Dilip Buildcon: On the fast track

Stocks in the road construction space have had a rough ride over the past six months. Concerns over execution delays, inability to achieve financial closure for projects and, in some cases, corporate governance issues, have resulted in share prices of most players in the space declining substantially.

Even so, one of the largest companies in the road construction segment, Dilip Buildcon, has continued to impress with its pace of execution and the ability to bag orders consistently. The stock nearly halved in price after rumours of the company’s auditors resigning, surfaced in May. But the company and the audit firm itself have brushed aside these reports as baseless.

The decline in the stock price presents a good opportunity for investors with a two-year horizon.

At ₹798, the stock trades at a little over 11 times its likely per share earnings for FY20, making it an attractive bet. Its three-year average PE multiple is more than 19.

Healthy order inflows, ability to win HAM (hybrid annuity model) contracts and robust execution ability are positives for the company. The company also has a diversified order book, spread across several States, reducing concentration risks. In FY18, Dilip Buildcon’s revenues increased by nearly 52 per cent over FY17’s numbers to ₹7,761 crore, while net profits rose by about 72 per cent to ₹621 crore.

The momentum in the company’s financials has continued this fiscal as well, with revenues in the June quarter increasing by 46.7 per cent Y-o-Y to ₹2,445 crore and net profits more than doubling to about ₹256 crore.

Solid execution record

Dilip Buildcon has consistently won contracts from the National Highway Authority of India (NHAI) and several state highway departments across regions for construction of roads. It has a presence in 17 States, including in key ones where there is considerable thrust on highway construction such as Maharashtra, Madhya Pradesh, Karnataka, Uttar Pradesh and Andhra Pradesh. The company’s expertise has mostly been in EPC (engineering, procurement and construction) contracts that carry fixed rates with no revenue risks for the bidders.

But over the past year or so, the company has also focused on HAM contracts — the government bears 40 per cent of the cost — as the NHAI has increasingly awarded contracts under this mode. Around 46 per cent of the company’s order book comprises HAM contracts.

Dilip Buildcon has consistently executed and completed projects ahead of schedule. The Guna-Biaora toll project, Sargaon-Bilaspur EPC contract and Mohanpura Multipurpose Dam are examples of the company finishing ahead of deadlines. It also has a presence in the mining space, that constitutes 7 per cent of its order book.

Healthy financial closure

Of the 12 HAM contracts that the company has won over the past few quarters, Dilip Buildcon has achieved financial closure for three projects. The other nine are expected to be completed within the next two to three months.

The company has a solid order book of ₹24,090 crore as of June 2018. This is around 3.1 times the firm’s FY18 revenues, thus giving it considerable visibility.

Dilip Buildcon has also improved on several financial parameters over the past couple of years. The company’s debt-equity ratio(yearly) is at 1.21 as of June 2018, down from 2.37 in March 2016.

The working-capital days have reduced from 119 last June to 85 currently. Debtors days have decreased from 77 to 59 in the same period. Thus, there is little or no strain with respect to cash flows.

Operating (EBITDA) margins are currently healthy at over 18 per cent. But given the competitive pressure in the EPC space, bidding for highway contracts can get aggressive. This could result in margin erosion for players such as Dilip Buildcon.

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