Buy Ashoka Buildcon Ltd. - shah investor's home Ltd.

Robust order book and sustained toll revenue, builds the road to prosperity

Initiating Coverage

On time execution, backed by vast experience and skilled manpower

Ashoka Buildcon Ltd. (ABL) started its operations in 1976 under the leadership of Mr. Ashok Katariya (B.E) as an E&C contractor for residential, commercial, industrial and institutional buildings. After acquiring significant experience and developed skills in EPC, the company in 1997 started its BOT journey. Backed by its vast experience and E&P skills the company has executed all of its projects on time or prior to the scheduled completion dates. There have been no instances where the performance guarantees of ABL have been invoked by any of its clients.

Integrated business player

ABL is an integrated BOT player with in-house EPC division. This integrated business model ensures the timely completion of projects and also reduces its reliance on subcontractors and controls cost. Developers that do not have an integrated business model are generally unable to control cost. An integrated model also allows the developer to scoop the entire margin in the value chain from EPC margin to developer as well as operating and maintenance margins.

In-house traffic estimation and RMC & bitumen facility, a key strength

All BOT projects have a long concession period (ranging from 10 to 30 year), where the growth in toll tariff is been decided in the concession agreement the key risk to the assumed IRR is the estimation of traffic growth. ABL has strong in-house expertise in analyzing vehicle traffic. The company also owns and operates 15 RMC facilities and also has bitumen enhancing facility, which leads to on time availability of raw materials, further assisting the company in cost control and capturing the margin in the value chain followed by timely completion of construction.

Robust growth in average ticket size of BOT projects

The company has bid and was awarded its first project (Dhule bypass) worth Rs.5.8 cr in 1997 and since has traveled a long way with strong execution track record. With increased net worth the company has successfully won projects worth higher value. The average ticket size of the company (adjusted to project stake) has gone up significantly (Exhibit 2) with a CAGR of 74% over 2006-2011.

Strong order book, a visibility of stable cash flow

ABL's order book at the end of FY12E stands at Rs.4,903 cr. The order book of the company is distributed into two broad segments power T&D and road projects, where road project consists of a larger share (close to 85% to 90%). The current order book which is close to 3.9x the FY12E EPC revenue gives a good visibility for future cash flows of the company in the EPC business. The stable flow of funds from the EPC business will also help the company to meet its equity obligation for its newly acquired projects.

Valuation

We value the various BOT projects on discounted free cash flow to equity analysis (Exhibit 25, example of Bhandara project NPV calculation) with an IRR assumption of 14% (risk free rate of 8.6%, Beta 0.9 and market premium of 6%) for operational projects and 15.2% (risk free rate of 8.6%, Beta 1.1 and market premium of 6%) for under construction projects. We arrive at a fair value of Rs.233 per share for the BOT division. Further we value the EPC business on EV/EBITDA multiple and arrive at fair value of Rs.149.8 per share at 6x FY12E EBITDA of Rs.131 cr. Post deduction of the net debt at standalone level of Rs.96.5 per share we arrive at fair value of Rs.286 per share for ABL.

We recommend BUY for Ashoka Buildcon at CMP with an upside potential of 46% and an investment horizon of 12 months.

Source : Equity Bulls

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