Primary offer: Dilip Buildcon - Growth at a cost

Dilip Buildcon (DB) constructs road, bridges, is into irrigation, mining, and urban development projects.

Its portfolio is diversified across 12 States, with Madhya Pradesh comprising close to 40 per cent of its order book followed by Andhra Pradesh (13 per cent) and Punjab (10 per cent). Around 86 per cent of the current order book includes engineering, procurement and constuction (EPC) projects while 14 per cent comes from build-operate-transfer (BOT) projects. As on March 2016, the company owned 7,345 construction equipment and vehicles.

While the company has a healthy order book, the high debt on its books is eroding profitability; net profit margin has been consistently sliding since FY 12. The road construction segment that the company operates in is extremely competitive and DB’s operating margin could contract if the bidding for projects turns more aggressive.

The company is making an initial public offer, comprising fresh issue of ₹430 crore and an offer for sale of close to ₹Rs 220 crore from its promoters.

Of the fresh issue, DB expects to use ₹202 crore to repay term loans and ₹200 crore for funding working capital. Even after retiring some of its debt, the company will be left with a debt outstanding of about ₹3,600 crore, and the debt-to-equity will remain high, at about 2.5 times, after the issue.

At the upper end of the public issue price band of ₹214 to ₹219 per share, the asking valuation for the DB stock is 15 times the trailing 12-month earnings (post-dilution). Peers such as KNR Construction, J Kumar Infrastructure and PNC Infratech trade in the range of 10 to 15 times. The issue appears expensive considering the company’s high debt and increasing competitiveness in its business, which pegs up the risk. Investors can therefore avoid this offer.

The company’s order book is healthy at ₹10,778 crore as of March 2016; this is 2.5 times its 2015-16 revenue. The operating margin was also strong at 24 per cent in 2015-16. But the net profit margin was just about 5 per cent, primarily due to heavy interest cost. Over the last three years, interest cost has more than quadrupled.

There is scope for growth in the EPC segment, thanks to the Centre’s thrust on road projects and its tilt towards the EPC model and the Hybrid Annuity Model over the BOT model. This is evident from increased order flows to the EPC segment. In 2015-16, the allocation for road projects through EPC mode was close to 3,000 km, more than 70 per cent of the total allocation. But this has also resulted in intensified competition in this space, with players reportedly bidding aggressively to win projects. Players with high debt could feel the heat in a scenario of weakening operating margins.

DB’s order book has grown from ₹2,600 crore to about ₹10,200 crore, a 42 per cent compounded annual growth between 2011-12 and 2015-16. About 85 per cent of the projects are in road construction, with a chunk from EPC (70 per cent). The BOT and HAM segments contribute about 15 per cent and other construction projects such as irrigation and mining, the rest.

The healthy growth in its order book has helped the company grow its revenue at a healthy annual average rate of 38 per cent from 2011-12 to 2015-16.

Operating profit growth has also been healthy at about 40 per cent during this period. But growth in net profit has been much slower at about 16 per cent. This is due to the high debt and interest burden on the company.

The profit margin has fallen from around 9 per cent in 2011-12 to around 5 per cent in 2015-16. Also, while revenue has grown consistently, there has been significant volatility in the net profit. The doubling of profit in 2015-16 was preceded by declines in the two prior years. The net profit last year is about 19 per cent, lower than what it was in 2012-13.

With leverage levels expected to remain elevated, the volatility in earnings could continue, especially if the company chooses to bid aggressively in a competitive environment.

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