Dilip Buildcon: Buy. Dilip Buildcon: Building a growth story

The stock of Dilip Buildcon has almost doubled from its listing in August 2016. The run-up in the stock price was aided by the sharp increase in 2017-18 budgetary allocation by the Centre towards road and other infrastructure projects.

The stock, which traded at around ₹240 at the end of January 2017, is now at ₹440.

Despite the run-up, the stock does not seem pricey on a relative basis. Its price-to-earnings (trailing 12-month) is at about 17 times, lower than that of its peer KNR Construction (about 22 times).

Investors with a two to three-year perspective can buy the Dilip Buildcon stock.

The company has grown both revenue and profit at an impressive pace. This should continue, given the government’s focus on road projects, which will present many opportunities for entities such as Dilip Buildcon.

The company is mainly into constructing roads, irrigation, mining, bridges and urban development projects.

Nearly 90 per cent of the revenue comes from road projects, most of it through the pure construction format (Engineering, Procurement and Construction). With government bodies such as National Highway Authority of India (NHAI) and Ministry of Road Transport and Highways (MORTH) awarding a chunk of their projects through the EPC route, companies such as Dilip Buildcon stand to gain.

For instance, 75 per cent of the nearly 4,200 km roads laid by NHAI in 2015-16 was done through EPC.

Also, with the Centre’s focus to augment the highway network in the country, land acquisition problems are expected to ease. With more road projects likely in the coming years, the order book of Dilip Buildcon should grow at a healthy pace.

Increase in competition is a risk the company may face. But this is mitigated by a strong order book and pan-India presence in the EPC road business.

In the third quarter 2017, India Rating & Research has upgraded the company’s rating from IND A- to IND A.

MORTH & NHAI contribute nearly 80 per cent of the company’s current project portfolio while the rest comes from State Governments and other companies entities.

Also, of the current order book, 83 per cent is from road projects and 15 per cent from mining projects.

EPC business from construction of roads, bridges, irrigation, urban development and mining contributes about 95 per cent of the company’s consolidated revenue. Within the EPC business, about 90 per cent comes from road projects.

Besides the mainstay EPC business, Dilip Buildcon has a portfolio of 14 operational Build, Operate and Transfer (BOT) projects. Apart from this, it has 10 BOT projects under construction across toll, annuity and hybrid annuity model format.

The company’s portfolio is geographically well diversified across 13 States; the chunk of the order book comes from Maharashtra (28 per cent), Madhya Pradesh (16 per cent), Uttar Pradesh (15 per cent) and Andhra Pradesh (11 per cent).

The Centre’s outlay for the road sector is ₹64,900 crore for 2017-18, a 24 per cent increase from the earlier year. It also intends to add about 2,000 km of coastal roads.

Although the Centre has bid out only 5,700 km for road construction till December 2016 (of the planned 10,000 km for 2016-17) due to land acquisition problems, the pace is expected to improve over the next few years.

The Centre’s intent to revive the road sector is seen through its change in preference towards the EPC format from the BOT format earlier, which saw many players encounter operational and financial troubles.

More than 70 per cent of the roads project allocation by NHAI in 2015-16 was through the EPC mode.

Also, the first half of 2016-17 saw more than six times’ increase in Hybrid Annuity Model (HAM) projects awarded compared to a mere 350 odd km awarded in 2015-16.

In the HAM model, 40 per cent of the project value is constructed through the EPC format and the rest constructed through concession format with the annuity being paid by the government authority.

Dilip Buildcon’s order book grew more than 60 per cent, from about ₹10,780 crore at the end of March 2016 to ₹17,570 crore at the end of March 2017. The order book has grown at an annualised rate of about 46 per cent since 2012.

Moreover, the company has strong execution capabilities. It received an early completion bonus of ₹106 crore for the year ended March 2017, nearly 55 per cent higher than the earlier year.

Increased focus by the Centre on road investment through EPC and HAM format is expected to continue for the next few years.

Further, the Centre and State governments intent to increase investments in irrigation and urban development sector should provide a strong impetus to the company’s allied segments too.

Dilip Buildcon’s revenue and profit grew at an annualised rate of about 35 per cent and 28 per cent between FY12 and FY17.

Of the current order book, 83 per cent is from road and bridge construction projects. The order book has improved from 2.5 times 2015-16 revenue to 3.3 times 2016-17 revenue.

The company’s consolidated revenue in 2016-17 was ₹5,319 crore, about 23 per cent higher than in 2015-16, while profit grew more than 56 per cent to ₹357 crore.

The proceeds from the IPO and drop in debt addition moderated interest cost rise to 7 per cent during FY17. This is much lower than 45 per cent interest cost rise in FY16.

The operating profit margin for FY17 is 17.2 per cent, marginally lower than about 18.1 per cent for FY16. The net profit margin for FY17 is about 7 per cent, higher than about 6.4 per cent for FY16.

The growth in interest cost should be subdued, going forward. This along with healthy growth rate in order book should help profit growth over the next few years.

The debt-to-equity ratio has decreased from 3.5 times at the end of FY16 to 2.4 times at the end of FY17.

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