Our Call. Ashoka Buildcon: Buy

The stock of Ashoka Buildcon, a road and power infrastructure company, has rocketed in recent times.

At ₹133, it trades at a price-earnings multiple of 19 times the trailing earnings, on a par with peer road developer, IRB Infrastructure. The multiple on forward earnings is 16.7 times.

The stock has run up partly because infrastructure stocks have caught the market’s eye in the hope that the sector will benefit from the Government’s reforms drive.

For those with a two/three-year perspective, Ashoka Buildcon is a good buy. For one, it is among the few infrastructure companies that have a reasonably sound balance sheet. Its debt-equity ratio of 2.5 times, interest cover of 3 times, and a steady working capital cycle all offer comfort.

Going strong Two, Ashoka has a large portfolio of completed road projects. Toll revenues did take a hit during the economic slowdown and projects such as the Durg bypass and the Belgaum-Dharward stretch saw growth of just 2-5 per cent in 2013-14. Besides, toll collection on several projects under the Maharashtra PWD was suspended last year; they contribute about 5 per cent to the toll income.

But with revenues beginning to flow in from recent projects such as Pimpalgaon-Gonde and improved contributions from its main toll roads, total toll revenues were up 14 per cent in fiscal 2014. In the three-year period, the annualised growth in toll collections has been at an impressive 48 per cent, as several new projects were commissioned.

Thirty-seven per cent of Ashoka’s ₹3,042-crore order book comes from plain vanilla construction contracts or engineering-procurement-construction (EPC) in the power transmission and distribution sector.

While power developers are in a soup, last-mile connectivity is still a paying proposition.

Orders from this segment have been strong, accounting for half the flows last fiscal. With several projects now being bid out on EPC basis, Ashoka stands to gain. EPC projects have shorter execution periods and working capital cycles and require lower capital investments.

Ashoka’s in-house construction capabilities offer better control over quality and costs. Its operating profit margins are strong at 20-22 per cent.

Comfortable funding Ashoka has two large road projects under development which will be completed over the next two years. These projects are on annuity basis and have lower risk element than those on toll.

But with three projects becoming operational over the past two years and fewer new projects taken on, revenues were down 3 per cent in FY14 from the 24 per cent growth in FY13. Growth should pick up with two new projects getting under way.

Ashoka is reasonably well-placed on the funding side, with finances tied up for all projects. Additionally, in 2012, the company received equity funding of ₹800 crore in a subsidiary that is responsible for six of its road projects, from Macquarie SBI Infrastructure Investment Pte and Macquarie SBI Infrastructure Trust, of which ₹177 crore is yet to flow in.

The company’s credit rating was also recently raised by CRISIL to AA- (stable) for long-term credit and A1+ for short-term credit.

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