Stock Fundamentals

Why Ashoka Buildcon stock is a ‘Sell’ at current levels

Keerthi Sanagasetti | Updated on April 11, 2021

Price correction on the cards as slow order intake and other factors do not bode well

Continuing weakness in execution, slow order intake and mounting debt make a good case for investors to exit Ashoka Buildcon at this juncture. While the company’s plans to sell its revenue generating toll projects could be a great succour if completed, there aren’t any binding offers yet. However, the company has quite a few funding requirements in the pipeline.

SBI-Macquarie, its strategic partner in a few BOT projects, is looking to exit its stake. Owing to a binding clause in its agreement with Ashoka Buildcon, the company needs to acquire the said stake from the SBI-Macquarie fund, following its previously failed exit attempts. This was a major overhang on the stock’s performance through most part of 2020.

In February 2021 when the management announced its plans to monetise a few of its assets to fund the payout to SBI -Macquarie, the stock rallied by over 13 per cent since the announcement. The management had in their earnings call indicated that the process of documentation for the said deal (details undisclosed) would get over by March 2021. However, there hasn’t been any communication yet regarding the same. Following this, the stock price cooled off by about 18 per cent (since its recent peak in February 2021), to ₹97. The stock currently trades at 17.8 times its two-year forward EPS (Bloomberg estimates) . This is higher than its three year average PE of about 15 times . Continuing weakness in revenue generation and lower margins could lead to more correction in the stock in the coming months.

Mounting debt

The company’s consolidated debt increased from ₹5,581 crore in June 2020 to ₹5,796 crore as at the end of December 2020 quarter, largely due to an increase in working capital requirements. Besides, its existing HAM projects require a funding of about ₹165 crore by FY22. The management has also resorted for a board approval for raising another ₹550 crore debt to fund their capex plans in the City gas distribution (CGD) project. Besides, for its EPC business it targets another capex of about Rs 680 crore in FY22. Existing cash balances of the company stood at ₹541 crore (as of December 2020), of which about ₹36 crore would be utilised for the purchase of additional 49 per cent stake in Ashoka Highways (Bhandara), in March 2021. Besides, owing to pending receivables, the management has guided for working capital requirements to remain at the current levels, going ahead.

The funding position of the company, at the current juncture, seems to be entirely dependent on its asset monetisation plans. The asset monetisation plans could free up the equity investments of the company in its existing HAM projects (completed and ongoing), which amounts to ₹2,700 crore. Any delay in the plans could worsen the debt burden for the company.

The mounting debt (currently at about 14 times its consolidated equity) could also hamper its ability to garner fresh HAM projects. In the EPC segment (road construction), the firm s facing fierce competition and has witnessed a lull in order intake in the first nine months of FY21. It, however, bagged an EPC order of a renewable energy plant for NTPC for ₹503 crore during the quarter ended December 2020. With this, the order backlog stands at a healthy ₹9,152 crore — implying a revenue visibility of about 2 times its FY20 revenue. The order book predominantly comprises of road projects –– HAM based (43 per cent) and EPC (33 per cent).

That said, execution has been a dampener of sorts for the company in the last couple of quarters.

Weak execution

In FY20 the company’s consolidated revenues grew by just 3 per cent, y-o-y to ₹5,152 crore. While the pandemic hampered the revenues for the initial months of FY21, its peers, such as KNR Constructions reported healthy numbers on a nine month basis (up 13 per cent y-o-y), given the ramp up in highway construction. Ashoka Buildcon however, reported a 5.4 per cent y-o-y drop in its consolidated revenues in the first nine months of FY21. Even the toll collections (20 per cent of revenues), were down by 8.6 per cent y-o-y in the first nine months of FY21.

That apart, with slower order intake in the road EPC segment during the year, the management has lowered its margin guidance for FY22 from 12-13 per cent earlier to 11 per cent in its third quarter earnings call, in line with the EBITDA margins in the quarter ended December 2020. Besides, the management also guided for another ₹2,000 -3,000 crore worth of order intake in the last quarter of FY21 and about ₹5,000 - 6,000 crore in FY22. But execution remains key for any material ramp up in earnings for the company.

Published on April 10, 2021

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