Ashoka Buildcon: Long road to riches

The stocks of road project developers have had a good ride in the last year as investors bet on a recovery. Ashoka Buildcon (ABL), a toll road developer with a strong contract business, is among those that benefited. The stock is up 24 per cent since October 2014. The company’s revenue growth has been robust, at around 15 per cent average over the last three years; revenue grew 29 per cent in 2014-15 — a tough year for most toll road developers.

Also, thanks to ₹500 crore raised recently through a Qualified Institutional Placement and its planned sale of land assets, it is well positioned to benefit from the pick-up in National Highways Authority of India’s (NHAI) new projects.

The company’s portfolio of toll road projects is mature, with limited downside risks. Additionally, net profit may improve as lower interest rates lead to a reduction in financing costs.

While these positives buoyed investor interest, the bottom-line was not too rosy. In the first half of 2015-16, earnings dipped 4 per cent compared with the same period a year ago.

The company’s earnings of ₹82 crore in 2014-15 was lower by 16 per cent compared to a year ago, as interest expenses more than doubled year-on-year.

As a result of the stock price appreciation and slip in earnings, the stock discounts its 2014-15 earnings by 34 times.

This is higher than the price-to-earnings ratio of peers, such as IRB Infra and IL&FS, which trade at multiples of 16 and seven times respectively. The share price is also at a premium to ABL’s three-year average historical valuation of 10-15 times.

The stock has had a good run, up from about ₹40 two years ago. Still, given that the company’s long-term prospects are good, investors are advised to hold the stock.

ABL’s revenue, which was about ₹2,300 crore in 2014-15, could benefit from a pick-up in project orders in the road sector. Orders awarded have already increased to over eight km per day from three-four km in the last three years, a positive for ABL’s engineering, procurement and construction (EPC) segment and build, operate and transfer (BOT) road segments.

The company is pre-qualified by NHAI to bid for an individual BOT project of up to ₹3,000 crore. Maintenance costs have been on a decline and operating profits could benefit from a fall in steel and bitumen prices.

ABL’s total debt and debt-to-equity ratio stood at ₹4,000 crore and 2.8 times respectively, as of March 2015. Leverage should improve as cash flows from BOT projects are used to pay down debt.

ABL also executes power projects; these offer lower margin (8 per cent) compared to 12 per cent for road projects.

Power EPC projects now account for over 50 per cent of the EPC order backlog, compared with 10 per cent in the past. With more road orders, margins in the EPC segment are likely to improve.

Besides the construction segment, the company has stake in 17 BOT road projects of over 4,700 lane km. Of these, 14 are operational and three are under construction.

The projects are concentrated in mining-rich areas of central and eastern India. West Bengal accounts for 40 per cent of the projects by value, followed by Madhya Pradesh (20 per cent share).

Toll collections were tepid prior to FY-15 due to mining bans in States such as Odisha, which accounts for 13 per cent of its projects. Low toll collections are likely to lead to stake dilution in these projects for ABL, if it cannot meet the 12 per cent rate of return committed to investor SBI Macquarie Infrastructure Trust.

While worries of a negative WPI linger, the toll segment revenue increased 47 per cent Y-o-Y in 2014-15 to ₹433 crore. Traffic growth is expected to pick up, going ahead.

The company received respite in its premium payments for two toll projects — Dhankuni Kharagpur and Belgaum Dharwad; after the restructuring, about ₹130 crore of dues per annum can be postponed, if there are no cash profits after debt servicing.