business. The company intends to take up BOT/HAM contracts only if these have a lucrative threshold IRR of 16-20%.
This strategy has helped keep leverage in check and should enable KNRC to bid aggressively for new projects both in the road EPC and HAM space. We expect order inflows of Rs 28bn for the company from the roads segment each in FY20 and FY21.
FIG 15 – LOWEST NET D/E (0.1-0.2X) IN THE EPC FIG 16 – AVERAGE NET WORKING CAPITAL EXPECTED SPACE SUPPORTED BY POSITIVE CFO TO REMAIN UNDER 55 DAYS OVER FY19-FY21
Source: Company, BOBCAPS Research Source: Company, BOBCAPS Research
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Attractive portfolio of operational road assets
KNRC’s operational asset portfolio comprises ten projects, six of which are HAM contracts in the development phase. Of the remaining four, the company has a balanced mix of two annuity and two BOT toll road projects. All except for one were awarded by NHAI and are located in South India, barring one in Bihar.
KNRC’s equity commitment (including subordinated debt) for the operational portfolio is Rs 5.3bn, which is fully funded. In FY18, the operational SPVs reported annuity receipts totalling Rs 1.5bn and gross toll collection of Rs 970mn (Rs 995mn in 9MFY19). The two operational BOT assets are fully funded and self-sustaining led by a pick-up in traffic and project refinancing, as outlined below.
Walayar-Vadakkancherry (KNR Walayar Tollways Private Ltd)
The Walayar-Vadakkancherry road project in Kerala was awarded to KNRC by NHAI on a BOT toll basis. The company holds 100% stake and achieved commercial operation date (COD) on 31 Oct 2015. Gross toll collection stood at Rs 517mn in FY18 (+24.4% YoY) and Rs 455mn in 9MFY19 (+20.1% YoY).
Management expects a ramp-up in collection from the current daily average of Rs 1.7mn/day to Rs 2.2mn/day once the adjoining stretches are completed (likely from H2FY20). Traffic improvement and interest rate reduction from 9.5% to 8.5% have helped the project generate sufficient cash to meet its principal, interest and operating & maintenance payments.
The road caters to commercial traffic heading towards Kochi Port and Kochi International Container Transhipment Terminal, besides serving as an arterial link to most of the important southern cities such as Salem, Erode, Coimbatore, Trissur, Palakkad, Kochi, Alappuzha, Kollam, Thiruvananthapuram and Nagercoil. Major industries such as the Wise Park, HP Gas Plant, ITI, BPL, UB, Instrumentation Limited, Percot Meridan and BEML are located in the vicinity.
Muzaffarpur-Barauni (KNR Muzaffarpur Baurauni Tollways Private Ltd)
The Muzaffarpur-Barauni project in Bihar was awarded to the company by NHAI on a BOT toll basis. KNRC holds 51% stake (balance held by JV partner JKM Infra Project) and achieved 100% provisional COD on 24 Aug 2017. The project stretch has not received the final COD certificate as NHAI is yet to hand over right of way to the second toll plaza.
Gross toll collection stood at Rs 453mn in FY18 (+139% YoY as only partly operational in FY17) and Rs 540mn in 9MFY19 (+74% YoY on a low base). This translates to an average daily toll collection of Rs 2mn/day in 9MFY19, which has risen to Rs 2.5mn/day currently led by higher overloading income. Management
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expects collections to normalise to Rs 2.2mn/day from FY20. Traffic improvement and interest rate reduction from 12% to 9.25% have helped the project generate sufficient cash to meet its principal, interest and operating & maintenance payments. So far, KNRC has invested ~Rs 900mn in the project and it is self-sustaining.
The project corridor is located in the state of Bihar and passes through three districts, namely Muzaffarpur, Samastipur and Begusarai. Muzaffarpur is an important area for the wholesale cloth trade and the largest city in northern Bihar, while Barauni is situated on the Ganga river and is an important industrial belt, housing major industrial units such as IOC Refinery, Barauni Thermal Power Plant, Hindustan Fertilizers Corporation and Barauni Dairy.
FIG 17 – EXPECT GROSS TOLL COLLECTION CAGR OF 20% OVER FY18-FY21 LED BY TRAFFIC IMPROVEMENT Gross toll Q1FY18 Q2FY18 Q3FY18 Q4FY18 FY18* Q1FY19 Q2FY19 Q3FY19 Q4FY19E FY19E** FY20E FY21E collection (Rs mn) Walayar- 119 127 133 138 517 154 138 163 173 628 715 787 Vadakkancherry Muzaffarpur- 112 82 117 142 453 212 147 182 199 739 813 890 Barauni Total 231 209 250 280 970 366 285 345 371 1,366 1,528 1,677 % Growth YoY 60.3 40.8 11.8 9.7 Source: Company, BOBCAPS Research I *Not comparable YoY as the projects were partially operational in FY17 I **Not comparable YoY due to lower traffic base
FIG 18 – EXPECT AVERAGE DAILY TOLL COLLECTION OF RS 2.2MN/DAY AT WALAYAR AND RS 2.4MN/DAY AT MUZAFFARPUR IN FY21
Source: Company, BOBCAPS Research
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FIG 19 – OPERATIONAL ASSET PORTFOLIO IS FULLY FUNDED AND SELF-SUSTAINING Patel KNR Infrastructures Patel KNR Heavy Infrastructures KNR Walayar Tollways KNR Muzaffarpur Barauni Particulars (Rs mn) Limited (PKIL)* Limited (PKHIL)** Private Limited Tollway Private Limited Stake 40% 40% 100% 51% Project type BOT (Annuity) BOT (Annuity) BOT (Toll) BOT (Toll) State Karnataka Telangana Kerala Bihar JV partner PEL PEIL - JKM Infra Project Ltd No of lanes - - Two to Four Two Client NHAI NHAI NHAI NHAI Length (km) 60 53 54 108 Concession start date 26-Mar-07 02-Mar-08 18-May-13 08-Jul-12 Concession period (years) 20 20 20 21 PCOD on 03-Jun-16 (on 75% basis) & on 24-Aug-17 COD 21-Dec-09 11-Jun-10 31-Oct-15 (on 100% basis). 100% toll collection commenced from 01 -Oct -17 Revenue sharing: Grant / Premium Rs 50mn (to - - 2,646 (Premium) increase by 5% YoY ) Project cost 4,420 5,920 9,005 4,589 Equity as on 31-Dec-18 370 649 3,974*** 1,771 Debt outstanding as 2,517 4,040 1,591 3,091 31 -Dec -18 Securitised Yes Yes - - Semi-annuity - 329.4 443.7 - - 36 instalments Rs 517mn in FY18 and Rs 453mn in FY18 and Toll revenue - - Rs 455 mn in 9M FY19 Rs 540 mn in 9M FY19 Source: Company, BOBCAPS Research | *PKIL securitised its project loan through issuance of non-convertible debentures to LIC of India & raised Rs 4.1bn in Apr’10. Proceeds were used to retire the existing high-cost project loan and unsecured loans of promoters and to meet issue expenses, ** PKHIL securitised its project loan through issuance of non-convertible debentures to L&T Infrastructures Finance Company and raised Rs 4bn in Sep’13. Proceeds were used to retire the existing high-cost project loans (other than the ECB of US$ 25mn availed from Standard Chartered Bank, London) and unsecured loans of promoters and to meet issue expenses, ***Includes additional quasi equity of Rs 2.6bn towards repayment of loans | PCOD – Provisional Commercial Operation Date
Financial closure achieved for four HAM projects
Equity commitment of KNRC secured five HAM contracts worth Rs 39.8bn (EPC cost) in Q4FY18, Rs 5.2bn for six HAM significantly boosting its order backlog, followed by a sixth win in Q4FY19. Of projects over 2.5-3 years these (former five projects), the company was awarded appointed dates for one NHAI project (Chittor-Mallavaram) in Jan’19 and expects dates for three others (all from NHAI) by Apr’19/May’19. It has already achieved financial closure for these projects.
As per the commercial terms with banks, the company has to contribute 50% of its equity commitment upfront for the four NHAI HAM projects, which translates to ~Rs 2bn. Of this, KNRC intends to invest ~Rs 710mn by end-Mar’19 (for one project). Management also indicated that banks have shown interest in financing its Karnataka State Highways Improvement Project (KSHIP). A concession agreement for KSHIP was signed in Jan’19 and the company expects to attain
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financial closure by end-May’19 and to receive the appointed date by end-Sep’19 or early-Oct’19 – we thus expect work to start only in H2FY20.
KNRC won its sixth HAM project in Mar’19 from NHAI at a bid cost of Rs 9.2bn and a total project cost of Rs 8.8bn, a steep ~25% premium to NHAI’s project cost of Rs 7bn. This showcases the company’s strength in selecting and bidding for projects with medium-to-low competitive intensity but higher EPC margins.
Monetisation of stake in three NHAI HAM projects
Stake sale by KNRC to Cube KNRC has signed a share purchase agreement (SPA) with Cube Highways and Highways Infrastructure (Cube) to sell its stake in three HAM projects housed in separate SPVs in a phased manner. The company is also in final discussions with Cube to Cube will initially invest sell the stake in its fourth NHAI HAM project. 49% during construction As per the SPA, KNRC and Cube shall infuse 51% and 49% of equity requirement respectively during the construction period (Cube to invest its share only after
First stage: Buy out KNRC’s 25% 90% right of way is acquired by NHAI and allotted to the company). KNRC will stake at the time of COD – taking thereafter sell its entire balance stake to Cube in two stages, with the first stage to Cube’s stake to 74% be completed post COD and the second stage scheduled after the mandatory lock-in period as per the concession agreement.
Second stage: Buy out KNRC expects to invest ~Rs 1.5bn for its 51% stake in the three SPVs against KNRC’s balance 26% stake two years after COD – taking Cube’s which it will receive ~Rs 2.6bn from Cube. This would cap the company’s equity stake to 100% commitment at 51%. However, we have not considered the transaction in our Source: Company, BOBCAPS Research valuation since Cube will begin investing for its 49% stake only once ROW is largely complete. According to management, this may take at least 12 months. Hence, we have valued the equity investments in all the HAM projects at 100% stake for KNRC.
FIG 20 – SHARE PURCHASE AGREEMENT WITH CUBE HIGHWAYS Total equity Equity investment - Equity investment – Consideration for Implied P/BV Project (Rs mn) requirement KNRC's share at 51% Cube ’s share at 49% KNRC’s 51% stake* (x) Trichiraopalli-Kallagam 962 491 472 736 1.5 Meensurutti-Chidambaram 455 232 223 365 1.6 Chittor-Mallavaram 1,433 731 702 1,521 2.1 Total 2,850 1,454 1,396 2,621 1.8 Source: Company, BOBCAPS Research I *Amount may undergo some changes at the time of COD
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FIG 21 – HAM PROJECTS: TOTAL EQUITY COMMITMENT OF RS 5.2BN TO BE INVESTED OVER 2.5-3 YEARS (~RS 1.2BN LIKELY TO BE INFUSED BY END OF MAR’19 Concessi HAM projects Length EPC (net FC date / Authority State on period BPC TPC Equity Grant Debt Land acquisition status (Rs mn) (km) of GST) AD (years) 83% 3H complete; MOA signed Trichiraopalli- 4-Jan-19/ with local NHAI project director NHAI Tamil Nadu 17 38.7 10,206 7,464 9,100 962 4,318 3,820 Kallagam Pending & sent to NHAI for clearance; AD likely by end -Apr ’19 >80% 3H complete; landowners asking for revised compensation, Meensurutti- 4-Jan-19/ NHAI Tamil Nadu 17 31.5 4,820 3,518 4,316 455 2,041 1,820 resulting in delays; negotiations Chidambaram Pending underway and likely to end soon; AD likely to be delayed to May ’19 70% 3H complete; delayed due to pending forest clearance on 7km stretch. 1 st stage forest clearance Ramsanpalle- 4-Oct-18/ from state complete; 2 nd stage NHAI Telangana 17 46.8 12,340 8,438 10,456 1,042 5,245 4,169 Mangloor Pending clearance from MOEF likely in May’19; AD likely by end-May’19; on completion of 2-stage forest clearance, 83% 3H complete Chittor- Andhra AD NHAI 17.5 61.1 17,301 11,607 14,555 1,433 7,393 5,730 > 90% 3H complete Mallavaram Pradesh 4-Jan -19 CA signed on 18-Jan-19; land acquisition will take four months; Magadi- FC likely KSHIP Karnataka 9 166 11,445 8,723 10,153 534 7,485 2,134 75% funded by ADB and 25% Somwarpeth by May’19 contribution from the company via debt:equity L1: 7-Mar-19; BPC: Rs 9.2bn; Oddanchatram- 1st year O&M cost: Rs 30mn; Madathukulam NHAI Tamil Nadu 17 45.4 9,200 6,300 8,790 800 3,680 4,310 Pending concession period: 17 years (Pkg -2) including construction period of 2 years Total 65,312 46,050 57,370 5,226 30,161 21,983 Source: Company, BOBCAPS Research | Note: AD – Appointed Date; BPC – Bid Project Cost; CA – Concession Agreement; FC – Financial Closure; MOA - Memorandum of Agreement
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Financial review Revenue to pick up from H2FY20 led by new order execution
Revenue growth in FY19 is likely to remain subdued due to a muted uptick in order backlog, as land acquisition issues have delayed the award of appointed dates for recently won HAM projects. KNRC has received the appointed date for one NHAI HAM project in Jan’19, expects dates for three more by Apr’19/May’19 and that for the KSHIP HAM project by Sep-Oct’19.
Once these dates are in hand, KNRC’s revenue trajectory is likely to improve sharply from FY20 onwards – we estimate a revenue contribution of 7%/49%/58% from the five HAM projects (awarded in Q4FY18) in Q4FY19/FY20/FY21 and accordingly model for a revenue CAGR of 16% for the company over FY18-FY21.
FIG 22 – REVENUE GROWTH TO BE DRIVEN BY RECENT HAM ORDER WINS
Revenue contribution from five HAM projects awarded in Q4FY18 expected at 49%/58% in FY20/FY21
Source: Company, BOBCAPS Research
Lean balance sheet
KNRC has one of the best balance sheets in the EPC space underpinned by efficient working capital management and limited exposure to the BOT space. Its standalone net D/E ratio as on Dec’18 stood at 0.2x and we expect this metric to improve to 0.1x by Mar’21 backed by a steady net working capital cycle of < 55 days (on average).
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FIG 23 – NET D/E WELL WITHIN THE COMFORT ZONE
Source: Company, BOBCAPS Research
Earnings growth impacted due to higher effective tax rate
KNRC enjoyed tax advantages under section 80IA of the Income Tax Act which is applicable to infrastructure projects. With the government announcing a sunset date of 31 Mar 2017 for section 80IA, any project whose execution commenced post this date attracts the full corporate tax rate. However, as per the Companies Act, KNRC was liable to pay tax as per the minimum alternate tax (MAT) rate for projects falling under the purview of section 80IA, which has resulted in the accumulation of MAT credit.
We expect KNRC’s effective tax rate to increase from 10% in 9MFY19 (–1.5% effective tax rate in FY18) to 29% in FY21 after factoring in the availability of MAT credit which the company intends to utilise over the next two years. The higher tax outgo would cause earnings growth to decelerate at an estimated 6% CAGR over FY18-FY21.
FIG 24 – SHIFT TO FULL TAX REGIME TO HIT EARNINGS GROWTH
Source: Company, BOBCAPS Research
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Valuation methodology
Initiate coverage with BUY Improved contract wins and a stronger order backlog have substantially raised and SOTP-based Mar’20 TP KNRC’s EPC revenue visibility for over 2 years. Moreover, the company’s sound of Rs 295 financial metrics comprising positive operating cash flows, lean working capital and low net D/E (0.2x as on Dec’18) will help it fund new HAM projects. Equity requirements for existing HAM projects are unlikely to be a concern due to its recent deal with Cube (49% stake to be monetised during the construction period). However, we have not considered this transaction in our valuation as Cube will begin investing only once 90% of ROW is available.
The stock is trading at 12.6x/11.1x FY20E/FY21E standalone earnings after adjusting Rs 67/sh for the value of its assets. These valuations are fairly attractive considering the company’s impressive execution track record, strong balance sheet, superior margins and favorable return ratios. We initiate coverage with BUY and a Mar’20 sum-of-the-parts (SOTP) target price of Rs 295.
14x one-year forward P/E For our SOTP model, we value (i) the EPC business at Rs 228/sh based on 14x multiple ascribed to core EPC FY21E earnings – this is higher than the 12x multiple we assign to its peer-set due business to its strong balance sheet, faster cash conversion cycle, superior margins and backward integration model; (ii) BOT assets at Rs 35/sh on P/BV basis (implied P/BV of 1x for invested equity in the two assets as on Mar’20); (iii) HAM projects at Rs 27/sh on P/BV (implied P/BV of 1-1.2x for equity investment in six projects as on Mar’20); and (iv) Land at Rs 5/sh on P/BV (of 1x for investment made as per balance sheet).
FIG 25 – SOTP-BASED TARGET PRICE OF RS 295 Value Multiple Valuation Value per share Business Basis of valuation (Rs mn) (x) (Rs mn) (Rs) * Standalone business (EPC) P/E on FY21E EPS 2,291 14 32,068 228 Equity investment in BOT and HAM road assets Equity investment as on Mar’20E 8,161 8,651 67 and real estate Equity investment in BOT projects P/BV 4,878 4,878 35 -Walayar 3,974 1.0 3,974 28 -Muzaffarpur 903 1.0 903 6 Equity investment in HAM projects P/BV 3,283 3,773 27 -Trichiraopalli-Kallagam 722 1.2 890 6 -Meensurutti-Chidambaram 228 1.2 281 2 -Ramsanpalle-Mangloor 521 1.0 521 4 -Chittor-Mallavaram 1,146 1.2 1,414 10 -Magadi-Somwarpeth 267 1.0 267 2 -Oddanchatram-Madathukulam 400 1.0 400 3 Land P/BV 733 1.0 733 5 Target price (Rs) 40,719 295 O/s shares (mn) 141 Source: Company, BOBCAPS Research I Note: Target price rounded off
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FIG 26 – FORWARD P/E BAND (5 YEAR MEAN AT 12X)
Source: Bloomberg, BOBCAPS Research
FIG 27 – RELATIVE STOCK PERFORMANCE
KNRC NSE Nifty 340
290
240 190
140
90 Jul-17 Jul-16 Jul-18 Jan-17 Jan-19 Jan-18 Apr-17 Apr-16 Apr-19 Apr-18 Oct-17 Oct-16 Oct-18 Source: NSE Key risks
. Slowdown in road sector capex: Capex in the road sector has witnessed some revival over the last two years. Any slowdown in project awarding would impact the company’s growth and our estimates. . Delay in execution of projects in hand: Execution delays due to land acquisition hurdles or delay in appointed dates or other regulatory bottlenecks could adversely affect KNRC’s revenue prospects. . Execution risk: While KNRC has excellent execution skills, a potential entry into new segments and geographies exposes it to execution risks. Also, with the average size and complexity of projects increasing, the company faces the challenge of completing large projects within the stipulated time and cost.
. Profitability risks: Historically, KNRC’s operating profitability has been higher than peers due to its backward integration model and concentration in the roads space in South India. If the company enters new geographies, it may not always have access to cheaper raw material sources/quarries and may face other challenges to sustaining profitability. . Unpredictable traffic: KNRC’s presence in the toll road segment exposes it to risks associated with unpredictability in traffic growth.
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Annexure A: Revenue projections
FIG 1 – CURRENT EXECUTABLE BACKLOG FORMS 36% OF TOTAL BOOK WHICH WE EXPECT WILL RISE TO 68% BY MAY’19 Revenue Original Order backlog Project (Rs mn) 9MFY19 Q4FY19E FY19E FY20E FY21E Comments order value as on Dec'18 Road There were tree cutting issues resulting in project delay; AD - Mar-17; ~15% complete in FY18, 30-35% execution expected in FY19 and balance in FY20; Hubli – Hospet Section of NH - 63 6,674 1,523 4,637 672 2,195 3,965 - Additional work order of Rs 610mn was awarded in Q3FY19 to the company's JV partner, BSCPL Infrastructure; However, the JV partner passed on the additional work to the company 85% complete up to Mar 2018; Additional work order of ~Rs 350mn was Madurai -Ramanathpuram Section of NH-49 9,371 1,340 510 434 1,774 77 - awarded in Q2FY19 due to change in scope; applied for final COD in Apr'19 Thiruvananthapuram (Trivandrum) Bypass 6,691 1,308 1,740 580 1,888 1,160 - Pending work expected to be completed in FY20 ~60% likely to be executed in FY19 and the balance in FY20; construction Construction of Two-Tier Flyover in Salem City 2,952 610 1,007 250 860 757 - period of 42 months Work is progressing slowly due to change in change in scope of work for which Gobuk – Mariyang – Sijhon- Nallah in (Pashighat) approval is pending for change in rates while the company has received 3,000 752 1,740 300 1,052 1,440 - Arunachal Pradesh approval for change in quantity; Execution likely to pick-up from Q1FY20; work likely to get over n FY20 Additional work of ~Rs 150mn awarded in Q3FY19 due to change in scope; Dindigul - Bangalore Road (Pollachi-Coimbatore ~80 work stands completed & the company has applied for PCOD; only 4,149 1,054 1,077 600 1,654 477 - Section) ~85% land available; balance work likely to get completed on availability of land; Company expects the land to get awarded by H1FY20 Arcot-Villupuram 3,200 480 200 - 480 200 - Scheduled for completion in Q1FY20 Kanchipuram-Vandavasi 1,850 20 - - 20 - - Completed in Q1FY19 Malliyakarai-Rasipuram-Thiruchengode-Erode Road 2,241 120 - - 120 - - Completed in Q1FY19 Construction of Grade Seperator with First level Flyover along Dr. Nanjappa road and Second Level Flyover along Chinnaswamy road & 100 Feet road 1,461 241 - - 241 - - Completed in Q1FY19 including pedestrian subway at Gandhipuram area in Coimbatore city Other road projects 1,688 1,282 256 1,945 1,026 - Scheduled for completion in FY20 (A) Total road projects 9,135 12,194 3,092 12,228 9,102 -
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Revenue Original Order backlog Project (Rs mn) 9MFY19 Q4FY19E FY19E FY20E FY21E Comments order value as on Dec'18 Irrigation 95% complete up to Mar’19; scheduled for completion in Q1FY20. Additional Konda Pochamma Sagar irrigation project 5,607 3,930 1,480 1,406 5,336 74 work order of ~Rs 1.1bn awarded in Q2FY19 due to change in scope of work. Company has applied for COD 90% complete up to Mar’19; scheduled for completion in Q1FY20. Additional Yedula irrigation project 6,006 1,020 180 162 1,182 18 work order of ~Rs 600mn awarded in Q2FY19 due to change in scope. Company has applied for COD Awarded in a JV on 18-May-16; Scheduled completion date: 17 Oct 18. Palamuru Rangareddy Lift Irrigation Scheme (in JV 3,831 130 1,200 - 130 1,200 Project running behind schedule due to land acquisition hurdles and funding with PSK & GVR; Cos share at 51%) issue from JV partners. Scheduled for completion in FY20 Other irrigation projects - 339 - - 339 Scheduled for completion in FY20 (B) Total irrigation projects 5,080 3,199 1,568 6,648 1,631 - (C) Other projects 15 - - 15 - Scheduled for completion in Q1FY20 (I) Total revenue (A+B+C) 14,215 15,408 4,660 18,876 10,748 - EPC cost of 5 HAM projects 83% - 3H complete; AD by end of apr'19; Memorandum of agreement Trichiraopalli - Kallagam, NHAI 7,464 7,464 - - 1,866 3,359 (MOA) signed with local project director of NHAI and sent to NHAI for final clearance >80% - 3H complete; AD likely to get delayed and expected by end May'19; Meensurutti - Chidambaram, NHAI 3,518 3,518 - - 880 1,583 Land owners asking for revision in compensation, resulting in delays; negotiations could be concluded soon 70% - 3H available; AD likely by end May’19. Delayed due to pending forest clearance on 7km stretch - 1ststage forest clearance from the state complete Ramsanpalle - Mangloor, NHAI 8,438 8,438 - - 2,110 3,797 and 2nd stage forest clearance from the Centre pending. On completion of two -stage forest clearance, 83% - 3H complete Chittor - Mallavaram, NHAI 11,607 11,607 1,400 1,400 4,875 4,991 90% - 3H complete; AD: 4-Jan-19 Concession agreement signed on 18-Jan-19; financial closure likely by Magadi - Somwarpeth, KSHIP 8,723 8,723 - 2,181 3,925 May’19. Land acquisition will take four months. 75% ADB (Asian Development Bank) funded and 25% contribution from the company (II) Total revenue from HAM projects 39,750 39,750 1,400 1,400 11,911 17,655 (III) Total revenue (I + II) 14,215 55,158 6,060 20,276 22,658 17,655 Expected revenue from current order backlog
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Revenue Original Order backlog Project (Rs mn) 9MFY19 Q4FY19E FY19E FY20E FY21E Comments order value as on Dec'18 Order inflows Q4FY19 (Roads) Concession agreement signed on 18-Jan-19; financial closure likely by Oddanchatram - Madathukulam, NHAI (HAM) 6,300 - - 315 2,835 May’19. Land acquisition will take four months. 75% ADB (Asian Development Bank) funded and 25% contribution from the company Bidadi - Harohalli road in Bengaluru, KRDCL 1,351 - - 338 675 L 1: 7-Mar-2019; AD likely by Jun'19; Construction period of 24 months Salem fly over, at Ramanathapuram and Sungam 2,238 560 1,119 L1: 26-Mar-2019; AD likely by Jun'19; Construction period of 24 months Junctions (IV) Total 9,889 - - 1,212 4,630 FY20E H1FY20E (Roads) 8,000 - - 400 3,200 5%/40% revenue contribution in FY20E/FY21E H2FY20E 27,000 - - - 4,600 -Irrigation 7,000 - - - 2,100 30% revenue contribution in FY21E -Roads 20,000 - - - 2,500 12.5% revenue contribution in FY21E (V) Total 35,000 - - 400 7,800 FY21E H1FY21E (Roads) 10,000 - - - 250 2.5% revenue contribution in FY21E H2FY21E 25,000 - - - - -Irrigation 10,000 - - - - Nil revenue contribution in FY21E -Roads 15,000 - - - - Nil revenue contribution in FY21E (VI) Total 35,000 - - - 250 Total combined revenue (III + IV + V + VI) 14,215 55,158 6,060 20,276 24,271 30,335 Expect revenue CAGR of ~16% over FY18-21E YoY growth (%) 5.0 19.7 25.0 Source: BOBCAPS Research I *Includes L1 projects announced up to Mar’19
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FINANCIALS (STANDALONE)
Income Statement Y/E 31 Mar (Rs mn) FY17A FY18A FY19E FY20E FY21E Total revenue 15,411 19,317 20,276 24,271 30,335 EBITDA 2,296 3,861 4,038 3,754 4,894 EBIT 1,657 2,520 2,327 2,238 3,124 Net interest income/(expenses) (219) (231) (299) (347) (379) Other income/(expenses) 303 393 461 470 480 Exceptional items 0 0 0 0 0 EBT 1,741 2,682 2,488 2,362 3,226 Income taxes (60) 39 (299) (354) (936) Extraordinary items (109) 0 110 0 0 Min. int./Inc. from associates 0 0 0 0 0 Reported net profit 1,573 2,721 2,300 2,007 2,291 Adjustments 0 0 0 0 0 Adjusted net profit 1,681 2,721 2,190 2,007 2,291
Balance Sheet Y/E 31 Mar (Rs mn) FY17A FY18A FY19E FY20E FY21E Accounts payables 1,427 2,184 1,778 2,327 2,909 Other current liabilities 0 0 0 0 0 Provisions 145 184 167 199 249 Debt funds 1,441 2,204 2,500 3,000 2,600 Other liabilities 4,212 3,508 3,569 4,448 5,552 Equity capital 281 281 281 281 281 Reserves & surplus 8,674 11,297 13,529 15,469 17,692 Shareholders’ fund 8,955 11,578 13,810 15,750 17,973 Total liabilities and equities 16,179 19,658 21,824 25,724 29,284 Cash and cash eq. 246 438 664 674 735 Accounts receivables 2,698 3,560 3,787 4,884 6,067 Inventories 574 712 778 997 1,247 Other current assets 0 0 0 0 0 Investments 5,966 5,976 7,449 9,264 10,641 Net fixed assets 2,607 3,315 3,504 3,489 2,969 CWIP 15 0 6 6 6 Intangible assets 0 0 0 0 0 Deferred tax assets, net 815 1,408 1,656 1,775 1,904 Other assets 3,258 4,248 3,980 4,636 5,716 Total assets 16,179 19,658 21,824 25,724 29,284 Source: Company, BOBCAPS Research
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KNR CONSTRUCTIONS
Cash Flows Y/E 31 Mar (Rs mn) FY17A FY18A FY19E FY20E FY21E Net income + Depreciation 2,211 4,062 4,011 3,523 4,060 Interest expenses 219 231 299 347 379 Non-cash adjustments 0 0 0 0 0 Changes in working capital 840 (2,134) (635) (630) (905) Other operating cash flows 0 0 0 0 0 Cash flow from operations 3,270 2,160 3,675 3,240 3,534 Capital expenditures (793) (2,035) (1,906) (1,500) (1,250) Change in investments (2,113) (11) (1,473) (1,815) (1,376) Other investing cash flows 0 0 0 0 0 Cash flow from investing (2,906) (2,045) (3,379) (3,315) (2,626) Equities issued/Others 0 0 0 0 0 Debt raised/repaid 316 763 296 500 (400) Interest expenses (219) (231) (299) (347) (379) Dividends paid (66) (66) (68) (68) (68) Other financing cash flows (310) (389) 0 0 0 Cash flow from financing (279) 77 (71) 86 (846) Changes in cash and cash eq. 85 192 225 10 61 Closing cash and cash eq. 246 438 664 674 735
Per Share Y/E 31 Mar (Rs) FY17A FY18A FY19E FY20E FY21E Reported EPS 11.2 19.3 16.4 14.3 16.3 Adjusted EPS 12.0 19.3 15.6 14.3 16.3 Dividend per share 0.4 0.4 0.4 0.4 0.4 Book value per share 63.7 82.3 98.2 112.0 127.8
Valuations Ratios Y/E 31 Mar (x) FY17A FY18A FY19E FY20E FY21E EV/Sales 2.3 1.9 1.8 1.5 1.2 EV/EBITDA 15.6 9.3 9.0 9.8 7.6 Adjusted P/E 20.7 12.8 15.9 17.3 15.2 P/BV 3.9 3.0 2.5 2.2 1.9
DuPont Analysis Y/E 31 Mar (%) FY17A FY18A FY19E FY20E FY21E Tax burden (Net profit/PBT) 96.6 101.5 88.0 85.0 71.0 Interest burden (PBT/EBIT) 105.1 106.4 107.0 105.5 103.3 EBIT margin (EBIT/Revenue) 10.8 13.0 11.5 9.2 10.3 Asset turnover (Revenue/Avg TA) 107.1 107.8 97.8 102.1 110.3 Leverage (Avg TA/Avg Equity) 1.8 1.7 1.6 1.6 1.6 Adjusted ROAE 20.6 26.5 17.3 13.6 13.6 Source: Company, BOBCAPS Research | Note: TA = Total Assets
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Ratio Analysis Y/E 31 Mar FY17A FY18A FY19E FY20E FY21E YoY growth (%) Revenue 70.7 25.3 5.0 19.7 25.0 EBITDA 50.1 68.2 4.6 (7.0) 30.4 Adjusted EPS 50.7 61.8 (19.5) (8.3) 14.1 Profitability & Return ratios (%) EBITDA margin 14.9 20.0 19.9 15.5 16.1 EBIT margin 10.8 13.0 11.5 9.2 10.3 Adjusted profit margin 10.9 14.1 10.8 8.3 7.6 Adjusted ROAE 20.6 26.5 17.3 13.6 13.6 ROCE 18.7 23.0 17.2 14.2 17.5 Working capital days (days) Receivables 64 67 68 73 73 Inventory 14 13 14 15 15 Payables 34 41 32 35 35 Ratios (x) Gross asset turnover 2.5 2.6 2.2 2.2 2.5 Current ratio 1.2 1.5 1.7 1.6 1.6 Net interest coverage ratio 7.6 10.9 7.8 6.5 8.3 Adjusted debt/equity 0.1 0.2 0.1 0.1 0.1 Source: Company, BOBCAPS Research
EQUITY RESEARCH 138 11 April 2019
INITIATING COVERAGE
BUY TP: Rs 210 | 40% PNC INFRATECH | Infrastructure | 11 April 2019
Geared for buoyant growth – initiate with BUY
With a Rs 129bn order backlog as on Mar’19E (incl. L1 of Rs 38.5bn) and book- Jiten Rushi to-bill ratio of 4.4x FY19E revenue, PNC Infratech (PNCL) has the most robust [email protected] revenue visibility in the sector. Its BOT portfolio of seven operational projects is fully funded and offers high cash flow visibility. Other key positives are low gearing
(0.2x as of Dec’18), healthy margins and likely award of appointed dates for three
HAM projects by Apr-May’19. We see strong rerating potential and hence prefer
PNCL in the infrastructure space – BUY with a Mar’20 TP of Rs 210.
High growth visibility led by regional edge: PNCL is a strong player in the roads Ticker/ Price PNCL IN /Rs 150 sector in North India, especially Uttar Pradesh which forms ~64% of its order Market cap US$ 554.9mn backlog. With appointed dates received for the Rs 25.2bn/Rs 20bn Purvanchal/ Shares o/s 257mn 3M ADV US$ 0.4mn Mumbai-Nagpur expre ssways, its current executable backlog stands at 70%, the 52wk high/low Rs 164/Rs 122 best amongst peers. PNCL has financial closure for its slate of three HAM Promoter/FPI/DII 56%/6%/22%
projects (EPC cost Rs 38.5bn) and expects appointed dates in Q1FY20, which Source: NSE will make the backlog 100% executable by end-Jun’19. We expect growth to accelerate from Q4FY19 and forecast a 47% revenue CAGR over FY18-FY21. STOCK PERFORMANCE (Rs) PNCL Fully funded BOT portfolio raises cash flow predictability: PNCL has 14 road 240 210 projects, of which 7 operational assets generated gross toll collection of Rs 180 150 6.8bn in FY18 (+15% YoY). These 7 projects are fully funded via a total equity 120 investment of Rs 5.9bn and are self-sustaining on a combined basis, driven by a 90 Jul-17 Jul-16 pickup in traffic and loan refinancing. Based on estimated toll receipts, we Jul-18 Jan-17 Jan-19 Jan-18 Apr-17 Apr-16 Apr-19 Apr-18 Oct-17 Oct-16 Oct-18
expect free cash flows of Rs 1.9bn for the BOT SPVs over FY18-FY21. Source: NSE
Initiate with BUY: PNCL is trading at 9.0x/7.7x FY20E/FY21E EPC earnings (ex-assets). Our SOTP target of Rs 210 values the EPC business at Rs 165 (12x FY21E EPS) & BOT/HAM assets at Rs 44 (NPV/1x P/BV). We see a rerating led by a large order book, steady margins (13.5%) and low leverage (0.4x, FY21E).
KEY FINANCIALS (STANDALONE) Y/E 31 Mar FY17A FY18A FY19E FY20E FY21E Adj. net profit (Rs mn) 1,844 1,604 2,241 3,031 3,535 Adj. EPS (Rs) 7.2 6.3 8.7 11.8 13.8 Adj. EPS growth (%) (5.7) (13.0) 39.7 35.3 16.6 Adj. ROAE (%) 12.5 9.5 11.7 13.9 14.2 Adj. P/E (x) 20.8 24.0 17.2 12.7 10.9 EV/EBITDA (x) 17.0 15.2 9.6 6.8 6.1
Source: Company, BOBCAPS Research
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PNC INFRATECH
In a nutshell
High executable order backlog
FIG 1 – ROBUST ORDER BACKLOG OF RS 129BN* FIG 2 – PICK-UP IN EXECUTION LED BY OFFERS STRONG GROWTH VISIBILITY CONTRIBUTION FROM NEWER PROJECTS
Source: Company, BOBCAPS Research I *Includes L1 projects of Rs 38.5bn Source: Company, BOBCAPS Research
Stable margin profile and low leverage
FIG 3 – EXPECT EBITDA MARGIN S TO REMAIN STABLE FIG 4 – STANDALONE NET D/E RATIO BETTER THAN IN THE HISTORICAL RANGE OF 13-14% PEERS (0.2 X AS ON DEC’18)
Source: Company, BOBCAPS Research Source: Company, BOBCAPS Research
Positive cash flows led by steady working capital
FIG 5 – NET WORKING CAPITAL CYCLE TO IMPROVE FIG 6 – OPERATIONAL ASSET PORTFOLIO TO FROM 124 DAYS IN FY18 TO 95 DAYS IN FY21E BECOME SELF-SUSTAINING ON COMBINED BASIS
Source: Company, BOBCAPS Research Source: Company, BOBCAPS Research | *Pro -rata stake adjusted for Ghaziabad Aligarh project
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PNC INFRATECH
Investment rationale Established EPC player with proven execution capabilities
Pan-India presence with PNCL has an established record of executing large construction works, projects executed across 13 particularly roads, highways and airport runways, cementing a reputation for timely states project completion. The company has completed 62 major infrastructure projects spread across 13 states since inception, including 39 road EPC and 20 airport runway contracts, backed by a fully integrated business model. It has a ‘Super Special’ class certification from Military Engineer Services, India’s largest government defence infrastructure agency, that qualifies it to build runways for military airports, and is currently executing 19 projects across sectors.
Integrated business model facilitates timely execution – a key strength
Earned early completion PNCL leverages its in-house design & engineering capabilities and large fleet of bonuses for various projects equipment to deliver projects that are both timely and tailored to client due to integrated model requirements. As of Dec’18, the company had a gross block of ~Rs 9bn, equipment bank of 3,294 assets and over 8,600 employees (including ~600 engineers). PNCL focuses on securing projects that have easy access to quarries for aggregates, which not only reduces construction costs but also expedites execution. With 20-40 years of experience in the infrastructure sector, the promoters have also been instrumental in ensuring strict adherence to timelines.
PNCL has received early completion bonuses for the following:
. Agra-Gwalior road project (Uttar Pradesh) finished ahead of schedule – received bonus from NHAI
. Gwalior-Bhind road project (Madhya Pradesh-Uttar Pradesh border road) commenced toll collection three months before schedule – received bonus from MPRDC
. Agra Lucknow Expressway road project (UP) completed 89 days ahead of schedule – received bonus of Rs 582mn from UPEIDA (Uttar Pradesh Expressways Industrial Development Authority)
. Raebareli-Jaunpur road project (UP) completed 96 days ahead of schedule – the special purpose vehicle (SPV), PNC Raebareli Highways Pvt Ltd, received a bonus of Rs 337mn from NHAI, of which Rs 253mn (75%) went to the EPC company, i.e. PNCL standalone entity
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FIG 7 – CAPEX OVER LAST 3 YE ARS SHOULD SUPPORT FIG 8 – STRONG IN-HOUSE EXECUTION TEAM WITH ANNUAL TURNOVER OF ~RS 40BN CURRENT EMPLOYEE STRENGTH OF OVER 8,600
(Rs bn) Gross block Addition (Nos.) Employee Addition 10 10,000 9.0 8,617 8 7.3 8,000 6.0 5,775 6 6,000 4.3 4,284 3.8 3,776 3,947 4 4,000 2,842 1.7 1.7 1,491 2 1.0 1.3 2,000 1,276 0.5 171 337 0 0 FY15 FY16 FY17 FY18 9MFY19 FY15 FY16 FY17 FY18 9MFY19
Source: Company, BOBCAPS Research Source: Company, BOBCAPS Research
Robust order backlog underpins high growth prospects
PNCL, with an order backlog of Rs 129bn as on Mar’19E (includes Rs 38.5bn of L1 projects) and a book-to-bill ratio of 4.4x FY19E revenue, offers strong growth visibility. Land acquisition issues had delayed the receipt of appointed dates for five EPC projects worth Rs 36bn (dates finally awarded between Jan’17 and Mar’18), and hence the company’s executable order backlog remained low – this led to revenues declining at a 6% CAGR over FY16-FY18. With execution challenges now being addressed, we expect revenue contribution of 35%/23%/14% from these five projects over FY19/FY20/FY21.
FIG 9 – APPOINTED DATES DELAYED FOR FIVE EPC PROJECTS BUT HAVE NOW BEEN AWARDED % of work O/s order Revenue Project L 1 announcement Appointed Project (Rs mn) completed as on backlog as on cost FY19E FY20E FY21E date date Dec ’18 Dec ’18 Nagina-Kashipur (UP) 11,560 25.1 8,660 3,130 4,046 3,764 30-Mar-16 28-Oct-17 Varanasi-Gorakhpur (UP) 8,690 48.9 4,450 3,040 3,250 250 09-Mar-16 01-Mar-17 Bhojpur-Buxar (Bihar) 4,770 2.1 4,670 550 1,750 2,470 28-Jul-15 25-Mar-18 Koilwar-Bhojpur (Bihar) 4,530 7.1 3,930 770 1,750 1,730 28-Jul-15 07-Jul-17 Aligarh-Moradabad (UP) 6,450 95.8 270 2,750 - - 03-Nov-15 26-Jan-17 Total 36,000 21,980 10,240 10,796 8,214 % share to total revenue 35.3 23.3 14.3 Source: Company, BOBCAPS Research
Additionally, revenue visibility remains high due to the execution of other big- ticket projects such as Purvanchal Expressway (Rs 25.2bn) and Mumbai-Nagpur Super Expressway (Rs 20bn). Overall, we estimate a 47% revenue CAGR for the company over FY18-FY21 (see Annexure A on Page 156 for detailed revenue projections).
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FIG 10 – ROBUST ORDER BACKLOG OF RS 129BN WITH CURRENT EXECUTABLE BACKLOG AT 70%
Order backlog to support standalone revenue CAGR of 47% over FY18-FY21E
Source: Company, BOBCAPS Research I *Includes L1 projects of Rs 38.5bn
FIG 11 – ORDER BACKLOG AS ON MAR’19E FIG 12 – REVENUE BREAKUP SEGMENT-WISE
Revenue break-up (%) FY19E FY20E FY21E
Captive road EPC projects 42.2 45.5 43.8
Third-party road EPC projects 51.5 54.3 56.1
Airport runway projects 4.3 - -
Other operating revenue 2.0 0.2 0.1
Total EPC revenue (Rs mn) 29,034 46,299 57,344
Growth YoY 61.4 59.5 23.9
Source: Company, BOBCAPS Research | *Includes L1 projects of Rs 38.5bn Source: Company, BOBCAPS Research
Strong footprint in UP which houses lucrative opportunities
~64% of current order PNCL is an Agra, Uttar Pradesh-based EPC player with a large presence in the backlog comes from UP, northern region, especially in its home state. So far, the company has executed showcasing strong regional ~58% of its projects in UP and the state constitutes ~64% of its order backlog as presence on Mar’19E, showcasing PNCL’s strong regional footprint. UP has recently garnered Rs 1.1tn in central funding to develop national highways, besides which the state government has increased allocation for roads under the 2018-19 budget to Rs 176bn (+22% YoY) and earmarked additional funds for mega expressway development, signaling bright prospects for regional contractors.
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FIG 13 – ~64% OF ORDER BACKLOG AS ON MAR’19E FROM UTTAR PRADESH Order backlog No. of State Share (%) Share (%) (Rs bn) projects Roads 128.6 99.7 18 94.7 Uttar Pradesh 82.7 64.1 12 63.2 Bihar 7.7 6.0 2 10.5 Karnataka 16.6 12.8 2 10.5 Rajasthan 1.7 1.3 1 5.3 Maharashtra 20.0 15.5 1 5.3 Airport runways - 0.0 1 5.3 Uttar Pradesh - 0.0 1 5.3 Others 0.4 0.3 - - Total existing order backlog incl. L1 projects 129.1 100.0 19 100.0 Source: Company, BOBCAPS Research
FIG 14 – AVG. REVENUE SHARE FROM UTTAR PRADESH AT ~64%, FY19-FY21E Y/E March (Rs mn) FY19E FY20E FY21E Revenue break-up HAM projects 12,245 21,074 25,092 Third-party EPC projects 14,946 25,150 32,177 Airport runway projects 1,250 - - Other operating revenue 592 75 75 Total revenue 29,034 46,299 57,344 Revenue share from Uttar Pradesh from 68.6 66.9 57.1 the existing order backlog (%) Revenue share (%) HAM projects 42.2 45.5 43.8 Third-party EPC projects 51.5 54.3 56.1 Airport runway projects 4.3 - - Other operating revenue 2.0 0.2 0.1 Total revenue 100.0 100.0 100.0 Source: Company, BOBCAPS Research
FIG 15 – PNCL HAS EXECUTED ~58% OF ITS PROJECTS IN UTTAR PRADESH Total projects Projects executed in Sector Share (%) executed so far Uttar Pradesh (nos.)
Highways 37 25 67.6 Airport Runways 21 8 38.1 Bridges 3 2 66.7 Power T&D 1 1 100.0 Total 62 36 58.1 Source: Company, BOBCAPS Research
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PNC INFRATECH
Increased allocation for roads under the UP State Budget 2018-19
Road ministry plans national In the 2018-19 budget, the UP state government has allocated ~Rs 176bn for the highways worth ~Rs 1.1tn development of quality roads and improvement of connectivity in the state, which in UP is 22% more funding than the previous year. In addition, a sum of Rs 6.5bn has been allocated for the Bundelkhand Expressway, Rs 5.5bn for the Gorakhpur Link Expressway, Rs 10bn for the Purvanchal Expressway and Rs 5bn for the Agra- Lucknow Expressway. A further Rs 7.7bn has been earmarked to upgrade national highways from two-lanes to four-lanes. Besides these state budgetary allocations, the road ministry recently announced investments of ~Rs 1.1tn towards construction of national highways in the state.
FIG 16 – PNCL’S SHARE AT 27% (IN KM), IN THE KEY HIGHWAY PROJECTS AWARDED IN UP IN THE RECENT TIME Project Length (km) Contractor Project cost (Rs bn) Gagalheri-Saharanpur-Yamunanagar 51.5 Welspun Enterprises 11.3 Varanasi-Dagamagpur (Pkg I) 34.0 Dilip Buildcon 6.7 Lucknow Outer Ring Road (Pkg II) 32.9 Sadbhav Engineering 9.8 Chutmalpur-Ganeshpur and Roorke-Chutmalpur-Gagalheri 53.3 Welspun Enterprises 9.4 Lalganj-Hanumanha 43.4 Dilip Buildcon 6.8 Dagamagpur-Lalganj 47.7 Dilip Buildcon 7.7 Aligarh-Kanpur 45.0 PNC Infratech 12.0 Hapur Bypass-Moradabad 99.9 IRB Infrastructure Developers 34.2 Jhansi-Khajuraho (Pkg I) 76.6 PNC Infratech 14.1 Jhansi-Khajuraho (Pkg II) 85.4 PNC Infratech 13.1 Purvanchal Expressway (Pkg I; Chand Sarai-Barabanki) 40.2 Gayatri Projects 14.8 Purvanchal Expressway (Pkg II; Sansara-Jaraikala) 39.7 Gayatri Projects 12.8 Purvanchal Expressway (Pkg III; Jaraikala-Sidhi Ganeshpur) 41.7 Apco Infratech 13.8 Purvanchal Expressway (Pkg IV; Sidhi Ganeshpur-Sansarpur) 42.7 GR Infraprojects 15.0 Purvanchal Expressway (Pkg V; Sansarpur-Gobindpur) 54.0 PNC Infratech 15.7 Purvanchal Expressway (Pkg VI; Gobindpur-Mojrapur) 28.2 PNC Infratech 9.5 Purvanchal Expressway (Pkg VII; Mojrapur-Bijapura) 46.1 GR Infraprojects 14.4 Purvanchal Expressway (Pkg VIII; Bijapura-Haidariya) 48.0 Oriental Structural Engineers 16.2 Total 910.2 237.2 PNCL’s share 244.2 52.4 % share 26.8 22.1
Source: UPEIDA, NHAI, Company, BOBCAPS Research
Expressway development progressing swiftly in UP
PNCL could be a key Unique land acquisition model supports road development: The state of UP beneficiary in light of its already has to its credit the longest expressway in the country – the 302km Agra- strong regional presence and Lucknow Expressway – as well as the 165km Yamuna Expressway. While the six- robust record on execution lane access-controlled Yamuna Expressway was opened to the public in Aug’12, the Agra-Lucknow route was commissioned in Nov’16. The former was implemented on a BOT toll basis and the latter on EPC mode.
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One of the key highlights of the Agra-Lucknow Expressway is that it was completed in 22 months against the scheduled 36-month timeline. Further, ~90% of the total 3,500 hectares of land required for the project was acquired within a period of six months. This was made possible by the state government’s unique land acquisition model, wherein landowners were paid twice the market value for land in urban areas and four times the value in rural areas.
In addition, the landowners were also compensated for trees, standing crops and building structures situated on the land. These measures created a hassle-free environment for the contractors to complete construction of the project ahead of schedule.
Purvanchal Expressway recently awarded: In Jul’18, the UP government successfully completed the tendering process for the 354km Purvanchal Expressway – this is to be executed on EPC mode at an estimated project cost of Rs 230bn (including land acquisition cost). At present, more than 90% of the land required for the project has been acquired.
The UP government also issued the appointed dates for all eight packages during the second week of Oct’18, besides approving the developers’ proposal to secure a Rs 120bn loan from Punjab National Bank for construction. In the first phase, Rs 78bn will be provided to developers at an interest rate of 8.3% for 15 years. The loan will be repaid in 48 instalments with a three-year moratorium period.
Current pipeline of ~Rs 118bn Strong expressway project pipeline from the state: In Apr’18, the UPEIDA from UP likely to be awarded finalised the alignment of three more expressways in the state, namely by May’19 (Bundelkhand & Bundelkhand, Prayag and Gorakhpur Link. Public sector agency KITCO has Gorakhpur Link Expressways) bagged the consultancy contract for the Prayag and Gorakhpur Link expressways from UPEIDA through competitive bidding.
FIG 17 – UPCOMING EPC OPPORTUNITY OF ~RS 148BN FROM UTTAR PRADESH Length UP state budget EPC Project (Rs bn) Lanes Status (k m) allocation 2018 -19 cost DPR completed; project tendered out; likely to be awarded in a couple of Bundelkhand Expressway 296 4 6.5 89 months Prayag Link Expressway 150 4 - 30* DPR stage; done by KITCO DPR completed; project tendered out; likely to be awarded in a couple of Gorakhpur Link Expressway 91 4 6.5 29 months Purvanchal Expressway 343 6 10.0 - Awarded; under construction Agra-Lucknow Expressway 302 6 5.0 - Operational Total 28.0 148 Source: UPEIDA, BOBCAPS Research I *Assumed | Note: DPR – Detailed Project Report
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FIG 18 – CURRENT UPEIDA ROAD PROJECT PIPELINE; FAVOURABLE FOR PNCL Length Bid project cost Project Lane Bid close date (km) (Rs bn) Gorakhpur Link Expressway Project (Jaitpur-Fulwariya, Package I) 4 48 17 29-May-19 Gorakhpur Link Expressway Project (Fulwariya-Salarpur, Package 2) 4 43 12 29-May-19 Bundelkhand Expressway (Gonda-Mahokhar, Package 1) 4 50 15 29-May-19 Bundelkhand Expressway (Mahokhar-Kaohari, Package 2) 4 50 14 29-May-19 Bundelkhand Expressway (Kaohari-Baroli Kharka, Package 3) 4 49 12 29-May-19 Bundelkhand Expressway (Baroli Kharka-Saalabad, Package 4) 4 51 16 29-May-19 Bundelkhand Expressway (Saalabad-Bakhariya, Package 5) 4 50 16 29-May-19 Bundelkhand Expressway (Bakhariya-Kudrail, Package 6) 4 45 15 29-May-19 Total 387 118 Source: UPEIDA, BOBCAPS Research
Cash generation from operating assets to gather pace
PNCL’s operational BOT asset portfolio comprises seven projects, including four BOT toll roads, one BOT annuity road, one OMT (operate-maintain-transfer) project, and one for redevelopment and management of an industrial estate. Most of these have been awarded by NHAI and state road development corporations in Uttar Pradesh and Madhya Pradesh, where rising traffic levels boost predictability of cash flows.
Expect FCFE of Rs 1.9bn over FY18-FY21
Gross toll collection CAGR of The total length of the roadworks in PNCL’s operational portfolio is 826km 11.5% over FY18-FY21E incurring a total project cost of Rs 44.3bn. As of Dec’18, cumulative outstanding debt attributable to these assets stands at Rs 26.5bn. PNCL’s share of equity commitment for this portfolio is Rs 5.9bn, which is fully funded. Annual gross toll collection stood at Rs 6.8bn in FY18 (+15.4% YoY) and Rs 5.5bn in 9MFY19 (+12.4% YoY). Led by improvement in traffic and project refinancing, we estimate combined FCFE of Rs 1.9bn for the company’s operating SPVs over FY18-FY21.
We highlight that an operating portfolio not only reduces execution risks but also offers a clear view of base traffic levels. This substantially improves the predictability of cash flows and, hence, project valuation.
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FIG 19 – OPERATING BOT ASSET PORTFOLIO TO BECOME SELF-SUSTAINING ON A COMBINED BASIS*
Source: Company, BOBCAPS Research | *Pro-rata stake adjusted for Ghaziabad-Aligarh project
We expect most assets in PNCL’s portfolio to turn FCFE-positive, except for the Bareilly-Almora road project (toll-based) where we anticipate incremental support from the parent due to below-expected traffic growth. With a residual weighted average concession period of ~10 years, the portfolio holds the potential for strong free cash flows in the long term.
FIG 20 – GROSS TOLL COLLECTION CAGR OF 11.5% OVER FY18-FY21E
Source: Company, BOBCAPS Research
FIG 21 – FY19E GROSS TOLL COLLECTION ON LIKE-TO-LIKE BASIS AT RS 7.5BN (+11.3% Y OY) (Rs mn) Q1FY18 Q2FY18 Q3FY18 Q4FY18 FY18 Q1FY19 Q2FY19 Q3FY19 Q4FY19E FY19E FY20E FY21E Raibareilly-Jaunpur 322 322 322 322 1,286 322 322 322 321 1,286 1,290 1,286 Bareilly-Almora 110 100 110 105 425 105 90 99 103 397 441 488 Ghaziabad-Aligarh 478 440 510 510 1,938 524 504 540 548 2,116 2,329 2,622 Kanpur-Ayodhya 671 660 810 774 2,915 860 780 963 974 3,577 3,974 4,391 Kanpur-Kabrai 191 173 210 299 873 290 170 250 257 967 1,074 1,187 Gwalior-Bhind 154 116 172 173 615 115 95 128 138 476 607 680 Narela Industrial Area 100 95 108 97 400 98 100 100 102 401 411 420 Total 2,026 1,906 2,242 2,279 8,452 2,314 2,061 2,402 2,444 9,220 10,126 11,074 Like-to-Like basis* 1,604 1,489 1,812 1,861 6,766 1,895 1,639 1,980 2,020 7,534 8,426 9,367 Growth YoY (%) 2.4 18.9 (3.4) 12.5 15.4 18.1 10.1 9.3 8.5 11.3 11.8 11.2 Source: Company, BOBCAPS Research | *Raibareilly-Jaunpur and Narela Industrial Area projects are annuity based and hence excluded
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Planned asset sale to support HAM equity commitment
Equity needs of Rs 6bn in 7 PNCL has won seven HAM projects over FY17-Q1FY19, of which four are in HAM projects could be met various stages of construction and three are in the development phase. from sale of 4 BOT assets Management has guided for an equity requirement of Rs 8.3bn over the next 2-3 years for this portfolio, of which ~Rs 6bn remains to be invested. PNCL has infused Rs 2.3bn up to 9MFY19 which we expect to reach ~Rs 2.4bn by end- Mar’19. It plans to infuse a further ~Rs 2.7bn in FY20 and the remainder in FY21.
Advanced discussion for stake This equity commitment can be met from monetisation of the operational BOT sale in Ghaziabad Aligarh portfolio. PNCL is looking for potential buyers for stakes in the Raebareli- BOT asset (35% stake) Jaunpur, Gwalior-Bhind (MP Highway) and Bareilly-Almora assets, where it has cumulatively invested equity of ~Rs 3bn. The company is also in advanced discussions with another potential buyer to sell its minority stake (35%) in the Ghaziabad-Aligarh project, where it has invested Rs 1.9bn up to Dec’18.
FIG 22 – ASSET MONETISATION CAN FREE UP EQUITY OF RS 4.9BN Projects (Rs mn) Type PNCL’s stake (%) Equity invested Raibareilly-Jaunpur Annuity 100 1,396 Gwalior-Bhind Toll 100 783 Bareilly-Almora Toll 100 746 Ghaziabad-Aligarh Toll 35 1,940 Total 4,865 Source: Company, BOBCAPS Research
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FIG 23 – OPERATIONAL BOT/ANNUITY ASSETS Length Project Total Grant/ PNCL’s share Debt o/s as Concession NPV at 100% PNCL’s NPV: PNCL’s Project (Rs mn) Type Authority Equity COD End date (km) cost debt (Premium) of equity on Dec’18 period (years) stake (Mar’20) stake (%) share Raibareilly-Jaunpur Annuity NHAI 166 8,364 6,968 - 1,396 Feb-16 1,396 6,310 17 Jun-31 620 100 620 Bareilly-Almora Toll UPSHA 54 6,045 4,590 700 746 Oct-15 746 4,390 25 Sep-35 (454) 100 (454) Ghaziabad-Aligarh Toll NHAI 125 20,190 15,140 3,110 1,940 Jul-15 1,860 10,980 24 Feb-35 5,262 35 1,842 Kanpur-Ayodhya OMT NHAI 217 - - (1,557) 1 Aug-13 1 - 9 Jul-22 1,235 100 1,235 Kanpur-Kabrai Toll NHAI 123 4,585 2,680 1,230 675 May-15 675 2,020 12 Jan-25 1,798 100 1,798 Gwalior-Bhind Toll MPRDC 108 3,403 2,321 266 783 Mar-13 783 1,930 14 Jun-25 368 100 368 Narela Industrial Area Mix DSIIDC 33 1,750 1,400 - 350 Oct-13 350 820 15 Dec-26 806 100 806 Total 826 44,337 33,099 3,749 5,891 5,811 26,450 9,638 6,217 Source: Company, BOBCAPS Research | Note: COD – Commercial Operation Date
FIG 24 – EQUITY COMMITMENT IN HAM PROJECTS AT RS 8.3BN; ~RS 2.4BN INVESTED UP TO MAR’19; BALANCE LIKELY TO BE INVESTED OVER 2-3 YEARS Length NHAI Equity infused Debt infused Financial Appointed Land acquisition Concession Project (Rs mn) State BPC TPC Debt Equity (km) grant up to Mar’19E up to Dec ’18 closure date date status (%) period (years) Dausa-Lalsot Rajasthan 83 8,810 8,200 3,710 660 3,840 584 2,610 03-Apr-17 31-May-17 98.0 17.5 Chitradurga-Davanagere Karnataka 73 14,340 13,380 6,060 1,070 6,250 535 2,450 12-Dec-17 27-Dec-17 96.0 17.5 Jhansi-Khajuraho (Pkg I) UP & MP 77 14,100 13,420 6,040 1,280 6,100 640 1,400 01-Nov-17 18-May-18 90.0 17.0 Jhansi-Khajuraho (Pkg II) UP & MP 85 13,100 12,620 5,900 1,040 5,680 520 1,880 02-Nov-17 13-Feb-18 93.0 17.0 Chakeri-Allahabad UP 145 21,590 20,180 8,730 1,920 9,530 38 - 20-Sep-18 Pending 90.0 17.5 Aligarh-Kanpur (Pkg II) UP 43 11,970 11,040 5,000 1,250 4,790 33 - 05-Nov-18 Pending 90.0 17.0 Challakere-Hariyur Karnataka 56 11,570 10,130 4,400 1,100 4,630 33 - 07-Dec-18 Pending 75.0 17.0 Total 95,480 88,970 39,840 8,320 40,820 2,382 8,340 Source: Company, BOBCAPS Research | Note: BPC – Bid Project Cost; TPC – Total Project Cost
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Financial review Expect standalone revenue CAGR of 47% over FY18-FY21
Including the Nagpur-Mumbai Expressway (appointed date received mid-Jan’19), PNCL’s executable order backlog stands at Rs 90.6bn or 70% of its total backlog of Rs 129bn as of Mar’19E, including L1 projects. All third-party/non-captive EPC projects in the backlog have entered the execution phase in Q4FY19, supporting future revenue growth.
Management has guided for an average quarterly revenue run-rate of ~Rs 10bn from FY20 onwards based on the current executable order backlog. Additionally, the company expects appointed dates for the remaining three HAM projects to be awarded in Q1FY20. Given the subsequent rise in the executable book, we expect a revenue CAGR of 47% over FY18-FY21.
FIG 25 – EXPECT 100% EXECUTABLE ORDER FIG 26 – EXPECT REVENUE CAGR OF 47% OVER BACKLOG BY JUN’19 FROM CURRENT 70% FY18-FY21
Source: Company, BOBCAPS Research | *Including L1 projects Source: Company, BOBCAPS Research
EBITDA margins to remain stable in historical range of 13-14%
PNCL’s standalone EBITDA margin has remained stable over the years at 13-14% largely due to its selective approach toward bidding as well as its ownership of a large, modern equipment bank. In FY15, however, margins jumped to 13.9% led by (i) a significant surge in revenue growth (+36% YoY) which drove higher operating leverage, and (ii) benefits of lower raw material and fuel costs. In FY18, margins moved even higher to 14.5% due to revenue of ~Rs 65mn for price variation claims in the Agra Bypass EPC project. We expect revenue from captive projects (HAM) to lend stability to EBITDA margins, supporting historical levels of 13-14% over FY19-FY21.
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FIG 27 – EXPECT EBITDA CAGR OF 44% OVER FY18-FY21E
Source: Company, BOBCAPS Research
Lean balance sheet led by improvement in net working capital
We forecast an improvement in net working capital cycle (ex-loans & advances to subsidiaries/associates) from 124 days in FY18 to 95 days by FY21 mainly due to significant EPC revenue contribution from captive road projects (HAM) and the receipt of mobilisation advances from newer contracts. Payment terms in captive projects are generally more favourable than those of third-party customers. Additionally, the company has one of the better net D/E ratios in the industry (0.2x as on Dec’18) on a standalone basis. While this ratio is likely to go up to 0.4x by Mar’21 due to equity funding for HAM contracts, it would still remain well under control.
FIG 28 – MOBILISATION ADVANCES OUTSTANDING AS ON MAR’19E AT ~RS 6.1BN Pending EPC Projects (Rs bn) mobilisation Comments cost advance s EPC -Purvanchal Expressway 25.2 1.3 AD received in Oct’18; company has drawn 5% of the 10% available mobilisation advance -Mumbai-Nagpur Super Communication 20.0 1.0 AD received in Jan’19; company has drawn 5% of the 10% available mobilisation advance Expressway HAM -Chakeri-Allahabad 18.7 1.9 AD pending; mobilisation advance expected in H1FY20 -Aligarh-Kanpur 10.3 1.0 AD pending; mobilisation advance expected in H1FY20 -Challakere-Hariyur 9.5 1.0 AD pending; mobilisation advance expected in H1FY20 Total mobilisation advances pending 83.7 6.1 Source: Company, BOBCAPS Research | Note: AD – Appointed Date
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FIG 29 – HEALTHY STANDALONE NET D/E RATIO (0.2X FIG 30 – IMPROVEMENT IN NET WORKING CAPITAL AS ON DEC’18) DAYS FROM 124 DAYS IN FY18 TO 95 DAYS IN FY21E
Source: Company, BOBCAPS Research Source: Company, BOBCAPS Research
FIG 31 – REVENUE CONTRIBUTION FROM HAM PROJECTS EXPECTED TO RISE FROM 32% IN FY18 TO 42%/45%/44% IN FY19E/FY20E/FY21E Revenue (Rs mn) FY18 FY19E FY20E FY21E Road HAM 5,711 12,245 21,074 25,092 Road EPC 10,794 14,946 25,150 32,177 Airports and others 1,479 1,250 - - Total 17,983 592 75 75 % share Road HAM 31.8 42.2 45.4 43.8 Road EPC 60.0 51.5 54.3 56.1 Airports and others 8.2 6.3 0.2 0.1 Total 100.0 100.0 100.0 100.0 Source: Company, BOBCAPS Research |
Strong earnings growth to boost return ratios
Led by robust growth in revenue, stable margins and controlled leverage, we expect PNCL to post an earnings CAGR of 30% over FY18-FY21. Strong earnings growth and higher asset turnover would in turn fuel better return ratios. We forecast a sharp improvement in ROCE to 18.2% in FY21 (vs. 9.9% in FY18) and ROIC to 24.3% (15.2%).
FIG 32 – STRONG EARNINGS GROWTH AND HIGHER GROSS ASSET TURNOVER TO PROPEL RETURNS
Source: Company, BOBCAPS Research
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Valuation methodology
Initiate coverage with BUY PNCL, with its strong execution record and lean balance sheet, is well placed to and an SOTP-based Mar’20 benefit from the growth opportunities offered by India’s roads sector. Further, as TP of Rs 210 execution picks up on newer projects starting Q4FY19, we expect growth rates to rebound. Appointed dates for all the company’s third-party EPC projects have come through, which should support this growth recovery. Land availability in the newer HAM projects is fairly high (above the threshold limit of 80%) and hence we expect appointed dates to come through by Q1FY20 with only a quarter’s delay, lending a further impetus to revenue from H2FY20.
We model for a robust 47% revenue CAGR and 42% PBT CAGR for PNCL over FY18-FY21 on a standalone basis. The stock is trading at 9.0x/7.7x FY20E/ FY21E standalone earnings adjusted for Rs 44/sh of BOT/HAM asset value. We initiate coverage with BUY and a Mar’20 sum-of-the-parts (SOTP) target price of Rs 210.
Target one-year forward P/E Within our SOTP model, we value (a) the standalone EPC business at Rs 165/sh multiple of 12x for the core based on 12x FY21E earnings, (b) the BOT business at Rs 24/sh using the EPC business discount rates of 11-15% for BOT toll/annuity-based projects to arrive at the Mar’20E NPV of FCFE, and (c) HAM projects at Rs 20/sh on P/BV basis (implied P/BV of 1x for equity investment in seven projects as on Mar’20).
FIG 33 – SOTP-BASED TARGET PRICE OF RS 210 Value Multiple Valuation Per share Business Basis of valuation (Rs mn) (x) (Rs mn) (Rs) Standalone business (EPC) P/E on FY21E earnings 3,535 12 42,425 165 Value of subsidiaries/associates 44 -BOT (operational assets) NPV of FCFE as on Mar’20E 6,217 - 6,217 24 -7 HAM projects P/BV – Equity investment as on Mar’20E 5,083 1.0 5,083 20 Total 9,753 48,642 210 Shares outstanding (mn) 257 Source: Company, BOBCAPS Research I Note: Target price rounded off
FIG 34 – FORWARD P/E BAND (4 YEAR MEAN AT 17X)
Source: Bloomberg
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FIG 35 – RELATIVE STOCK PERFORMANCE
PNCL NSE Nifty 210
180
150
120
90 Jul-17 Jul-16 Jul-18 Jan-17 Jan-19 Jan-18 Apr-17 Apr-16 Apr-19 Apr-18 Oct-17 Oct-16 Oct-18 Source: NSE Key risks
. Political risk: PNCL has a strong presence in its home state of UP. Any slowdown in state government spending may affect the company’s growth prospects.
. Downturn in road sector capex: Capex in the road sector has witnessed some revival over the last two years. Any slowdown in project awarding would impact the company’s growth and our estimates.
. Concentrated order backlog: Close to 64% of PNCL’s current order backlog (including L1 positions) is from Uttar Pradesh. Any delay or execution constraints on these projects will significantly affect our revenue and profit estimates.
. Slowdown in traffic: A slowdown in industrial activity in areas housing PNCL’s toll BOT projects may lead to below-expected revenue collection, resulting in negative FCFE. This may cause the company to infuse further equity from its standalone balance sheet to support its BOT SPVs.
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Annexure A: Revenue projections
FIG 1 – EXPECT 100% ORDER BACKLOG TO BECOME EXECUTABLE BY END-JUN’19 Revenue Original 9MFY19 Order backlog List of projects (Rs mn) Q4FY19E FY19E FY20E FY21E Comments contract value revenue as on Dec 2018 Roads -EPC AD: 28-Oct-17; ~90% land available; 25% construction work completed up to Nagina Kashipur (UP) 11,560 2,280 8,660 850 3,130 4,046 3,764 Dec’18 AD: Mar’17; ~95% land available; Execution began in Q1FY18 and picked up from Varanasi Gorakhpur (UP) 8,690 2,090 4,450 950 3,040 3,250 250 H2FY18 ; 49% construction work completed up to Dec’18 AD: End Mar’18; 85% land available; 2% construction work completed up to Bhojpur-Buxar (Bihar) 4,770 100 4,670 450 550 1,750 2,470 Dec’18; the work has picked up from Q4FY19 and is scheduled for completion in FY21 AD: 7-Jul-17; 80% land available; 7% construction work completed up to Dec’18; Koilwar-Bhojpur (Bihar) 4,530 320 3,930 450 770 1,750 1,730 the work has picked up from Q4FY19 and is scheduled for completion in FY21 AD: 26-Jan-17; Project got completed on 28-Feb-19, ahead of schedule; PNCL Aligarh-Moradabad (UP) 6,450 2,480 270 270 2,750 - - expects early completion bonus of 3% of the total project cost in the months to come Etah Kasganj (UP) 2,329 510 1,500 200 710 1,300 - Work began in Q3FY17; Pending work expected to be completed in H1FY20 Nanau-Dadon (UP) 1,199 240 950 100 340 850 - Work began in Q3FY17; Pending work expected to be completed in H1FY20 Sharda Sahayak Feeder Canal road 2,521 710 730 250 960 480 - Work began in Q1FY17; Pending work expected to be completed in H1FY20 project, Lucknow (UP) Purvanchal Expressway (UP) - Package 5 15,660 - 15,660 783 783 4,698 7,047 AD: 10-Oct-18; 93% land available - Package 6 9,540 - 9,540 477 477 2,862 4,293 AD: 10-Oct-18; 93% land available Other road projects - 1,336 540 100 1,436 440 - Pending work expected to be completed in H1FY20 (a) Total 10,066 50,900 4,880 14,946 21,426 19,554 -HAM AD: 18-May-18; ~90% land available; 22% construction work completed up to Jhansi –Khajuraho (Package I, UP) 12,182 2,080 9,540 1,000 3,080 5,482 3,058 Dec’18 AD: 27-Dec-17; ~96% land available; 33% construction work completed up to Chitradurga – Davanagere (Karnataka) 12,500 3,390 8,180 1,125 4,515 5,000 2,055 Dec’18
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Revenue Original 9MFY19 Order backlog List of projects (Rs mn) Q4FY19E FY19E FY20E FY21E Comments contract value revenue as on Dec 2018 AD: 13-Feb-18; ~93% land available; 27% construction work completed up to Jhansi –Khajuraho (Package II, UP) 11,318 2,360 8,360 1,050 3,410 5,093 2,217 Dec’18 AD: 3-April-17; 98% land available; 70% construction work completed upto Dec'18; slowdown in execution was seen in 9MFY19 largely due to tree cutting Dausa-Lalsot-Kauthun (Rajasthan) 7,120 640 2,250 600 1,240 1,650 - issues and utility shifting in the remaining portion of the land; 100% land expected by end of Sep-19; issues sorted and execution is likely to pick up from Q4FY19; Schedule COD: Nov'19 (b) Total 8,470 28,330 3,775 12,245 17,225 7,330 (A) Total (a + b) 18,536 79,230 8,655 27,191 38,651 26,884 Airport runways Bakshi Ka Talab, Lucknow (UP) 1,406 530 - - 530 - - Work got completed in Q3FY19 Chakeri, Kanpur (UP) 1,672 300 420 420 720 - - Schedule for completion in Q4FY19 (B) Total 830 420 420 1,250 - - (C) Other operating revenue 592 75 75 (I) Total (A+B+C) 19,959 79,650 9,075 29,034 38,726 26,959 List of projects not yet included in the order backlog as on Dec'18 -EPC Mumbai Nagpur Super Communication 19,995 - 19,995 - - 3,599 7,998 AD: 15-Jan-19; over 90% land available Expressway (Pkg 4, Maharashtra) (c) Total 19,995 - 19,995 - - 3,599 7,998 -HAM FC: 20-Sep-18; AD delayed led by obstructions due to trees, structures and Chakeri-Allahabad (UP) 18,660 - 18,660 - - 1,866 7,464 utilities; AD likely by Apr'19; ~90% land available FC: 5-Nov-18; AD delayed led by obstructions due to trees, structures and Aligarh-Kanpur (UP) 10,330 - 10,330 - - 1,033 4,649 utilities; AD likely by Apr'19; ~90% land available FC: 7-Dec-18; AD delayed led by obstructions due to trees, structures and Challakere to Hariyur (Karnataka) 9,500 - 9,500 - - 950 4,275 utilities; AD likely by May'19; ~75% land available (d) Total 38,490 19,959 38,490 - - 3,849 16,388 (II) Total from projects not forming part 58,485 - 58,485 - - 7,448 24,386 of order backlog as on Dec'18 (c + d) (III) Total revenue (I + II) 1,38,135 9,075 29,034 46,174 51,344 Revenue from current order backlog
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Revenue Original 9MFY19 Order backlog List of projects (Rs mn) Q4FY19E FY19E FY20E FY21E Comments contract value revenue as on Dec 2018 Expected order inflows FY20E 50,000 - - 125 5,375 H1FY20E 5,000 - - - 125 2,000 -HAM ------EPC 5,000 - - - 125 2,000 2.5%/40% revenue contribution in FY20E/FY21E H2FY20E 45,000 - - - - 3,375 -HAM 15,000 - - - - 1,125 7.5% revenue contribution in FY21E -EPC 30,000 - - - - 2,250 7.5% revenue contribution in FY21E (IV) Total for FY20E 50,000 - - - 125 5,375 FY21E 58,500 - - - - 625 H1FY21E 25,000 - - - - 625 -HAM 10,000 - - - - 250 2.5% revenue contribution in FY21E -EPC 15,000 - - - - 375 2.5% revenue contribution in FY21E H2FY21E 33,500 ------HAM 13,500 - - - - - Nil revenue contribution in FY21E -EPC 20,000 - - - - - Nil revenue contribution in FY21E (V) Total for FY21E 58,500 - - - - 625 Total revenue (III + IV + V) 19,959 1,38,135 9,075 29,034 46,299 57,344 Expect revenue CAGR of 47% over FY18-FY21E % growth YoY 29.5 61.4 59.5 23.7 Source: Company, BOBCAPS Research | Note: AD – Appointed Date; FC – Financial Closure
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FINANCIALS (STANDALONE)
Income Statement Y/E 31 Mar (Rs mn) FY17A FY18A FY19E FY20E FY21E Total revenue 16,891 17,983 29,034 46,299 57,344 EBITDA 2,210 2,606 4,032 6,257 7,763 EBIT 1,677 1,834 3,133 5,109 6,481 Net interest income/(expenses) (203) (307) (650) (1,243) (1,730) Other income/(expenses) 466 230 371 286 300 Exceptional items 0 0 0 0 0 EBT 1,939 1,757 2,855 4,153 5,051 Income taxes 95 153 614 1,121 1,515 Extraordinary items 252 906 177 0 0 Min. int./Inc. from associates 0 0 0 0 0 Reported net profit 2,097 2,510 2,418 3,031 3,535 Adjustments 0 0 0 0 0 Adjusted net profit 1,844 1,604 2,241 3,031 3,535
Balance Sheet Y/E 31 Mar (Rs mn) FY17A FY18A FY19E FY20E FY21E Accounts payables 2,369 4,628 5,170 8,245 10,212 Other current liabilities 0 0 0 0 0 Provisions 241 176 318 634 786 Debt funds 1,473 1,697 4,947 9,397 12,072 Other liabilities 4,132 3,296 5,807 10,021 12,411 Equity capital 513 513 513 513 513 Reserves & surplus 15,209 17,554 19,818 22,695 26,076 Shareholders’ fund 15,722 18,067 20,331 23,208 26,590 Total liabilities and equities 23,937 27,864 36,573 51,506 62,070 Cash and cash eq. 355 1,473 610 678 712 Accounts receivables 7,440 7,632 9,784 15,216 18,853 Inventories 1,535 1,758 3,182 5,328 6,599 Other current assets 0 0 0 0 0 Investments 4,676 4,948 7,069 9,771 13,008 Net fixed assets 3,479 4,064 5,665 5,767 5,986 CWIP 78 111 105 105 105 Intangible assets 0 0 0 0 0 Deferred tax assets, net 23 20 6 (15) (40) Other assets 6,352 7,858 10,152 14,656 16,848 Total assets 23,937 27,864 36,573 51,506 62,070 Source: Company, BOBCAPS Research
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Cash Flows Y/E 31 Mar (Rs mn) FY17A FY18A FY19E FY20E FY21E Net income + Depreciation 2,630 3,282 3,317 4,179 4,817 Interest expenses 203 307 650 1,243 1,730 Non-cash adjustments (252) (498) 0 0 0 Changes in working capital (2,520) (560) (2,660) (4,456) (2,567) Other operating cash flows 0 0 0 0 0 Cash flow from operations 61 2,531 1,306 966 3,981 Capital expenditures (1,946) (1,391) (2,494) (1,250) (1,500) Change in investments (32) (272) (2,122) (2,702) (3,237) Other investing cash flows 0 0 0 0 0 Cash flow from investing (1,979) (1,663) (4,615) (3,952) (4,737) Equities issued/Others 0 0 0 0 0 Debt raised/repaid 1,411 224 3,250 4,450 2,675 Interest expenses (203) (307) (650) (1,243) (1,730) Dividends paid (150) (150) (154) (154) (154) Other financing cash flows 244 483 0 0 0 Cash flow from financing 1,302 250 2,446 3,053 790 Changes in cash and cash eq. (616) 1,118 (863) 67 34 Closing cash and cash eq. 355 1,473 610 678 712
Per Share Y/E 31 Mar (Rs) FY17A FY18A FY19E FY20E FY21E Reported EPS 8.2 9.8 9.4 11.8 13.8 Adjusted EPS 7.2 6.3 8.7 11.8 13.8 Dividend per share 0.5 0.5 0.5 0.5 0.5 Book value per share 61.3 70.4 79.3 90.5 103.6
Valuations Ratios Y/E 31 Mar (x) FY17A FY18A FY19E FY20E FY21E EV/Sales 2.2 2.2 1.3 0.9 0.8 EV/EBITDA 17.0 15.2 9.6 6.8 6.1 Adjusted P/E 20.8 24.0 17.2 12.7 10.9 P/BV 2.4 2.1 1.9 1.7 1.4
DuPont Analysis Y/E 31 Mar (%) FY17A FY18A FY19E FY20E FY21E Tax burden (Net profit/PBT) 95.1 91.3 78.5 73.0 70.0 Interest burden (PBT/EBIT) 115.7 95.8 91.1 81.3 77.9 EBIT margin (EBIT/Revenue) 9.9 10.2 10.8 11.0 11.3 Asset turnover (Revenue/Avg TA) 78.9 69.4 90.1 105.1 101.0 Leverage (Avg TA/Avg Equity) 1.5 1.5 1.7 2.0 2.3 Adjusted ROAE 12.5 9.5 11.7 13.9 14.2 Source: Company, BOBCAPS Research | Note: TA = Total Assets
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Ratio Analysis Y/E 31 Mar FY17A FY18A FY19E FY20E FY21E YoY growth (%) Revenue (16.1) 6.5 61.4 59.5 23.9 EBITDA (16.9) 17.9 54.7 55.2 24.1 Adjusted EPS (5.7) (13.0) 39.7 35.3 16.6 Profitability & Return ratios (%) EBITDA margin 13.1 14.5 13.9 13.5 13.5 EBIT margin 9.9 10.2 10.8 11.0 11.3 Adjusted profit margin 10.9 8.9 7.7 6.5 6.2 Adjusted ROAE 12.5 9.5 11.7 13.9 14.2 ROCE 10.8 9.9 13.9 17.7 18.2 Working capital days (days) Receivables 161 155 123 120 120 Inventory 33 36 40 42 42 Payables 51 94 65 65 65 Ratios (x) Gross asset turnover 3.3 2.7 3.4 4.4 4.9 Current ratio 2.3 2.3 2.1 1.9 1.8 Net interest coverage ratio 8.3 6.0 4.8 4.1 3.7 Adjusted debt/equity 0.1 0.0 0.2 0.4 0.4 Source: Company, BOBCAPS Research
EQUITY RESEARCH 161 11 April 2019
INITIATING COVERAGE
BUY SADBHAV TP: Rs 295 | 20% ENGINEERING | Infrastructure | 11 April 2019
Growth revival ahead – initiate with BUY
Sadbhav Engineering (SADE) has strong credentials in the EPC segment with Jiten Rushi a track record of profitable growth and a diversified presence across roads, [email protected] mining and irrigation. This coupled with a sizeable ~Rs 116bn EPC order backlog as on Mar’19E (3x FY19E revenue) is forecast to revive revenue growth to a 15%
CAGR (standalone) over FY18-FY21. Importantly, we expect a rising contribution from HAM projects to uplift EBITDA margins (+20bps over FY18-FY21 to 12%), driving a 25% PBT CAGR. Initiate with BUY and a Mar’20 TP of Rs 295.
Poised for a strong recovery: SADE has an order backlog of Rs 116bn as on Ticker/ Price SADE IN /Rs 246 Mar’19E, which is 3x FY19E standalone revenue. With 68% of the orders under Market cap US$ 609.5mn execution and the balance likely to commence in Q1FY20, we expect a brisk 15% Shares o/s 172mn 3M ADV US$ 0.7mn revenue CAGR over FY18-FY21 (vs. 6% over FY15-FY18). Additionally, we 52wk high/low Rs 406/Rs 162 forecast EPC and HAM order inflows in SADE’s highways segment at Promoter/FPI/DII 47%/16%/22%
Rs 61.5bn/Rs 64.5bn in FY20/ FY21, underpinned by an estimated ~Rs 1tn/pa Source: NSE project award pipeline from NHAI over five years through to FY24. STOCK PERFORMANCE
HAM projects to uplift margins and shorten working capital cycle: We estimate (Rs) SADE that revenue share from own HAM projects would rise to 54.5% on average over 450 390 FY19-FY21 from 34.4% in FY18, expanding SADE’s EBITDA margin from 11.8% 330 270 in FY18 to 12% in FY21 and fuelling a 25% pre-tax earnings CAGR. Higher HAM 210 share, better recoveries of dues from irrigation works, and expected receipt of 150 Jul-17 Jul-16 Jul-18
mobilisation advances worth ~Rs 6bn in coming quarters could help pare net Jan-17 Jan-19 Jan-18 Apr-17 Apr-16 Apr-19 Apr-18 Oct-17 Oct-16 Oct-18
working capital to 144 days by Mar’21 from 185 days in Sep’18 and contain leverage. Source: NSE
Initiate with BUY: Excluding asset value (Rs 101/sh) from the CMP, the stock is trading at 10.1x/8.7x FY20E/FY21E standalone earnings. Our Mar’20 SOTP TP of Rs 295 values EPC assets at Rs 194 (12x FY21E adj. earnings), BOT assets at Rs 100 and the Gadag -Honnali HAM project at R e 1 (1x P/BV , Mar’20E equity ).
KEY FINANCIALS (STANDALONE) Y/E 31 Mar FY17A FY18A FY19E FY20E FY21E Adj. net profit (Rs mn) 1,878 2,206 2,407 2,467 2,853 Adj. EPS (Rs) 11.0 12.9 14.0 14.4 16.6 Adj. EPS growth (%) 23.0 17.4 9.1 2.5 15.7 Adj. ROAE (%) 11.9 12.5 12.2 11.2 11.7 Adj. P/E (x) 22.5 19.1 17.5 17.1 14.8 EV/EBITDA (x) 15.1 14.4 12.5 10.3 8.5
Source: Company, BOBCAPS Research
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SADBHAV ENGINEERING
In a nutshell Margin expansion ahead led by favourable order backlog and revenue mix
FIG 1 – ORDER BACKLOG OF RS 116BN AS ON MAR’19E FIG 2 – EBITDA MARGIN EXPANSION BY ~20BPS (3X FY19E REVENUE) OVER FY18-FY21E LED BY BETTER REVENUE MIX
Source: Company, BOBCAPS Research Source: Company, BOBCAPS Research
Improvement in leverage led by working capital contraction
FIG 3 – WORKING CAPITAL CYCLE TO REDUCE TO 144 FIG 4 – NET D/E TO IMPROVE TO 0.4X BY MAR’21E DAYS BY MAR’21E FROM 185 DAYS AS ON SEP’18 FROM 0.8X IN DEC’18 (0.7X IN MAR’18)
Source: Company, BOBCAPS Research Source: Company, BOBCAPS Research
Strong pre-tax earnings growth and high asset turnover to bolster returns
FIG 5 – IMPROVEMENT IN ROCE/ROIC FROM FIG 6 – EXPECT REVENUE/EBITDA/PBT CAGR OF 9.6%/12.1% IN FY18 TO 14.5%/14.5% BY MAR’21E 15%/16%/25% OVER FY18-FY21E
Source: Company, BOBCAPS Research Source: Company, BOBCAPS Research
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Investment rationale High executable order backlog to fuel revenue recovery
As on Mar’19E, SADE had an order backlog of Rs 116bn, implying a book-to-bill ratio of 3x FY19E standalone revenues. The executable share of this backlog is high at 68% and we expect it to touch 100% by end-Jun’19 as appointed dates for the remaining five HAM projects worth Rs 36.6bn (EPC cost) are likely to come through in Q1FY20, as per management. Based on a project-wise estimate of potential execution levels, we forecast a 15% standalone revenue CAGR for SADE over FY18-FY21 vs. 6% for FY15-FY18 (see Annexure A on Page 177 for detailed revenue projections).
FIG 7 – MAR’19E ORDER BACKLOG OF RS 116BN FIG 8 – SEGMENTAL BREAKUP OF ORDER BACKLOG
Source: Company, BOBCAPS Research Source: Company, BOBCAPS Research
FIG 9 – PROJECTS WORTH RS 36.6BN YET TO RECEIVE APPOINTED DATES* Project Project type EPC cost (Rs bn) Bhimasar ‐Bhuj Road - HAM 7.5 Kim-Ankleshwar Package V Road - HAM 9.5 Gadag ‐Honnali Road - HAM 8.9 Tumkur-Shivamogga Road - HAM 7.0 Visakhapatnam Port Road Road - HAM 3.8 Total unexecutable order backlog (%) 31.6 36.6 Source: Company, BOBCAPS Research I *AD likely by Q1FY20
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FIG 10 – RISING REVENUE SHARE FROM CAPTIVE (BOT/HAM) PROJECTS Revenue breakup (Rs mn) FY17 FY18 FY19E FY20E FY21E Transportation 25,355 29,170 34,507 38,534 47,122 BOT/HAM 3,330 12,040 24,972 21,218 27,551 EPC 22,026 17,130 9,535 17,316 19,572 Mining 3,168 2,567 1,913 3,614 5,517 Irrigation 4,580 3,243 1,535 3,202 1,224 Power generation 57 53 60 70 75 Other operating revenue 42 17 30 35 40 Total 33,203 35,050 38,045 45,455 53,978 Growth YoY (%) 4.2 5.6 8.5 19.5 18.8 Revenue share (%) Transportation 76.4 83.2 90.7 84.8 87.3 BOT/HAM 10.0 34.4 65.6 46.7 51.0 EPC 66.3 48.9 25.1 38.1 36.3 Mining 9.5 7.3 5.0 7.9 10.2 Irrigation 13.8 9.3 4.0 7.0 2.3 Power generation 0.2 0.2 0.2 0.2 0.1 Other operating revenue 0.1 0.0 0.1 0.1 0.1 Total 100.0 100.0 100.0 100.0 100.0 Source: Company, BOBCAPS Research
Favourable revenue mix to aid margin gains
SADE’s EBITDA margins have remained stable in the range of 10-11% over a decade to FY17. The company provides EPC services for captive projects (BOT/annuity/HAM) as well as non-captive third-party EPC contracts. Margins are at 11-12% in the non-captive road EPC segment, 12-14% in the captive road EPC segment, 14-15% in mining, and ~12% in irrigation.
Expect 20bps margin improvement over FY18-FY21
Margins to expand to 12% in In FY18, margins improved 110bps YoY to 11.8% and we expect a further uptick to FY20 11.9% in FY19 and 12% each in FY20/FY21 led by a better revenue mix upon (i) completion of a major portion of low-margin irrigation projects in H1FY20 (outstanding order backlog of Rs 2.6bn as on Mar’19E), (ii) execution of a Rs 1.6bn high-margin irrigation project from Q4FY19 onwards, (iii) new mining contracts worth Rs 9.7bn which have 14-15% EBITDA margins as against 11-12% from older contracts, and (iv) rising revenue share from captive BOT/HAM EPC works (to 54.5% on average over FY19-FY21E vs. 34.4% in FY18 and 10% in FY17).
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FIG 11 – EBITDA MARGIN LIKELY TO RISE 20BPS OVER FY18-FY21 TO 12% ON IMPROVED REVENUE MIX
Source: Company, BOBCAPS Research
FIG 12 – EBITDA CAGR OF 16% EXPECTED OVER FY18-FY21 Particulars FY19E FY20E FY21E EBITDA margin breakup (%) Transportation 12.0 11.8 11.8 BOT/HAM 12.5 12.5 12.5 EPC 11.0 11.0 11.0 Mining 12.0 14.0 14.0 Irrigation 10.0 12.0 12.0 Power generation 9.0 9.0 9.0 Other operating revenue 9.0 9.0 9.0 Blended margin (%) 11.9 12.0 12.0 Growth YoY (bps) 10.0 6.0 3.7
EBITDA break-up (Rs mn) Transportation 4,153 4,557 5,573 BOT/HAM 3,109 2,652 3,430 EPC 1,044 1,905 2,143 Mining 230 506 770 Irrigation 154 384 147 Power generation 5 6 7 Other operating revenue 3 3 4 Total EBITDA 4,544 5,457 6,500 Source: Company, BOBCAPS Research
Better recoveries to reduce working capital intensity
SADE’s net working capital (NWC) cycle surged from 107 days in FY16 – excluding loans & advances to subsidiary/SPVs – to 193 days in FY17 and 185 days as on Sep’18, due to pending recoveries on three irrigation projects and a DMRC metro contract, as well as delayed receipt of ~Rs 6bn in mobilisation advances and GST credits. With the pending project dues received in FY19 and mobilisation/ GST amounts guided to come through by H1FY20, we model for NWC levels to moderate to 159/144 days by end-Mar’20/Mar’21.
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Working capital days spiked in FY17
In FY17, SADE had pending recoveries in three irrigation projects taken over from GKC and in a DMRC metro contract taken over from Isolux Corsan. The JV partners in these projects had stopped execution on their share of work, which was later taken over by SADE. Recoveries thereon were delayed due to the slow release of payments by clients, elevating the NWC cycle in FY17/FY18 – however, according to management, these dues have been fully settled in FY19.
In addition, we expect execution to pick up on the Rampur-Kathgodam Pkg-II (Nainital section) road project as NHAI has approved descoping of work to the tune of Rs 720mn, implying outstanding EPC work of Rs 3.2bn. Lenders had earlier stopped funding the project due to a lack of clarity on descoping and, hence, SADE had to internally fund and execute it, inflating working capital levels. With the NHAI formally approving the de-linking of work from the contract in Feb’19, lenders have released the requisite project funds.
Mobilisation & GST receivables to come through by H1FY20E…
As on Mar’19, SADE was yet to receive mobilisation advances of ~Rs 6bn for its recently won HAM and EPC projects. The delay in award of appointed dates (by a quarter) has pushed the payout of mobilisation advances back by about a quarter as well – management now expects to receive the funds by end-H1FY20. Additionally, the company has pending receivables of ~Rs 1bn related to GST, which it expects NHAI to clear by end-Q1FY20.
FIG 13 – EXPECT MOBILISATION ADVANCES BY END-H1FY20 Mobilisation advance Project (Rs mn ) Vizag Port 421 Bhimsar-Bhuj 850 Tumkur-Shivamoga 784 Kim-Ankleshwar 1,125 Gadag-Honnali 995 Mumbai-Nagpur 810 Lucknow Ring Road 981 O/s mobilisation advances as on Mar’19 5,966 Source: Company, BOBCAPS Research
…easing pressure on working capital
With the anticipated receipt of mobilisation advances and recoveries related to GST along with a rising share of revenue from HAM projects (which have a faster payment schedule vis-à-vis EPC), we anticipate (i) improvement in NWC levels to 174/159/144 days by Mar’19/Mar’20/Mar’21 from 185 days as on Sep’18, and (ii) reduction in net D/E ratio to 0.4x as on Mar’21 from 0.7x as on Dec’18 (0.8x as on Mar’18).
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FIG 14 – WORKING CAPITAL LEVELS TO IMPROVE TO FIG 15 – NET D/E LIKELY TO REDUCE TO 0.4X BY 144 DAYS BY MAR’21E FROM 185 DAYS IN SEP’18 MAR’21E FROM 0.7X IN DEC’18
Source: Company, BOBCAPS Research Source: Company, BOBCAPS Research
Strong slate of operational road assets
Sadbhav Infrastructure Projects (SINP; 69.6% owned by SADE) has a portfolio of 23 roads and 1 border check-post project. These comprise 12 BOT (11 fully and 1 partly operational) and 12 under-development HAM contracts – an asset composition that (i) offers high visibility of future revenue and cash flows as the risk of initial toll revenue coming in short of expectations is mitigated, (ii) reduces execution risks, and (iii) lends a clear view of base traffic levels. All these factors in turn imply higher predictability of cash flows and, hence, better project valuations.
High traffic growth imparts stability to toll revenue
The 12 BOT projects are located along India’s main freight corridors where industrial traffic growth is high. We believe their location in states with strong economic growth (Gujarat, Maharashtra, Rajasthan and others) lends stability to SINP’s toll revenues. Gross toll collection from operational assets grew 12.9% YoY in FY18 to Rs 10.1bn and 10% YoY in 9MFY19 to Rs 8.3bn, backed by improvement in traffic due to an economic recovery post-demonetisation and GST rollout.
Operational assets fully funded
Equity requirement in 12 SINP’s operational projects are fully funded and have no further equity HAM projects at Rs 13.3bn; requirement. In HAM projects, of the total equity requirement of Rs 13.3bn, Rs 3.4bn invested till Dec’18 SINP had invested ~Rs 3.4bn up to Dec’18 and the remainder is likely to be invested over a period of 2.5-3 years. Mobilisation advances of Rs 4.2bn are due for five HAM contracts over Q1-Q2FY20 where appointed dates are expected to come though by Q1FY20.
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FIG 16 – OPERATIONAL/PARTIALLY OPERATIONAL ASSETS WITH AVERAGE RESIDUAL LIFE OF ~14 YEARS Equity FY18 o/s debt Operational assets Length Project Stake Revenue Revenue EBITDA EBITDA Concession Authority Type State investment (incl. sponsor COD End date (Rs mn) (km) cost (%) in FY17* in FY18* in FY17* in FY18* period (yrs) (incl. sub -debt) loan) Ahmedabad RR AUDA 76 Toll Gujarat 5,435 100 1,037 2,566 941 997 777 810 May-08 20 Dec-26 Govt. of Aurangabad-Jalna 66 Toll Maharashtra 2,724 100 1,118 2,269 508 528 451 442 Jul-09 25 Apr-32 Maharashtra Bhilwara-Rajsamand NHAI 87 Toll Rajasthan 6,761 100 1,333 2,801 329 438 236 308 Jun-16 30 Oct-43 Bijapur-Hungund NHAI 97 Toll Karnataka 13,689 77 1,398 7,983 1,158 1,217 1,052 1,094 Apr-12 24 Sep-34 Dhule-Palesner NHAI 89 Toll Maharashtra 14,200 100 3,824 10,531 1,690 1,816 1,502 1,642 Jan-12 22 Jun-31 Hyderabad-Yadgiri NHAI 36 Toll Telangana 4,947 100 1,190 3,730 569 696 502 629 Dec-12 28 Mar-38 Govt. of 24 MBCPNL^^ Toll Maharashtra 14,264 91 4,566 10,916 1,607 1,858 1,047 1,369 Apr-13 26 Mar-36 Maharashtra check-posts Rohtak-Hissar NHAI 99 Toll Haryana 12,716 100 1,101 10,476 390 571 326 479 Aug-16 22 Dec-35 Rohtak-Panipat NHAI 81 Toll Haryana 11,610 100 2,427 11,315 908 1,073 754 940 Jan-14 30 Apr-41 Shreenathji-Udaipur NHAI 79 Toll Rajasthan 11,515 100 3,115 8,715 1,031 1,076 892 914 Dec-15 31 Apr-44 Maharashtra Nagpur-Seoni** NHAI 28 Annuity 3,748 100 435 2,578 384 384 358 350 May-10 20 Nov-27 /MP Govt. of Mysore-Bellary**^ 193 Annuity Karnataka 8,112 100 791 4,247 - 712 0 680 Jun-17 10 Dec-24 Karnataka Total 109,720 22,334 78,128 9,517 11,365 7,898 9,658 Source: Company, BOBCAPS Research I *Includes recurring income (incl. advertising, rent received), O&M cost, MMR cost, employee benefit and other operating expenses; excludes NHAI grant, construction revenue and costs I **For annuity projects: Revenue includes only annuity amount and EBITDA is annuity amount less operating expenses I ^Stake in Mysore Bellary is currently owned by SADE; we expect that SINP will acquire 100% stake in the SPV in FY20 I ^^18 check-posts operational as on Dec’18; balance 6 under construction | COD – Commercial Operation Date
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FIG 17 – HAM PROJECTS WITH BALANCE EQUITY REQUIREMENT OF RS 10BN TO BE INVESTED OVER 2.5-3 YEARS O/s EPC order Equity Pending HAM Projects* Length FY18 backlog as on Scheduled Concession State BPC Grant Equity Debt invested up to equity Comments (Rs mn) (km) Debt Dec'18 COD years Dec’18 requirement (ex -GST) Bhavnagar-Talaja 48 Gujarat 8,190 3,596 1,082 4,330 360 722 1,204 2,001 Aug-19 17.5 Scheduled for completion in FY20 BRT Tiger Reserve 171 Bengaluru 10,080 4,405 1,211 4,846 620 591 175 2,683 Aug -19 17.0 Scheduled for completion in FY20 Rampur- Uttar Pending works are likely to get spilled over in FY20 and Kathgodam 43 7,380 3,278 886 3,543 640 246 1,449 2,197 Mar-19 17.0 Pradesh expected to get over in H1FY20 Pkg -I (Rudrapur) Descoping of work approved by NHAI to the tune of Rs Rampur- Uttar 720mn; accordingly, order backlog of Rs 3.9bn as on Kathgodam 50 6,570 2,979 789 3,157 460 329 156 3,881 Oct-19 17.0 Pradesh Dec’18 stands revised downwards to Rs 3.2bn.; Pkg-II (Nainital) Scheduled for completion in FY20 Project is facing ROW issue and hence the SPV has proposed that NHAI delink 6-8km of the project stretch Una-Kodinar 41 Gujarat 6,230 2,791 840 3,361 240 600 731 2,351 Aug-19 17.5 from the scope of work and issue PCOD on scheduled completion date; BPC likely to reduce by ~Rs 1bn; Scheduled for completion in FY20 Udaipur Bypass 24 Rajasthan 8,910 3,841 1,075 4,300 430 645 673 1,668 Nov-19 17.0 Scheduled for completion in FY20 Waranga- 67 Maharashtra 10,710 4,682 1,292 5,168 490 802 - 4,831 Sep-20 17.5 Scheduled for completion in H1FY21 Mahagaon Jodhpur Ring AD: 14-Dec-18; >90% land available; Construction 75 Rajasthan 11,060 4,761 1,333 5,332 170 1,163 - 7,637 Jul-20 17.0 Road period of 730 days CA signed: 23-May-18; 55-65% land available in 3H Bhimasar-Bhuj 60 Gujarat 10,500 4,598 1,270 5,079 - 1,270 - 7,535 Apr-21 17.5 stage; FC complete; AD likely by Q1FY20 Tumkur- CA signed: 4-May-18; ~60% land available in 3H stage; Shivamoga 49 Karnataka 10,080 4,375 1,216 4,866 - 1,216 - 7,000 Oct-20 17.0 Company has received in-principle approval from Pkg -III lenders for financial sanctions; AD likely in Q1FY20 CA signed: 10-May-18; ~75% land available in 3H stage; Kim-Ankleshwar, 24 Gujarat 14,040 6,094 1,694 6,777 - 1,694 - 9,465 Oct-20 17.0 Company has submitted financing documents to NHAI Pkg-V for FC; AD likely by Q1FY20 CA signed: 3-May-18; 55-65% land available in 3H Visakhapatnam Andhra 13 5,280 2,252 636 2,545 - 636 - 3,756 Apr-20 16.5 stage; Company has received in-principle approval from Port Pradesh lenders for financial sanctions; AD likely in Q1FY20 Total 1,09,030 47,652 13,324 53,304 3,410 9,914 4,388 Source: Company, BOBCAPS Research I *100% stake of Sadbhav Infrastructure Project | Note: AD – Appointed Date; BPC – Bid Project Cost; CA – Concession Agreement; COD – Commercial Operation Date; FC – Financial Closure; PCOD – Provisional COD; ROW – Right of Way
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Self-sustaining BOT assets will cap support from SADE
SINP’s operating assets had lower-than-expected initial toll collections, which prompted financial support from SADE – outstanding loans & advances to the subsidiary stood at Rs 4.5bn as on Dec’18. We expect cash flows from operating assets to improve given (i) economic recovery leading to higher traffic, (ii) full commissioning of the Maharashtra border check-post project in FY20 (18 operational out of 24), (iii) stabilisation of traffic along the Rohtak-Panipat and Rohtak-Hissar stretches and (iv) debt refinancing leading to lower interest cost and extension of loan tenure.
Project refinancing to bolster cash flows
MBCPNL refinanced via top- SADE’s subsidiary, SINP, had refinanced its Mumbai check-post SPV, up loan of Rs 5.2bn; SINP’s MBCPNL, with an additional top-up loan facility of Rs 5.2bn. Up to Sep’18, overall BOT portfolio to be MBCPNL had utilised Rs 1.3bn to part pay the outstanding loans and advances self-sustaining due to SADE. Additionally, SINP has entered into a definitive agreement with the Piramal Group for debt financing of Rs 6bn to support its equity requirements of Rs 10bn in ongoing HAM projects (Rs 500mn utilised so far). Based on current and estimated toll collections, we expect SINP’s BOT portfolio to be self- sustaining on a combined basis by FY19, obviating the need for additional equity support from SADE.
FIG 18 – REFINANCED BOT PROJECTS* Interest rate Interest rate Projects (%) Refinancing month pre -refinancing (%) post -refinancing (%) Dhule Panesar 11.7 9.7 Nov-15 Nagpur Seoni 8.9 8.8 Dec-15 Hyderabad Yadgiri 11.0 9.2 Apr-16 Aurangabad Jalna 10.8 9.8 May-16 Bijapur-Hungund 11.1 9.2 May-16 Ahmedabad Ring Road 10.9 8.7 Aug-17 Sreenathji Udaipur 11.3 9.2 Aug-17 Bhilw ara-Rajsamand 11.1 9.2 Feb-18 Maharashtra Border Checkpost 11.0 9.3 Mar-18 Source: Company, BOBCAPS Research I *Refinancing of Rohtak-Panipat and Rohtak-Hissar likely in FY20
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FIG 19 – ESTIMATED GROSS TOLL COLLECTION CAGR OF 10.2% OVER FY18-FY21 Gross toll collection Q1FY18 Q2FY18 Q3FY18 Q4FY18 FY18 Q1FY19 Q2FY19 Q3FY19 Q4FY19E FY19E FY20E FY21E (Rs mn) Ahmedabad RR (ex of 234 227 233 245 939 239 232 248 251 1,002 1,106 1,217 claims) Aurangabad-Jalna (ex of 93 86 96 102 376 102 95 145 149 536 672 711 claims) Bijapur-Hungud 296 297 300 319 1,212 316 315 296 317 1,244 1,382 1,527 Hyderabad-Yadgiri 171 159 185 179 694 202 171 193 204 770 855 945 Dhule-Palesnar 426 441 475 475 1,817 458 484 482 490 1,913 2,126 2,349 Rohtak Panipat 247 250 284 290 1,072 303 264 262 279 1,108 1,231 1,360 Maharashtra Border 451 432 493 494 1,870 582 574 567 586 2,309 2,547 2,693 Check Post ( MBCPNL) Shreenathji-Udaipur 263 265 273 262 1,062 282 280 311 316 1,190 1,322 1,460 Bhilwara-Rajsamand 116 110 108 104 438 115 120 134 139 508 564 623 Rohtak-Hisar 132 136 153 150 571 151 150 171 177 649 721 797 Total 2,430 2,402 2,600 2,620 10,051 2,750 2,686 2,808 2,908 11,230 12,526 13,681 Growth YoY (%) 15.6 12.0 13.6 10.7 12.9 13.2 12.6 5.9 8.8 9.8 11.5 9.2 Source: Company, BOBCAPS Research
FIG 20 – EXPECT TRAFFIC GROWTH OF OVER ~4% IN FY19
Source: Company, BOBCAPS Research
Likely near-term stake sale in operational assets
Monetisation proceeds will be SADE’s subsidiary, SINP, is in advanced discussions with a financial investor for a used to bring down stake sale in its nine operational assets, which include a mix of toll (seven) and borrowings by ~Rs 5.3bn annuity (two) assets. As on Mar’19, the total equity investment in these assets stands at Rs 14.2bn and outstanding debt stands at ~Rs 43bn.
Monetisation proceeds will be used by the subsidiary to (i) fund the balance equity requirement in HAM projects (~Rs 10bn), and (ii) repay Rs 4.5bn of loans to SADE. Additionally, SINP plans to monetise its 12 HAM projects post-COD via a contractual agreement with the financial partner, wherein the partner will have the first right of offer to buy these assets.
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Financial review Execution pick-up to fuel standalone revenue CAGR of 15%
SADE has a robust order backlog of Rs 116bn as on Mar’19E, which is 3x FY19E standalone revenue. With 68% of the orders under execution and work on the remaining likely to commence in Q1FY20, we expect the company to log a brisk 15% revenue CAGR over FY18-FY21. Additionally, based on government announcements and NHAI’s estimated ~Rs 1tn/pa award pipeline, we forecast order inflows of Rs Rs 61.5bn/Rs 64.5bn in FY20/FY21 for SADE in the highways segment, lending revenue visibility.
FIG 21 – EXPECT REVENUE CAGR OF 15% OVER FIG 22 – AVERAGE HAM REVENUE SHARE FORECAST FY18-FY21 TO RISE TO 54.5% OVER FY19-FY21
Source: Company, BOBCAPS Research Source: Company, BOBCAPS Research
Leverage to moderate as working capital eases
We expect NWC levels to improve to 174/159/144 days by Mar’19/Mar’20/ Mar’21 from 185 days as on Sep’18, led by a rise in revenue contribution from own HAM projects (better payment terms), improved recoveries and receipt of mobilisation advances. As working capital levels moderate, the company’s net D/E ratio is projected to improve to 0.4x by Mar’21 from 0.7x as on Dec’18.
FIG 23 – WORKING CAPITAL AND LEVERAGE TO MODERATE
Source: Company, BOBCAPS Research
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Pre-tax earnings growth to boost return ratios
Led by strong revenue growth, EBITDA margin expansion (~20bps over FY18- FY21E) and better leverage, we expect SADE to post a pre-tax earnings/EPS CAGR of 25%/9% over FY18-FY21. Strong PBT growth and high asset turnover would in turn bolster return ratios – we model for ROCE/ROIC of 14.5% each in FY21 as against 9.6%/12.1% in FY18.
FIG 24 – STRONG GROWTH IN PRE-TAX EARNINGS AND HIGHER ASSET TURNOVER TO DRIVE RETURNS
Source: Company, BOBCAPS Research
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Valuation methodology
Initiate coverage with BUY SADE is well placed to benefit from the large growth opportunities offered by and SOTP-based Mar’20 TP India’s road sector. We see clear execution visibility on its outstanding order of Rs 295 backlog from HAM projects, with seven of these progressing well – for the balance five, SADE is likely to receive appointed dates in Q1FY20. As a result, we expect the company to log a 15%/25% revenue/PBT CAGR over FY18-FY21 on a standalone basis.
12x one-year forward P/E The stock is trading at 10.1x/8.7x FY19E/FY20E standalone earnings, adjusted for multiple ascribed to Rs 101/sh of asset value. We initiate coverage with BUY and a Mar’20 sum-of- standalone business the-parts (SOTP) target price of Rs 295. For our SOTP model, we value (i) the standalone EPC business at Rs 194/sh (12x FY21E earnings), (ii) SINP at Rs 100/sh (20% discount to its current market cap after adjusting for SADE’s stake of 69.6%), and (iii) the Gadag-Honnali HAM project at Re 1/sh, valuing the cumulative equity investment made up to Mar’20E on a 1x P/BV multiple
FIG 25 – SOTP-BASED TARGET PRICE OF RS 295 SADE's Value Multiple Valuation SADE's Holding co Per share Business Basis of valuation value (Rs mn) (x) (Rs mn) stake (%) discount (%) (Rs) (Rs mn) P/E on FY21E adjusted SADE standalone (EPC) 2,769 12 33,231 - - 33,231 194 earnings * Gadag-Honnali (HAM project, P/BV on investment made 249 1.0 249 100.0% - 249 1 KSHIIP) up to Mar ’20E Sadbhav Infrastructure Project Market cap 30,803 - 30,803 69.6% 20.0% 17,158 100 Total 33,820 64,282 50,638 295 O/s shares (mn) 172 Source: Company, BOBCAPS Research I *PBT less dividend from SINP = Adjusted PBT and Adjusted PAT (net of tax) I Note: Target price rounded off
FIG 26 – FORWARD P/E BAND (5 YEAR MEAN AT 25.5X)
Source: Bloomberg
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FIG 27 – RELATIVE STOCK PERFORMANCE
SADE NSE Nifty 170
140
110
80
50 Jul-17 Jul-16 Jul-18 Jan-17 Jan-19 Jan-18 Apr-17 Apr-19 Apr-16 Apr-18 Oct-17 Oct-16 Oct-18 Source: NSE Key risks
. Slowdown in road sector capex: Capex in the road sector has witnessed some revival over the last two years. Any slowdown in project awarding would impact the company’s growth and our estimates.
. Delay in execution of projects in hand: Execution hurdles due to delays in land acquisition or delay in appointed dates or other regulatory bottlenecks could affect SADE’s revenue.
. Slowdown in traffic: A slowdown in industrial activity in areas housing SADE’s toll BOT projects may impair revenue collection, resulting in negative cash flows. This may cause the company to infuse further equity from its standalone balance sheet to support BOT SPVs.
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Annexure A: Revenue projections
FIG 1 – ORDER BACKLOG OF RS 116BN IS 68% EXECUTABLE; EXPECT REVENUE CAGR OF 15% OVER FY18-FY21 Revenue Original contract Order backlog as on Segments (Rs mn) Q4FY19E FY19E FY20E FY21E Comments value on gross basis Dec’18 (ex - GST) Road EPC (non-captive/third party) AD: Feb’18. Delayed due to land acquisition issue and Ahmedabad-Rajkot Pkg-4 (Sayla-Bamanbore) + 9,000 7,496 750 - 6,371 375 utility shifting; Execution has picked up from Q4FY19 Ahmedabad-Rajkot Pkg-2 (Bagodara-Limbdi) and is scheduled for completion in Q1FY21 DMRC project at Badli for Jahangir Puri-Badli Corridor 570 - - 570 - Scheduled for completion in FY20 (extension of line -2); phase -lll of Delhi MRTS Other road EPC projects 3,743 1,423 - 2,321 - Scheduled for completion in FY19 AD: 05-Jan-19; >80% land available; Construction Mumbai-Nagpur Samruddhi Expressway, Pkg-5 16,200 15,799 405 - 4,860 7,899 period of 30 months AD: 09-Dec-18; >90% land available; Construction Lucknow Ring Road (Behta Road-Sitapur Road, Pkg-2) 9,810 8,383 491 - 2,943 3,772 period of 3 years Kandla Port (Smart Industrial Port City (SIPC) Location 2 1,675 462 462 - - - Scheduled for completion in Q4FY19 at Kandla -Gandhidham -Adipur Complex) (I) Total 36,453 3,529 - 17,066 12,047 Road BOT/HAM (captive) 47,030 Pending works likely to spill over into FY20 and Rampur-Kathgodam Pkg-1 6,030 2,197 879 - 1,318 - expected to be completed in H1FY20 Descoping of work approved by NHAI to the tune of Rs 720mn; accordingly order backlog of Rs 3.9bn as on Rampur-Kathgodam Pkg-2 5,250 3,881 776 - 2,385 - Dec’18 stands revised downwards to Rs 3.2bn; Pending work scheduled for completion in FY20 Bhavnagar-Talaja 6,500 2,001 901 - 1,101 - Scheduled for completion in FY20 Project is facing RoW issue and hence the SPV has proposed to the NHAI to de-link 6-8 km of the project stretch from the scope of work and issue Una-Kodinar 4,950 2,351 470 - 1,881 - PCOD at a scheduled completion date; BPC is likely to get reduced by ~Rs 1bn; Pending work scheduled for comple tion in FY20 BRT Tiger Reserve 8,550 2,683 1,500 - 1,183 - Scheduled for completion in FY20 Udaipur Bypass (Pkg-IV) 7,450 1,668 1,250 - 418 - Scheduled for completion in FY20
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Revenue Original contract Order backlog as on Segments (Rs mn) Q4FY19E FY19E FY20E FY21E Comments value on gross basis Dec’18 (ex - GST) Waranga-Mahagaon (Pkg-I) 8,300 4,831 1,100 - 2,416 1,316 Scheduled for completion in H1FY21 AD: 14-Dec-18; >90% land available; Construction Jodhpur Ring Road (Dangiywas-Jajiwal, Package-I) 9,750 7,637 573 - 3,895 3,169 period of 730 days CA signed: 23-May-18; 55-65% land available in 3H Bhimasar-Bhuj 8,500 7,535 - - 1,356 3,391 stage; FC complete; AD likely by Q1FY20 CA signed: 10-May-18; ~75% land available in 3H Vadodara-Kim Expressway (Pkg-V) 11,250 9,465 - - 1,704 5,206 stage; Company has submitted financing documents to NHAI for FC; AD likely by Q1FY20 CA signed: 3-May-18; 55-65% land available in 3H stage; Company has received in-principle approval Visakhapatnam Port Road 7,535 3,756 - - 676 3,080 from lenders for financial sanctions; AD likely in Q1FY20 CA signed: 4-May-18; ~60% land available in 3H stage; Company has received in-principle approval Tumkur-Shivamoga (Pkg-III) 8,880 7,000 - - 1,260 3,850 from lenders for financial sanctions; AD likely in Q1FY20 CA signed in Feb’19; State highway project where land requirement is minimal as the road is to be built Gadag-Honnali (KSHIP) 8,880 8,880 - - 1,332 4,884 alongside the existing road; FC likely by end-Apr’19; AD likely by end -Q1FY20 Others 587 - - 293 293 Scheduled for completion in FY21 (II) Total 64,472 7,449 - 21,218 25,188 Mining Bharat Coking Coal, Dhanbad 2,185 109 - 328 437 Basantimata-Dahibari Patch of Dahibari Colliery 4,075 204 - 611 815
Banduhurang Opencast Mine 263 13 - 39 53 Work was progressing slowly but has picked up from Dhansar Colliery of Kusunda Area 1,521 76 - 228 304 Q4FY19 Jalipa Lignite Mines 3,924 196 - 589 785 Kolgaon OCM of Wani Area 1,051 53 - 158 210 Bhanegaon OCM, Nagpur 1,134 1,197 30 - 239 299 Work started from Q3FY19; 5-year contract Kolarpimpri Ext. OCM, Wani North Area 5,608 5,394 135 - 809 1,348 Work started from Q3FY19; 4.5-year contract Gevra OCM, South Eastern Coal Fields, Chhattisgarh 3,171 3,063 77 - 613 766 Work started from Q3FY19; 3-year contract
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Revenue Original contract Order backlog as on Segments (Rs mn) Q4FY19E FY19E FY20E FY21E Comments value on gross basis Dec’18 (ex - GST) (III) Total 22,671 892 - 3,614 5,017 Irrigation Gouravelly Right Side Canal and Left Side Canal in 371 93 - 278 - Karimnagar District, Andhra Pradesh Baitarani Left Bank Canal (BLBC), Orissa 282 70 - 211 - Scheduled for completion in FY20 Narmada Development Halon Division, Bichhiya, Dist. 819 205 - 614 - Mandala, MP Bhauti High Level Canal, MP 1,070 267 - 802 - Chitradurga Branch Canal Project, Karnataka 1,609 1,609 - - 563 724 AD: 30-Jan-19 Others 979 245 - 734 - Scheduled for completion in FY20 (IV) Total 5,128 880 - 3,202 724 (i) Power generation - 12 - 70 75 (ii) Other Operating revenue - 8 - 35 40 (V) Other projects (i+ii) - 20 - 105 115 Total expected revenue in Q4FY19E (I+II+III+IV+V) 12,769 - 9MFY19 9MFY19 FY19E Road-BOT/HAM - 17,524 24,972 - - Road-EPC - 6,006 9,535 - - Mining - 1,020 1,913 - - Irrigation - 655 1,535 - - Power generation - 49 60 - - Other Operating revenue - 22 30 - - (A) Total (I+II+III+IV+V) 1,28,725 25,276 38,045 45,205 43,901 Revenue from the existing order backlog Expected order inflows in FY20E/FY21E FY20E H1FY20E 10,000 - - 250 4,000 - Road HAM - - - - Road EPC 10,000 - - 205 4,000 2.5%/40% execution in FY20E/FY21E - Mining - - -
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Revenue Original contract Order backlog as on Segments (Rs mn) Q4FY19E FY19E FY20E FY21E Comments value on gross basis Dec’18 (ex - GST) - Irrigation - - - H2FY20E 59,500 - - - 5,950 - Road HAM 20,500 - - - 2,050 10% execution in FY21E - Road EPC 31,000 - - - 3,100 10% execution in FY21E - Mining 4,000 - - - 400 10% execution in FY21E - Irrigation 4,000 - - - 400 10% execution in FY21E Total FY20E (VII) 69,500 - 250 9,950 FY21E H1FY21E 37,500 - - - 938 - Road HAM 12,500 - - - 313 2.5% execution in FY21E - Road EPC 17,000 - - - 425 2.5% execution in FY21E - Mining 4,000 - - - 100 2.5% execution in FY21E - Irrigation 4,000 - - - 100 2.5% execution in FY21E H2FY21E 41,000 - - - - - Road HAM 15,000 - - - - Nil revenue in FY21E - Road EPC 20,000 - - - - Nil revenue in FY21E - Mining 3,000 - - - - Nil revenue in FY21E - Irrigation 3,000 - - - - Nil revenue in FY21E Total FY21E (VIII) 78,500 - - - 938 (B) Total (VI+VII+VIII) - - 250 10,888 Revenue from new order inflows Total (A+B) 12,769 38,045 45,455 53,978 Total revenue CAGR of 15% over FY18-FY21E % Growth YoY 15.6 8.5 19.5 18.8 Source: Company, BOBCAPS Research | Note: AD – Appointed Date; CA – Concession Agreement; FC – Financial Closure
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FINANCIALS (STANDALONE)
Income Statement Y/E 31 Mar (Rs mn) FY17A FY18A FY19E FY20E FY21E Total revenue 33,203 35,050 38,045 45,455 53,978 EBITDA 3,556 4,151 4,544 5,457 6,500 EBIT 2,556 3,172 3,558 4,350 5,266 Net interest income/(expenses) (1,458) (1,705) (1,820) (1,894) (1,923) Other income/(expenses) 799 695 1,061 833 852 Exceptional items 0 0 0 0 0 EBT 1,897 2,162 2,799 3,289 4,195 Income taxes (18) 44 (392) (822) (1,342) Extraordinary items 0 0 0 0 0 Min. int./Inc. from associates 0 0 0 0 0 Reported net profit 1,878 2,206 2,407 2,467 2,853 Adjustments 0 0 0 0 0 Adjusted net profit 1,878 2,206 2,407 2,467 2,853
Balance Sheet Y/E 31 Mar (Rs mn) FY17A FY18A FY19E FY20E FY21E Accounts payables 4,910 5,990 4,690 6,227 7,394 Other current liabilities 0 0 0 0 0 Provisions 165 182 235 241 248 Debt funds 17,771 14,847 14,500 13,600 12,400 Other liabilities 749 4,020 4,690 6,227 7,320 Equity capital 172 172 172 172 172 Reserves & surplus 6,291 6,291 6,291 6,291 6,291 Shareholders’ fund 16,609 18,668 20,868 23,128 25,774 Total liabilities and equities 40,203 43,706 44,985 49,423 53,136 Cash and cash eq. 230 127 754 820 835 Accounts receivables 17,010 16,280 15,635 18,057 21,148 Inventories 1,234 1,643 2,397 3,113 3,697 Other current assets 0 0 0 0 0 Investments 5,694 5,775 6,000 5,664 5,813 Net fixed assets 5,159 5,004 4,918 4,811 4,577 CWIP 69 23 38 38 38 Intangible assets 0 0 0 0 0 Deferred tax assets, net 477 994 1,022 1,055 1,097 Other assets 10,331 13,860 14,219 15,863 15,931 Total assets 40,203 43,706 44,985 49,423 53,136 Source: Company, BOBCAPS Research
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Cash Flows Y/E 31 Mar (Rs mn) FY17A FY18A FY19E FY20E FY21E Net income + Depreciation 2,879 3,185 3,393 3,573 4,087 Interest expenses 1,458 1,705 1,820 1,894 1,923 Non-cash adjustments 0 0 0 0 0 Changes in working capital (8,473) 632 (1,123) (1,737) (1,516) Other operating cash flows 0 0 0 0 0 Cash flow from operations (4,136) 5,522 4,090 3,730 4,494 Capital expenditures (299) (778) (915) (1,000) (1,000) Change in investments (65) (80) (225) 336 (149) Other investing cash flows (283) 59 0 0 0 Cash flow from investing (646) (799) (1,140) (664) (1,149) Equities issued/Others 0 0 0 0 0 Debt raised/repaid 6,184 (2,924) (347) (900) (1,200) Interest expenses (1,458) (1,705) (1,820) (1,894) (1,923) Dividends paid (145) (145) (155) (207) (207) Other financing cash flows 265 (52) 0 0 0 Cash flow from financing 4,846 (4,825) (2,322) (3,001) (3,329) Changes in cash and cash eq. 64 (103) 627 66 15 Closing cash and cash eq. 230 127 754 820 835
Per Share Y/E 31 Mar (Rs) FY17A FY18A FY19E FY20E FY21E Reported EPS 11.0 12.9 14.0 14.4 16.6 Adjusted EPS 11.0 12.9 14.0 14.4 16.6 Dividend per share 0.7 0.8 1.0 1.0 1.0 Book value per share 96.8 108.8 121.7 134.8 150.3
Valuations Ratios Y/E 31 Mar (x) FY17A FY18A FY19E FY20E FY21E EV/Sales 1.6 1.7 1.5 1.2 1.0 EV/EBITDA 15.1 14.4 12.5 10.3 8.5 Adjusted P/E 22.5 19.1 17.5 17.1 14.8 P/BV 2.5 2.3 2.0 1.8 1.6
DuPont Analysis Y/E 31 Mar (%) FY17A FY18A FY19E FY20E FY21E Tax burden (Net profit/PBT) 99.0 102.0 86.0 75.0 68.0 Interest burden (PBT/EBIT) 74.2 68.2 78.7 75.6 79.7 EBIT margin (EBIT/Revenue) 7.7 9.1 9.4 9.6 9.8 Asset turnover (Revenue/Avg TA) 88.4 83.5 85.8 96.3 105.3 Leverage (Avg TA/Avg Equity) 2.4 2.4 2.2 2.1 2.1 Adjusted ROAE 11.9 12.5 12.2 11.2 11.7 Source: Company, BOBCAPS Research | Note: TA = Total Assets
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Ratio Analysis Y/E 31 Mar FY17A FY18A FY19E FY20E FY21E YoY growth (%) Revenue 4.2 5.6 8.5 19.5 18.8 EBITDA 6.2 16.7 9.5 20.1 19.1 Adjusted EPS 23.0 17.4 9.1 2.5 15.7 Profitability & Return ratios (%) EBITDA margin 10.7 11.8 11.9 12.0 12.0 EBIT margin 7.7 9.1 9.4 9.6 9.8 Adjusted profit margin 5.7 6.3 6.3 5.4 5.3 Adjusted ROAE 11.9 12.5 12.2 11.2 11.7 ROCE 8.5 9.6 10.6 12.4 14.5 Working capital days (days) Receivables 187 170 150 145 143 Inventory 14 17 23 25 25 Payables 54 62 45 50 50 Ratios (x) Gross asset turnover 4.9 5.0 4.9 5.2 5.6 Current ratio 4.9 3.1 3.4 3.0 2.8 Net interest coverage ratio 1.8 1.9 2.0 2.3 2.7 Adjusted debt/equity 1.1 0.8 0.7 0.6 0.4 Source: Company, BOBCAPS Research
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Disclaimer
Recommendations and Absolute returns (%) over 12 months
BUY – Expected return >+15%
ADD – Expected return from >+5% to +15%
REDUCE – Expected return from -5% to +5%
SELL – Expected return <-5%
Note: Recommendation structure changed with effect from 1 January 2018 (Hold rating discontinued and replaced by Add / Reduce)
Rating distribution
As of 31 March 2019, out of 71 rated stocks in the BOB Capital Markets Limited (BOBCAPS) coverage universe, 42 have BUY ratings, 18 are rated ADD, 6 are rated REDUCE and 5 are rated SELL. None of these companies have been investment banking clients in the last 12 months.
Analyst certification
The research analyst(s) authoring this report hereby certifies that (1) all of the views expressed in this research report accurately reflect his/her personal views about the subject company or companies and its or their securities, and (2) no part of his/her compensation was, is, or will be, directly or indirectly, related to the specific recommendation(s) or view(s) in this report. Analysts are not registered as research analysts by FINRA and are not associated persons of BOBCAPS.
General disclaimers
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