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The stocks of major road project developers are turning around after a lull. Ashoka Buildcon’s operations in construction and maintenance business across road and power projects should give it an advantage, with the Centre’s renewed thrust in these areas.
But, over the last three fiscals, increasing interest cost has hurt earnings. Besides, Ashoka Buildcon’s current trailing 12-month price to earnings of 54 times is high compared to its three-year historical average of 28 times.
However, the company has strong growth prospects, mature projects generating steady cash flows, sound order book with good revenue visibility. Hence, investors can continue to hold the stock but avoid taking fresh exposures at this juncture.
All round growthRoad projects have been gaining traction over the past year or so. The Centre’s thrust on increasing the speed of road construction from 8 km per day (as seen prior to 2014) to around 15 km per day is on track. The emphasis on construction and hybrid model of road contracts, where government institutions take long-term demand risk, is encouraging for companies like Ashoka Buildcon.
Power sector reforms like UDAY and rural electrification schemes should also assist Ashoka Buildcon’s strong order book growth.
The current order book size as of September 2016 stands close to ₹5,850 crore, which is 2.2 times the revenue in 2015-16.
Good prospectsAshoka Buildcon operates a total of 11 BOT road projects. The total toll revenue collected in 2015-16 was ₹843 crore, a 17 per cent increase from the previous year. While the growth was assisted by an increase in the traffic flow, the negative wholesale price index (WPI) played spoilsport. However, with WPI growth turning positive in the past few months, road projects whose toll revenues are indexed to changes in WPI indicator, should benefit.
The increased activity in the mining sector should provide respite to the company’s projects along the mining rich areas.
The EPC order book for road and power T&D projects at the end of September 2016 stands at ₹2,927 crore and ₹691 crore respectively. This should gain momentum with the increased focus of the Centre and power utilities on the EPC segments.
The major EPC projects under construction are the Eastern peripheral expressway in the state of Haryana-Uttar Pradesh and Mumbai-JNPT road project at a cost of ₹790 and ₹414 crore respectively.
Though the consolidated revenue grew at annualised growth rate of 21 per cent over the last two years, a steep increase in interest (84 per cent CAGR) and depreciation cost (34 per cent CAGR) during the same period has taken a toll on the company’s net profit.
Mixed financialsIn 2015-16, consolidated revenue stood at ₹2,666 crore while interest and depreciation cost was ₹448 and ₹250 crore respectively. Net profit has fallen by 30 per cent annually over the past two fiscals. The net profit in 2015-16 stood at ₹58 crore; net profit margin was at 2 per cent.
The strong order flow is expected to boost the topline as well as the bottom line going ahead. The debt to equity ratio decreased to 1.8 times at the end of March 2016 compared with 2.1 times in the previous year.
The rising interest in investment trust model to monetise strong cash flow generating assets should help the company in the long run.
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