INSTITUTIONAL EQUITY RESEARCH Infrastructurebackoffice.phillipcapital.in/Backoffice/Researchfiles/Researchfiles... · years for the Indian economy, especially for infrastructure

INSTITUTIONAL EQUITY RESEARCH

Page | 1 | PHILLIPCAPITAL INDIA RESEARCH Please see penultimate page for additional important disclosures. PhillipCapital (India) Private Limited. (“PHILLIPCAP”) is a foreign broker-dealer unregistered in the USA. PHILLIPCAP research is prepared by research analysts who are not registered in the USA. PHILLIPCAP research is distributed in the USA pursuant to Rule 15a-6 of the Securities Exchange Act of 1934 solely by Rosenblatt Securities Inc, an SEC registered and FINRA-member broker-dealer.

Infrastructure Encore 2014 awaits – Buy the sector NOW !!

INDIA | INFRASTRUCTURE | Sector Update

25 March 2019

Its elections time in India again! And given the uncertainty in the outcome (uptil now) this time, the market and infrastructure stocks have remained largely sideways, after the significant value erosion in CY18. We believe the current market offers an excellent opportunity to BUILD a portfolio in the infrastructure sector, which can deliver significant outperformance over the next 12 months and beyond. We saw this in 2014, and in 2009, and in 2004 – irrespective of the outcome of the elections, infrastructure stocks report significant outperformance in the few months leading up to, and post elections.

In this report, we analyse the performance of infrastructure stocks over the last three national election years and why we expect an even better performance this time. We would also like to highlight that PhillipCapital is one of the very few houses, which has an extensive coverage of infrastructure space since 2011 – and we have seen the highs and lows of the sector, through the entire cycle. Our analysis here is thus based on the extensive sectoral experience that very few can match!

Strong outperformance in 2014 and earlier election years - expect an encore in 2019: In last election year 2014, key infrastructure stocks delivered between 80-800% returns in the fifteen months leading up to and post elections. Even in 2009 and 2004 election years, key infrastructure stocks delivered average returns of 133% and 94% respectively in the same 15-month period. We expect an encore of the performance in 2014 this time; fundamentals actually warrant an even superior performance.

Superior fundamentals than in 2014: Over 2014-19, most infrastructure companies have significantly repaired their balance sheets by divesting non-core assets and raising equity capital. As a result, the average leverage of the sector stands at 0.3x (vs. 1.1x in 2014) while the interest coverage ratio is at a healthy 3.9x (vs. 2.4x in 2014). Investments and loans to subsidiaries have been controlled (and reduced over FY14-19), while the working capital appears to be under control. Companies start the year on a much stronger platform, having reported strong revenue/earnings CAGR over last three years than the three years preceding elections in 2014.

Superior macro environment and outlook for the sector: Almost all macro-economic indicators are in a diametrically opposite direction in 2019 than they were in 2014. The GDP growth is strong, inflation is low, and interest rates are likely to come down further. Construction and award activity are at peaks compared with the policy paralysis in 2014. Also, the outlook for the sector appears sanguine, with a mammoth award pipeline and robust orderbooks. In 2014, we were looking at infrastructure spend of Rs 10 trillion over the next five years – in 2019, we are staring at an expenditure almost twice that size at Rs 21 trillion. At the same time, the orderbooks of most sector companies stand at more than 3x book-to-sales – providing high revenue visibility. These orderbooks also have much lower share of captive/BOT projects than in 2014.

Inexpensive valuations provide the perfect icing on the cake!: Over the last 12 months, ALL infrastructure stocks have corrected significantly – average value erosion of over 30%. As a result, all of them are trading at extremely attractive valuations – and at huge discounts to their peak valuations in Feb-18 and their last ten year average. This, when they are sitting on record orderbooks and strongest ever balance sheets.

What do we still need to watch out for?: Despite strong fundamentals, we raise certain red flags that investors should be careful or concerned about. We remain cautious about the high share of HAM projects in orderbooks, higher tax rate, and scalability challenges for few players – and generic/macro challenges for ALL players.

Pecking order: Based on the parameters of balance sheet, orderbook (size and break-up), growth prospects, and valuations – we maintain our top pick as NCC, followed by Ahluwalia/PNC, followed by KNR/Ashoka/Sadbhav. We expect IRB and ITDC to underperform peers. Amongst the stocks under passive coverage, we like Capacite and PSP, and remain highly negative on stocks like JKumar, Simplex, Gayatri and Dilip.

Companies Nagarjuna Construction (NCC) BUY CMP, Rs Rs 110 Target Price, Rs Rs 180

Ahluwalia Contracts BUY CMP, Rs Rs 322 Target Price, Rs Rs 430

PNC Infratech BUY CMP, Rs Rs 158 Target Price, Rs Rs 210

KNR Construction NEUTRAL CMP, Rs Rs 268 Target Price, Rs Rs 280

Sadbhav Engineering BUY CMP, Rs Rs 247 Target Price, Rs Rs 315

Ashoka Buildcon BUY CMP, Rs Rs 129 Target Price, Rs Rs 190

IRB Infrastructure NEUTRAL CMP, Rs Rs 146 Target Price, Rs Rs 170

ITD Cementation SELL CMP, Rs Rs 132 Target Price, Rs Rs 115

PASSIVE COVERAGE

Capacite Infraprojects NOT RATED CMP, Rs Rs 234

PSP Projects NOT RATED CMP, Rs Rs 458

Dilip Buildcon NOT RATED CMP, Rs Rs 636

JKumar Infraprojects NOT RATED CMP, Rs Rs 156

Simplex Infrastructure NOT RATED CMP, Rs Rs 160

Gayatri Projects NOT RATED CMP, Rs Rs 151

Vibhor Singhal (+ 9122 6246 4109) [email protected] Deepika Bhandari (+ 9122 6246 4138)

[email protected]

Page | 2 | PHILLIPCAPITAL INDIA RESEARCH

INFRASTRUCTURE SECTOR UPDATE

Table of Contents

Buy the sector NOW, for a 2014 encore ······························································ 3

What happened in 2014? ··········································································· 3

What happened in other election years? ···················································· 5

Much superior fundamentals, than in 2014 ························································ 6

Significantly stronger balance sheets now ·················································· 6

Special Section: Revisiting our ‘EPC Trinity’·················································· 9

Much superior macro environment ···························································· 10

Much brighter future ahead, than was visible in 2014 ······························· 11

Valuations favourable – thanks to the 2018 fall ················································· 13

Which players didn’t survive and why·································································· 15

What do we still need to watch out for? ····························································· 17

Pecking order ······································································································ 20

Our Recommendations ························································································ 21

Companies Section NCC Ltd ·············································································································· 23

Ahluwalia Contracts ···························································································· 27

PNC Infratech ······································································································· 31

KNR Construction ································································································ 35

Sadbhav Engineering ························································································· 39

Ashoka Buildcon ·································································································· 43

IRB Infrastructure ······························································································· 47

ITD Cementation ·································································································· 51

Passive coverage Capacite Infrastructure ························································································ 55

PSP Projects ········································································································· 58

Dilip Buildcon ······································································································· 61

JKumar Infraprojects ··························································································· 65

Simplex Infrastructure ························································································ 69

Gayatri Projects ··································································································· 72

Appendix : Mammoth opportunity over next five years ································· 75



Buy the sector NOW, for a 2014 encore Its elections time in India again! And given the uncertainty in the outcome this time (equal possibility of an NDA majority government and a fractured mandate), the market has remained largely sideways. On the same note, infrastructure stocks too, have remained flat, after the significant value erosion in CY18. So much was the apathy to any buying interest, that most stocks remained unmoved, despite significant outperformance vs. estimates in Q3FY19 (NCC, Ashoka, PNC and others) and positive management commentary. However, while the investor interest remains low, the current market offers an excellent opportunity to BUILD a portfolio in the infrastructure sector, which can deliver significant outperformance over the next 12 months and beyond. We saw this in 2014, and in 2009 before that and in 2004 before that – irrespective of the outcome of the elections, the infrastructure stocks report significant outperformance in the few months leading up to elections and post elections. The high deficit in adequate infrastructure in the country and the multiplier effect of the sector (esp. in creating jobs) means that the sector has, and will, remain a priority for all governments, irrespective of their political ideology.

What happened in 2014 ? Before we look at what happened in 2014, it is important to look at what happened in years preceding the 2014 general elections. 2011-2014 was one of the worst few years for the Indian economy, especially for infrastructure. The period was marred by:

A high number of stuck projects due to lack of environmental/forest clearance

Lackadaisical order awards with lower government spending on infrastructure due to tight fiscal situation

A high interest rate regime, which meant companies were paying high interest, thereby reducing cashflows and diminishing earnings

Indiscriminate investments by players (in BOT, real estate), which meant that balance sheets were considerably leveraged, plunging companies into a vicious loop of debt-interest-cashflow.

As a result, infrastructure stocks saw significant value erosion in the months preceding elections. Most stocks lost over third of their value in CY13. During this time, earnings for these stocks were also downgraded repeatedly on lower execution, stretched balance sheets, and rising interest rates.

The year leading upto 2014 elections saw significant value erosion in infra stocks

Source: Bloomberg

-31%

-6%

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-20%

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BSE

Dec 12 to Dec 13

Deteriorating macro and micro environment led to sharp correction in infra sector over CY13



However, what happened January 2014 onwards made history. The markets rallied in an unprecedented manner on hopes of a stable pro-business government at the centre. Infrastructure stocks rallied even more – on hopes of improvement in order award and execution scenario leading to a revival in growth and earnings. In the five months leading up to election results, key infrastructure stocks delivered over 100% returns – some even more than 200%. The results of the elections were even better than expected, providing a majority to a single party after 40 years. That further intensified the rally, and the same infrastructure stocks delivered another 100% returns over the next nine months.

Infrastructure stocks delivered supernormal returns, in the fifteen months leading upto and post 2014 election results

Source: Bloomberg

Overall, in the fifteen months leading upto and post elections, key infrastructure stocks delivered between 80-800% returns – with most stocks delivering over 150%. The wealth creation in the sector that took place was massive and the stocks reached valuations that perhaps, with the benefit of hindsight, discounted the next three years of growth and earnings!!

135% 121% 114%

142%

54%

199% 185%

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295%

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July 14 to Mar 15

154% 158%

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IRB Ashoka Sadbhav NCC Jkumar KNR HCC ITDC Ahluwalia Simplex L&T BSE

Jan 14 to Mar 15



What happened in other election years? However, 2014 was NOT an isolated event. In earlier election years too, key infrastructure stocks delivered stupendous returns, significantly outperforming the markets and creating massive wealth for investors. Key infrastructure stocks delivered average returns of 94% in 2004, 133% in 2009 – as compared to 150% in 2014 – in the fifteen months leading upto and post elections.

Just like 2014, infra stocks delivered stupendous returns in earlier election years in 2004 and 2009

Source: Bloomberg

While most infrastructure stocks might have delivered significant returns in the last three election years, we note that the players were not the same every time. Apart from a few common players (L&T, NCC, HCC) most companies that reported strong returns in 2004 didn’t exist in 2014; many companies that reported strong returns in 2014 weren’t event listed (or born) in 2004.

Overall, infra stocks have delivered superior returns, in all elections years

Source: Bloomberg

Hence the same brush cannot be applied to ALL stocks in the infrastructure space – and not all of them should be expected to deliver similar returns. Worse – many stocks might not just provide inferior returns than others, but might actually cease to exist in a few years, run-over by intense competition and the capital-intensive nature of the sector. It then becomes highly imperative to pick and choose stocks carefully – to sift the winners from the possible losers.

84%

136% 161%

107% 130%

289%

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538%

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2004 2009 2014 Infrastructure stocks have delivered stupendous in all of the last three election years



Why expect an encore in 2019? While outperformance (and significant outperformance) over three consecutive elections is a reasonably enough data set – history alone cannot provide an assurance of future performance. There has to be concrete rationale, backed by fundamentals, that can assure a repeat of the earlier performance. We see two primary reasons to warrant (perhaps) an even superior performance this time (vs. 2014) – superior fundamentals and attractive valuations.

Much superior fundamentals, than in 2014 We expect an encore of 2014 in the infrastructure space, primarily because we see much superior fundamentals for the sector (both macro and micro) – much better than they were, in 2014. We also see a much healthier pipeline of infrastructure projects to be awarded over the next five years than what was visible in 2014. At this point, we would like to highlight that very few houses on the street will be able to provide the comparative analysis of the sector’s fundamentals that we can. While anyone can pull data from Bloomberg and companies’ ARs – PhillipCapital is one of the very few houses that has an extensive coverage of the infrastructure space since 2011. In fact, our analyst faced the brunt of 2011-14 when activity in the sector was at all-time low and stocks were in free-fall mode. It is this experience that we bring to investors in this report – a comparative analysis that very few can match!

Companies much better placed today The primary reason that we expect infrastructure stocks to repeat their 2014 performance (and perhaps exceed it) is because of their much superior fundamentals now. 2011-2014 was one of the worst few years for the Indian economy, especially for the infrastructure sector. The period was marred by:

High number of stuck projects due to lack of environmental/forest clearance

Order awards remained lackadaisical due to lower government spending on infrastructure due to tight fiscal situation

High interest rate regime meant that companies were paying high amounts as interest expense, thereby reducing cashflows and diminishing earnings.

Indiscriminate investments by players (in BOT, real estate) meant that the balance sheets were considerably leveraged – plunging companies into a vicious loop of debt-interest-cashflow

All these factors took a heavy toll on the financial and operational performance of the sector’s companies, and most reported flat to declining sales/earning and stretched balance sheets.

Significantly stronger balance sheets now If there is one lesson that most infrastructure companies learnt and implemented from the last cycle – it was the importance of strong balance sheets. It was one factor that hit them the hardest in the rising interest rate regime of 2011-14. High leverage ate into the companies’ earnings and cashflows, forcing them into a vicious loop of higher debt-interest-cashflow. However, over 2014-19, most companies have significantly repaired their balance sheets – by divesting non-core assets, selling land parcels, raising equity capital – and focussing on keeping strong control over working capital. As a result, most companies have much stronger balance sheets at standalone and consolidated levels compared to 2014.

Very few brokerage houses on the street will be able to provide the comparative analysis of the sector’s fundamentals, over FY11-19, which we can



Infra companies have repaired their balance sheets, using multiple avenues Company Capital raising Amount Asset Sale Amount

Events Rs mn Events Rs mn

IRB Infra QIP 4,400 InvIT listing 22,000

Ashoka Buidlcon QIP 5,000 BOT divestment 8,000

Sadbhav Engg QIP 2,500 SIPL listing 667

NCC Right issue, QIP 11,500 Sale of power, road assets 6,500

Jkumar QIPs 5,470

-

KNR

- Sale of stake in HAMs 4,018

PNC IPO 4,347

-

Ahluwalia Rights issue 500

-

The balance sheets today, are in much better state, than in 2014 Debt & Leverage FY14 FY19E

Standalone Consolidated Standalone Consolidated

Rs mn Debt Net DE Debt Net DE Debt Net DE Debt Net DE

Ashoka Buildcon 2,240 0.2 31,032 2.4 7,099 0.3 57,792 10.8 Sadbhav Engg 8,633 0.8 57,139 4.4 14,347 0.6 1,06,557 8.8 NCC 24,746 1.0 39,145 1.4 22,001 0.4 27,609 0.5 Jkumar 5,571 0.8 5,571 0.8 6,285 0.0 6,285 0.0 KNR Construction 908 0.2 4,258 0.6 2,503 0.0 7,951 0.4 ITD Cementation 6,950 0.9 7,695 1.8 5,886 0.4 5,886 0.4 PNC Infra 2,747 0.3 10,250 1.3 5,697 0.2 31,209 1.6 Ahluwalia 2,386 0.8 2,386 0.8 296 NA 296 NA

Ability to service debt too, is much better today, than it was in 2014 Interest Coverage FY14 FY19E

Rs mn

Interest

Expense

Interest

coverage

Interest

Expense

Interest

coverage

Ashoka Buildcon 334 4.1 870 4.0 Sadbhav Engg 1,181 2.6 1,131 3.1 NCC 4,660 0.7 4,603 2.0 Jkumar 576 2.1 886 2.5 KNR Construction 172 4.5 294 8.5 ITD Cementation 1,283 0.5 1,212 1.9 PNC Infra 234 3.7 629 4.7 Ahluwalia 363 1.2 200 7.2

Source: Companies, PhillipCapital India Research

Apart from capital raising, one of the primary reasons that led to this significant improvement in balance sheets was the companies’ divestment drive and their abstinence from investing in non-core and capital-intensive businesses. Companies like NCC, IRB, Sadbhav, and Ashoka divested various projects (or partial stakes) and are much more careful about investing in capital-intensive BOT projects (NCC took a board decision to not invest in any BOT projects in 2014).

Investments and Loans & Advances form a much smaller part of the balance sheets today, than in 2014


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Balance sheets are in much better shape today – in terms of leverage and serviceability of interest

The consol balance sheets of few players are appear highly leverage today, because of the recent HAM projects



At the same time, these companies have been highly careful in maintaining their working capital at stable levels.

The working capital cycle has remained stable, though elevated a bit recently

FY14 FY19E

Rs mn Debtors Days NWC Days Debtors Days NWC Days

Ashoka Buildcon 1,896 39 -477 11 10,117 119 5,007 67 Sadbhav Engg 7,319 114 8,370 117 16,280 173 21,718 233 NCC 13,410 80 31,411 187 36,453 176 34,079 165 Jkumar 1,320 41 6,365 196 5,288 94 11,588 206 KNR Construction 1,171 51 2,882 121 2,320 44 3,082 50 ITD Cementation 4,016 93 9,264 213 1,095 19 3,687 65 PNC Infra 3,436 109 4,010 127 6,900 136 10,620 180 Ahluwalia 4,707 179 2,486 94 5,100 113 4,393 97

Source: Companies, PhillipCapital India Research The importance of this cannot be emphasized more. The primary reason for the dire straits that infrastructure companies got into in 2011-14 was that in chasing orders and topline, they took they their eyes off of their balance sheets. Rising topline led to rising aspirations of promoters – of getting into unrelated and capital intensive domains. The fundamental shift based on lessons learnt from the 2011-14 cycle including focus shifting from the topline to the balance sheet, is what makes us confident of a strong performance by the sector over the next few years. Furthermore, the topline/profitability profile also appears to be in much better shape than in 2014. Companies have been reporting strong topline/earnings growth over the last three years compared to a declining trend in the three years leading upto 2014.

Companies have performed much better, in last three years leading upto elections this time, than they did in 2014

CAGR (%)

2011-14 2016-19

Topline Earnings Topline Earnings

IRB Infra 15% 0% 8% 12%

Ashoka Buildcon 5% -21% 22% 22%

Sadbhav Engg 2% -4% 6% 23%

NCC 6% -37% 13% 33%

Jkumar 8% 4% 19% 17%

KNR Construction 2% 2% 30% 12%

ITD Cementation 3% 0% -6% NA

PNC Infra 0% 0% 13% 2%

Ahluwalia -17% -33% 14% 16%


Sector companies have fared much better this time, leading into the election year

Working capital for few players appear stretched, due to IND-AS adoption, wherein Retention money is classified as Debtors



Special Section: Revisiting our ‘EPC Trinity’ In 2014, we had highlighted the ‘trinity of forces’ acting on infrastructure players, which we expected would impact the P&Ls of companies in a three-pronged manner, leading to manifold earnings growth (read report here). The ‘trinity’ was: 1) Increased order awards 2) Reduced competition 3) Lower interest rates

Trinity at work for the EPC Sector

Potential triggers

Income statement

Impact of the trigger

Increased order awards

Revenue

Robust topline growth

+ Operating Expenses

EBITDA +

Low competition

EBITDA margins

Margin expansion

+ Depreciation

+

Lower interest rates

Interest expense

Lower interest expense

= Tax

=

Cumulative impact

Net profit

Manifold earnings growth


Over FY14-17, we saw two of the three forces of our ‘EPC Trinity’ play out along expected lines – margin expansion and lower interest expenses. Reducing competition has led to profound margin expansion for most players, while reduction in interest rates and lower debt (due to asset divestment) has led to significant reduction in interest expense.

ALL the three Trinity forces have realized over the last 5 years – to perfection Rs mn FY14 FY15 FY16 FY17 FY18 FY19E

Orderboook 4,82,986 4,76,782 5,10,895 6,17,676 8,08,875 10,58,461

% yoy 3% -1% 7% 21% 31% 31%

Revenue 1,57,502 1,97,926 2,21,008 2,24,244 2,30,587 3,17,165

% yoy 4% 26% 12% 1% 3% 38%

EBITDA 15,299 19,986 23,399 24,527 30,804 41,275

% yoy 7% 31% 17% 5% 26% 34%

EBITDA Margins 9.7% 10.1% 10.6% 10.9% 13.4% 13.0%

PAT 5,342 7,190 10,581 12,665 16,672 20,067

% yoy 49% 35% 47% 20% 32% 20%

Interest Expense 8,804 10,802 10,139 7,670 7,811 9,824

Debt 54,926 54,592 47,624 47,312 43,314 64,114

Leverage 0.8 0.6 0.5 0.4 0.3 0.4


(Data above cumulative numbers of 8 infra companies under coverage)

The only force that hadn’t played out was topline growth. Over FY17-19, we saw a strong order award momentum, especially from buildings, metro, and roads segments. As a result, most infrastructure companies shored up their orderbooks to more than 3x book-to-sales levels and are expected to report super strong topline growth in FY19 and beyond (9MFY19 results have already been strong) – leading to the realization of our third Trinity force as well !!

Our Dec-14 ‘EPC Trinity’ report

http://backoffice.phillipcapital.in/Backoffice/Researchfiles/PC_-_Infrastructure_Sector_Update_-_Nov_2014_20141202151927.pdf

http://backoffice.phillipcapital.in/Backoffice/Researchfiles/PC_-_Infrastructure_Sector_Update_-_Nov_2014_20141202151927.pdf



A much superior macro environment The macro environment in 2019 is significantly more favourable to businesses (esp. infrastructure) than it was in 2014. 2011-14 saw a period of heightened economic paralysis, where large numbers of projects were stuck due to lack of clearances and lethargic government activity. GDP growth had come down to 6% and the Indian economy was part of the ‘fragile five’ that were in a precarious state according to global experts. The interest rate regime too, was very high, and on its way up – as growth continued to slacken and inflation was much ahead of RBI’s comfort zone.

However, the situation is completely different in 2019. India is now the fastest growing large economy in the world, with GDP growth rate inching higher every successive year. Inflation is at all-time lows, and expected to remain so – leading to expectations of further lowering of interest rate by RBI (after being lowered recently). Most importantly, there appears to be a business-friendly environment in the country, with no more unnecessary delays in approvals and execution.

Macro-economic conditions are much more favourable today % 4QCY18 3QCY18 2QCY18 CY18 4QCY13 3QCY13 2QCY13 CY13

GDP Growth rate 6.6 7.0 8.0 7.3 6.5 7.3 6.4 6.1

Repo rate 6.5 6.5 6.3 6.3 7.8 7.5 7.3 7.5

Inflation 2.6 3.9 4.8 4.0 10.6 10.1 8.8 9.8

Source: RBI, Bloomberg

Also, we have seen an unrelenting focus from the current government on increasing spends on infrastructure. The budgetary allocation to various schemes and segments in the sector bears testimony to this.

Budgetary allocations to infrastructure segments have been steadily increasing

Budgetary allocations (Planned)

Rs bn FY18 FY19BE FY19RE FY20E Increment % Increase

Roads 610.0 710.0 786.3 830.2 43.9 6%

NHAI 238.9 296.6 373.2 366.9 -6.3 -2%

Urban development 340.2 352.6 364.6 411.8 47.2 13%

Smart cities etc 45.3 61.7 61.7 66.0 4.3 7%

AMRUT 50.0 60.0 64.0 73.0 9.0 14%

Metro projects 139.8 150.0 156.0 191.5 35.5 23%

Railways 452.3 550.9 551.4 667.7 116.3 21%

Shipping 14.9 18.8 19.4 19.0 -0.4 -2%

Sagar mala, ports 4.8 6.0 3.8 5.5 1.7 44%

Inland transport 4.7 5.1 8.9 7.6 -1.3 -15%

Power 139.8 150.5 156.3 158.7 2.5 2%

Source: Budgetary documents

NHAI awards have dropped in the election year, and jumped significantly in the next two years – every time

Source: NHAI

895

3,4

76

678

372

1,3

05

4,7

40

1,7

30

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643

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96

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Len

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Elec

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The macro environment in 2019 is significantly more favourable to businesses than it was in 2014

NHAI order awards have always seen a lull in the year leading into elections – and a sharp jump, after elections

Elec

tio

ns



Much brighter future ahead than what was visible in 2014 While 2014 could be called the nadir for the infrastructure sector, not everything appeared hunky-dory when the results of the elections were declared – or, for that matter, even six months after that. Most segments of the sector (roads, buildings, power, ports, airports) were in dilapidated state, and required significant debottlenecking – on the other hand, sectors like metros and water didn’t exist as ones with formidable opportunity. All that there was, was hope !! Compare that with the current state of the sector, and we see a bright future ahead in almost all segments. The roads sector has a mammoth pipeline with the announcement of Bharatmala about 15 months ago; metros and irrigation segments continue to see great momentum from state governments, and the buildings segment has received a massive boost from PMAY’s affordable housing scheme. Hence, the order award pipeline in 2019 appears too much bigger, and in a much better state of being awarded than it was in 2014. Here again, we would like to highlight that while we were able to go back to our own report on the infrastructure sector in 2014 to check what future we saw ahead of us at THAT point of time – very few brokers would be able to provide that comparative analysis.

Bottom-up analysis of the opportunity – FY19 Roads Length, km Cost, Rs bn

Irrigation

Cost, Rs bn

Bharatmala 83,677 6,923

State plans

3,000

NRLP

2,000

Total 83,677 6,923

Total

5,000

Metros Length, km Cost, Rs bn Buildings Units Cost, Rs bn

Operational cities 164 790

PMAY 22 mn 3,130

Under construction 212 777

Smart Cites /AMRUT 100/500 1,000

Under development 511 1,117

IITs/IIMs/AIIMs 6/9/12 441

Total 886 2,684

Total

4,571

Grand Total

19,178

Bottom-up analysis of the opportunity – FY14 Roads Length, km Cost, Rs bn

Railways Length, km Cost, Rs bn

Pipeline (excl Phase IV) 6,158 616

Railways PPP NA 1,069 Phase IV pipeline 9,842 246

High Speed Rail 4,215 674

Backlog of FY12-14 awards 15,000 1,500

DFCC 3,338 750 Border & Coastal Roads 22,500 1,125

Total 53,500 3,487

Total 7,553 2,493

MRTS Length, km Cost, Rs bn Ports Mn tonnes Cost, Rs bn

Under construction Metros 489.9 1,362

Opps at Major Ports 199 111 Planned Metros 421.6 1,569

PPP opps at Major Ports 116 83

Planned Monorails 131.7 193.7

Private port opps 389 353

Total 1,043 3,125

Total 704 548

Grand Total

9,653 Source: PhillipCapital India Research

At the same time, the orderbooks of most sector companies also paint a much more sanguine picture than what it was in 2014. Most companies orderbooks today are +3x book-to-sales, which provides high revenue visibility. And this is when NHAI has had a forgettable FY19 having awarded only 2,200km YTD vs. 7,400km in FY18. These orderbooks have swelled up over FY17/18 with orders accrued across segments – roads, metros, irrigation, and buildings. Our unique quarterly publication, the order-book-keeper, tracks the orderbook status of 15 sector companies every quarter – and corroborates the sanguine picture.

We are able to compare the opportunity that was visible in 2014, as we were able to go back to our own sector report in 2014. Read the 2014 report here

http://backoffice.phillipcapital.in/Backoffice/Researchfiles/PC_-_Infrastructure_-_The_Next_Three_Years_-_July_2014_20140731101700.pdf



Orderbooks stand at much healthy levels today, than in 2014

Rs mn

FY14 Current (3QFY19)

Orderbooks Book-to-sales Orderbooks Book-to-sales

IRB Infra 1,19,737 4.5 1,21,673 2.9

Ashoka Buildcon 35,460 2.3 97,512 3.0

Sadbhav Engg 89,407 3.8 1,28,725 3.5

NCC 2,09,560 3.4 3,41,850 3.1

Jkumar 41,532 3.5 1,24,650 4.6

KNR Construction 12,960 1.6 55,158 2.7

ITD Cementation 38,210 2.4 1,02,421 4.0

PNC Infra 31,430 2.7 1,44,775 5.2

Ahluwalia 24,427 2.5 63,370 3.8


Also, in 2014, a high share of the orderbooks comprised of road BOT projects – which meant the companies had to stretch their balance sheets to invest equity into these projects. While today, orderbooks of many ‘road’ companies comprise of HAM projects, they differ from the traditional BOT projects as they involve (1) much lower equity requirements as 40% equity is contributed by NHAI, (2) NO traffic/tariff risk as annuity payments are fixed and (3) lower life-cycle of projects, which means capital gets locked for a smaller period.

With most concerns of a traditional BOT project addressed, there SHOULD NOT be any major negative surprises with HAM projects. But for the sake of erring on the side of caution, we would prefer to invest in companies with lower share of HAM projects. Overall, we can summarize the strong fundamentals of the sector, in the below parameters – which provide us with the confidence to expect an encore of 2014.

Most companies today have a much stronger balance sheet and tight control on working capital FY19E (Rs mn) Gross Debt Leverage Investments Inv as a % BS Debtors Debtor Days NWC NWC Days

Ashoka Buildcon 7,099 0.3 16,440 33% 13,130 120 8,317 68

Sadbhav Engg 14,347 0.7 5,775 12% 17,468 164 23,556 220

NCC 22,001 0.5 10,237 7% 65,859 200 46,152 140

Jkumar 6,285 0.4 150 0% 6,138 95 13,827 214

KNR Construction 2,503 0.2 6,106 28% 2,358 43 4,960 52

ITD Cementation 5,886 0.5 6 0% 4,697 65 8,787 121

PNC Infra 5,697 0.3 7,444 21% 9,919 125 12,797 153

Ahluwalia 296 0.0 63 0% 7,579 150 5,592 111

Most companies have strong orderbooks and are looking at strong topline/earnings growth over next two years

FY19E (Rs mn) Orderbook

Book-to-

sales Topline

CAGR

FY 18-21

EBIDTA

Margins

Interest

Expense

Interest

Coverage PAT

CAGR

FY 18-21

Ashoka Buildcon 1,02,989 2.9 35,500 31% 13% 870 4.0 2,541 7%

Sadbhav Engg 1,24,989 3.3 37,504 13% 12% 1,131 3.1 2,434 9%

NCC 4,04,807 3.4 1,20,193 30% 12% 4,603 2.0 5,644 42%

Jkumar 91,217 3.9 23,583 15% 17% 886 2.5 1,593 19%

KNR Construction 53,254 2.7 20,012 17% 20% 294 8.5 2,246 -5%

ITD Cementation 97,164 3.7 25,756 23% 12% 1,212 1.9 1,510 17%

PNC Infra 1,39,217 4.8 28,963 38% 15% 629 4.7 2,454 8%

Ahluwalia 57,301 3.1 18,442 16% 13% 200 7.2 1,313 19%


Strong orderbooks provide a strong revenue visibility this time, as compared to 2014 Read our latest ‘Orderbook Keeper’ here

http://backoffice.phillipcapital.in/Backoffice/Researchfiles/PC_-_Infrastructure_-_Order-Book-Keeper_-_Feb_2019_20190220145613.pdf



Valuations favourable – thanks to the 2018 fall If superior fundamentals weren’t enough, valuations provide the perfect icing on the cake! Over the last 12 months, ALL infrastructure stocks have corrected significantly with an average value erosion of over 30%. And this has happened despite the fact that, unlike in CY13, the Indian economy has been on an upward trajectory all through CY18 and that infrastructure companies have a strong financial profile. While we saw a similar correction before the last elections, in CY13 it was primarily because of a worsening macro environment and declining financial and operational profile of the companies. Hence, while the correction was justified in CY13, it has largely been unwarranted in CY18, driven only by the uncertainty around the results of elections in 2019.

Sharp correction, similar to the one prior to 2014 elections, happened this time too

Source: Bloomberg

Nonetheless, because of the sharp correction, ALL stocks are trading at extremely attractive valuations and at huge discounts to their peak valuations in Feb-18 and their ten year averages. This, when they are sitting on record orderbooks and strongest ever balance sheets (more on this in the next section).

Most companies are trading at highly inexpensive valuations

Company

Market Cap

(Rs bn) CMP

(Rs / share)

BOT/Others Valuation

(Rs / share) CMP implied

FY21 PE (EPC)

IRB Infra 51.3 146 26 6.4 Ashoka Buildcon 36.2 129 65 6.2 Sadbhav Engg 42.4 247 97 9.1 NCC 66.1 110 - 8.1 KNR 37.8 269 38 14.1 ITD Cementation 22.7 132 - 14.8 PNC Infra 40.5 158 41 9.6 Ahluwalia 21.6 322 - 11.1

Source: Companies, PhillipCapital India Research (OB = Orderbook)

We see these extremely attractive valuations as a blessing in disguise. True, it has led to significant wealth erosion over the last 12 months, but that has been the case for the entire midcap sector. If this correction had not occurred over the last 12 months, and stocks were trading at levels similar or higher to those in Feb-18, current valuations would NOT have left so much upside potential. Hence, investors would have been partly reluctant to invest in the sector despite it having strong fundamentals.

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Dec 12 to Dec 13 Apr 18-Feb 19

Infrastructure stocks have corrected sharply over CY18, just like they did in 2013 – despite much stronger fundamentals

As a result of the sharp price erosion, stocks are trading at highly attractive valuations, on strong fundamentals



Valuations are much cheaper, as compared 10 year historic peak and average

Peak PE

(Over CY09-CY18)

Mean PE

(Over CY09-CY18)

Current PE

(FY20 PE)

IRB 21.4 11.2 8.8

Ashoka 21.8 9.2 13.5

Sadbhav 70.8 21.5 18.5

NCC 47.2 15.9 9.6

Jkumar 20.4 6.9 6.3

KNR 26.3 5.2 22.4

ITDC 90.3 10.7 15.9

Ahluwalia 96.1 7.7 15.9

L&T 40.9 23.6 19.1

Source: Bloomberg, PhillipCapital India Research

We take NCC as a proxy (the only stock that existed in the 2004, 2009, and 2014 elections and remains a leading player in 2019 as well. NCC has reported 178%, 84%, and 392% returns in the 15 months leading upto and post the elections in 2004, 2009, and 2014 respectively. We see no reason why it cannot repeat a similar feat in 2019, especially when it boasts of much superior fundamentals this time.

NCC (as a proxy) outperformed the infra sector & index in last three election years

Source: Bloomberg

Also, we find that NCC’s current valuations are 1SD below its historical average – a significant 40x% discount. At the same time, current valuations are at sharp discounts to peak valuations touched in 2004, 2009, and 2014 election years – leaving mammoth upside potential.

NCC is trading below its 10 year average and significantly under -1SD

Source: Bloomberg, PhillipCapital India Research

178%

94%

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84%

133%

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392%

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NCC (as a proxy) has outperformed the sector and the overall index, in tow of the last three last elections



How and what to learn from the last cycle As important and cheerful as it is to expect an encore of 2014, it is equally important to learn the lessons of the last cycle. As we have stated before – NOT ALL stocks are going to deliver superior returns, and one has to pick and choose stocks with strong fundamentals and growth potential.

Which players didn’t survive and why At the peak of the last cycle, most companies had a leverage of more than 1.0x at the standalone level – much higher at the consolidated level. The leverage was an outcome of multiple factors – some external, others of their own doing: 1) Delay in payment by various govt. bodies, esp. irrigation projects, and external

issues like land acquisition and environmental clearances led to ballooning of working capital, which in turn led to higher debt levels.

2) NHAI awarded ONLY BOT projects over FY11-14 (due to their financial constraints), which led to EPC players bidding for BOT projects, which in turn led to additional capital requirement for equity investment in the projects.

3) Indiscriminate investments by companies in real estate and other unrelated businesses led to additional strain on balance sheets.

We looked at what happened in the last cycle by using the four premier infrastructure companies in the last cycle – Gammon, IVRCL, HCC and NCC – as case studies.

Companies made indiscriminate investments into subsidiaries... .... and gave them loans from parent companies

The working capital cycle also swelled for the sector… … primarily due to increase in debtor days


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As a result, debt levels ballooned for most companies… …and leverage crossed 1x for most of them

Compounding effect of higher debt and interest rates meant interest expenses overshot operating profits

This exceptionally high interest expense led to much lower profitability – straining the cashflow – in turn leading to higher debt – and hence even higher interest expense and lower profitability. This viscous loop led to many of these companies battling for survival. NCC was the only company that managed to survive because of its exceptional financial discipline.

As topline growth also slowed down due to muted orders inflow… … earnings reported a significant decline


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What do we still need to watch out for? While everything about the infrastructure sector might appear highly optimistic, we need to be cautious with this volatile and cyclical sector. The financial health of infrastructure companies is highly dependent on various external factors, which include the macro-economic environment, government policies, and most of all, their own financial prudence and strategy. We identify the following ‘red flags’ that investors would need to watch out for.

Red flags that we need to keep a watchful eye on Specific issues Companies impacted

HAM projects leading to stretching of balance sheet PNC, IRB, Ashoka, Sadbhav, Dilip

Change in tax rate Sadhav, KNR, PNC, Dilip

Execution scale challenges KNR, PNC, Ahluwalia, Dilip

Investments in unrelated businesses Ashoka, PNC

Generic issues Companies impacted

Elongation of working capital All players

External issues Companies impacted

Land acquisition troubles All players

Competition from small local players All players

Order award activity All players

Economic growth and interest rates All players

Source: PhillipCapital India Research

HAM projects leading to stretching of balance sheets NHAI awarded 3400km of HAM projects (of the total 7400km) in FY18 – over 75% of them, in the last few months of FY18. On the back of these HAM project wins, orderbooks of some of developers have acquired a high concentration of HAM projects. For players such as Ashoka, Sadbhav, PNC, KNR and Dilip Buildcon, more than 50% of their orderbooks (incl. L1) comprise of HAM projects. In our earlier report on HAM projects (read here) we had raised concerns about the pending financial closure (FC) of HAM projects in orderbooks, especially due to the state of the banking system. As of now, most companies have managed to achieve FC for most of their projects – albeit on inferior terms (lower debt funding, higher equity investment upfront, higher interest rate). While FC issues have resolved, we remain concerned about the equity requirement for these HAM projects. The magnitude of these projects in orderbooks is so high that they will strain balance sheets of developers even more, as they will need to take on higher debt to fund the equity requirement of these projects. Sadbhav (HAMs in separate entity SIPL) and KNR (already sold stake in HAMs to reduce equity commitment) might be able to avoid this. But IRB, PNC, Ashoka, and Dilip will see their standalone debt shoot up in funding these projects.

The equity requirement for HAM projects could burden few balance sheets Company (Rs mn) Equity required Current Debt* As % of debt

Sadbhav Infra 13,597 14,847 92%

Ashoka Buildcon 9,674 1,599 399%

KNR Construction 4,426 2,203 201%

PNC Infra 8,320 1,697 490%

IRB Infra 6,690 30,252 22%

Dilip Buildcon 16,293 27,706 59%

Total 59,000 78,304 71%

Source: Companies, PhillipCapital India Research (*All Debt figures at standalone/holdco level)

Notably, this is reminiscent of 2011-14, when the balance sheets of many pure EPC players (IVRCL, HCC, Gammon) were stretched beyond repair in trying to fund equity requirements of BOT projects. While HAM is a much more risk-free model than BOT, also entailing much lower equity requirement, we would want to keep a keen eye on when this parameters spirals out of control.

High share of HAM projects in the orderbook might lead to the balance sheet being stretched for few players Read our detailed report on HAM projects

here

http://backoffice.phillipcapital.in/Backoffice/Researchfiles/PC_-_Infrastructure_Sector_Udpate__-_HAM_-_July_20180731105157.pdf

http://backoffice.phillipcapital.in/Backoffice/Researchfiles/PC_-_Infrastructure_Sector_Udpate__-_HAM_-_July_20180731105157.pdf



Off-late, a new problem – delay in AD (Appointed Date) has cropped up. Many HAM projects that have achieved FC are seeing delays in NHAI confirming their ADs, delaying their execution. While we are NOT really concerned about this and view it more as of timing issue, it will lead to few companies (Sadbhav, Dilip) missing their FY19 revenue guidance as execution will now move to FY20. The growth in FY20, too, depends on “when” in FY20 projects are awarded their ADs.

High share of HAM projects in the orderbooks of few developers

Company (Rs mn) Tot OB HAM Projects OB Share

HAMs Awaiting

FC/AD OB Share

Sadbhav Engg 1,28,725 64,472 50% 41,750 32%

Ashoka Buildcon 97,512 48,934 50% 24,747 25%

KNR Construction 55,158 39,750 72% 39,750 72%

PNC Infra 1,44,775 71,820 50% 43,490 30%

IRB Infra 1,21,673 50,830 42% 50,830 42%

Dilip Buildcon 2,31,008 1,38,434 60% 1,17,669 51%

Total 7,78,851 4,14,240 53% 3,18,236 41%

Source: Companies, PhillipCapital India Research (OB = Orderbook)

Change in tax rates for few players Many companies in the infrastructure sector have been availing benefits of section 80IA of the Income Tax Act (giving them exemption from paying tax on infrastructure projects). The Minimum Alternative Tax (MAT) that they had to pay was also allowed to be set-off against the tax payable in later years. Hence, many companies have been paying ZERO tax for the last few years, some even reporting NET tax credit.

The Union Budget FY17 had put an end to these benefits. Now infrastructure companies stand to lose tax benefits that they were claiming. While the existing MAT credit might allow them to report less-than-full tax rate (30%) for FY18 and FY19 – almost ALL of them will have to start paying full tax rate by FY20/21.

Increase in tax rate in FY19-20 will have significant impact on OCF, PAT growth, and ROEs of few companies KNR Construction PNC Infratech

Rs mn FY17 FY18 FY19 FY20 FY21 FY17 FY18 FY19 FY20 FY21

Topline 15,411 19,317 20,012 25,015 31,269 16,891 18,566 28,963 39,100 48,874

% growth 70.7% 25.3% 3.6% 25.0% 25.0% -16.1% 9.9% 56.0% 35.0% 25.0%

PBT 1,632 2,682 2,552 2,407 3,287 1,939 2,339 3,106 3,637 4,477

% growth 26.4% 64.3% -4.8% -5.7% 36.5% -0.2% 20.6% 32.8% 17.1% 23.1%

Tax -60 39 -306 -722 -986 158 171 -652 -1,091 -1,343

Tax rate % -3.7% 1.5% -12.0% -30.0% -30.0% 8.1% 7.3% -21.0% -30.0% -30.0%

PAT 1,573 2,721 2,246 1,685 2,301 2,097 2,510 2,454 2,546 3,134

% growth -2.4% 73.0% -17.5% -25.0% 36.5% -10.6% 19.7% -2.3% 3.8% 23.1%

OCF 2,713 1,572 3,664 2,213 2,825 -51 2,940 301 793 811

OCF as % of EBITDA 118.2% 40.7% 93.9% 53.6% 54.8% -2.3% 92.2% 7.1% 14.2% 11.6%

RoE 20.6% 26.5% 17.7% 11.5% 13.9% 14.2% 14.9% 12.8% 11.8% 12.9%

Ashoka Buildcon Sadbhav Engineering

Rs mn FY17 FY18 FY19 FY20 FY21 FY17 FY18 FY19 FY20 FY21

Topline 20,133 24,483 35,500 46,150 55,380 33,203 35,051 37,504 43,130 50,031

% growth 3.6% 21.6% 45.0% 30.0% 20.0% 4.2% 5.6% 7.0% 15.0% 16.0%

PBT 2,164 2,894 3,574 3,843 4,147 1,897 2,163 2,705 3,265 4,035

% growth 6.6% 33.8% 23.5% 7.5% 7.9% 15.3% 14.0% 25.1% 20.7% 23.6%

Tax -403 -524 -1,033 -1,153 -1,244 -18 44 -270 -980 -1,210

Tax rate % -18.6% -18.1% -28.9% -30.0% -30.0% -1.0% 2.0% -10.0% -30.0% -30.0%

PAT 1,761 2,370 2,541 2,690 2,903 1,878 2,207 2,434 2,286 2,824

% growth 26.8% 34.6% 7.2% 5.9% 7.9% 42.3% 17.5% 10.3% -6.1% 23.6%

OCF 5,758 2,464 -350 260 1,013 -4,975 3,828 2,583 1,651 1,929

OCF as % of EBITDA 237.3% 84.0% -7.6% 4.5% 14.6% -139.9% 92.2% 58.9% 33.3% 33.5%

RoE 10.2% 12.3% 13.1% 11.2% 10.8% 11.3% 11.8% 11.6% 9.9% 10.9%


The higher tax is going to impact financials of these companies in three ways: 1) The cash flows of these companies were significantly enhanced due to lower

taxes payable – to the extent of 30% of their PBT. Now, with the benefit gone, cashflows will appear weaker, leading to lower operating and free cashflow.

Surge in HAM project awards, in the ending months of FY18 means many companies are sitting with high share of HAM projects in their orderbooks



2) Progressively higher tax in FY18 – FY19 – FY20 will lead to lower earnings growth for these companies. While the PBT growth will still remain strong (in line with topline and EBITDA growth), we will see muted growth in reported PAT.

3) Lower PAT will also lead to lower ROEs – a key factor in determining the valuation multiple for companies.

We note that few companies might still have significant MAT credit available with them, which might keep their tax rate in FY20 also below 30%. However, we believe, for a like-to-like comparison, and ensuring a clearer picture of the sustainable earnings, one should use full tax rate for calculating FY20/21 earnings, irrespective of what ‘actual’ tax rates the companies are expected to report in FY20/21. We have assumed full tax rate for all companies, in our estimates for FY20/21.

Separating the ‘men’ from the ‘boys’ While the construction space remains highly fragmented, with lots of small players, there is a significantly large ‘chasm’ that few companies have been able to cross over the last few decades. L&T remains the largest construction company with an annual turnover of Rs 1.2trillion. Next in line in the listed space (and unlisted too) is NCC with a turnover of barely Rs 120bn. No company has been able to cross the hurdle of Rs 100bn turnover over so many years – excluding NCC (which also will do it this year). And it gets even more interesting thereafter. After NCC, is a spate of companies with annual turnover of less than Rs 50bn – with very few in Rs 50-100bn space. Many companies came close to crossing the Rs 50bn chasm in FY11-12, but apart from NCC, most have remained stagnant, or have completely vanished.

Most EPC companies have been unable to cross the hurdle of Rs 50bn topline successfully – apart from NCC Rs mn FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19E

NCC 28,711 34,729 41,514 47,778 50,737 52,505 57,249 61,173 82,969 83,252 78,921 75,593 1,20,193

HCC 23,576 30,828 33,137 36,442 40,932 39,915 38,371 40,395 41,267 41,909 41,959 45,751 45,751

Simplex 17,110 28,121 46,627 44,435 46,912 58,976 58,208 55,130 55,816 59,046 56,075 57,662 63,428

Sadbhav 4,901 8,927 10,587 12,565 22,092 26,755 18,110 23,581 29,698 31,863 33,203 35,051 37,504

IRB 2,370 3,630 5,672 10,242 16,704 22,750 27,289 26,579 21,084 31,311 35,912 39,734 43,711

IVRCL 23,059 36,606 48,819 54,923 56,515 61,780 37,591 43,048 31,174 23,617 NA NA NA

Gammon 18,647 23,336 36,998 45,363 56,334 55,337 51,974 32,793 29,670 17,184 NA NA NA


Currently many new companies (like KNR, PNC, Ahluwalia, JKumar) with a revenue of less than Rs 50bn, appear to have the maximum potential to grow over the next few years. However, we need to be certain about the management bandwidth of these companies. Most of them are regional (PNC - UP, Ahluwalia - NCR, KNR – South India, JKumar - Mumbai) and their businesses are restricted to 1-2 domains (roads/buildings/metros). It was convenient for them to restrict their businesses to the geography/segment of their comfort – as they continued to report growth while maintaining margins. Now, as they look to cross the hurdle of Rs 50bn of annual turnover, they will have to expand their businesses outside their comfort zones to new geographies and segments. It is this litmus test that these companies need to pass. Expanding to new geographies and segments translates into requirement of better equipment and working-capital management. Most importantly, it will be a test of their management bandwidth. It is easier to manage a turnover of Rs 10-20bn with 15-20 construction sites. The moment this increases to 40-50 sites and a turnover of Rs 35-50bn, it becomes much more difficult to manage operations. Execution challenges, and how the companies handle them, will have to be keenly watched to be able to choose the ‘men’ from these ‘boys’.



Pecking order Finally, it all comes down to selection of stocks that would maximize investors returns and have the most favourable risk-reward profile. We define three parameters to decide which stocks provide the most favourable risk-reward profile: 1) Strength of balance sheet with equity requirement considerations:

Key parameters here include leverage, WC cycle, and equity requirement for HAM (or other BOT) projects

2) State of the orderbook and expected growth over next three years Key parameters we look for in this section are diversification (across segments and geography) of the orderbooks, book-to-sales ratio, and likely revenue/earnings growth over next three years

3) Relative valuations This section includes current valuations adjusted for BOT/HAM/other businesses

Segregating companies on the basis of key parameters – active and passive coverage

Active Coverage Passive coverage

Positive Moderate Negative Positive Moderate Negative

Strength of balance sheet with HAM equity requirement

Ahluwalia, KNR, NCC, ITD Cementation

PNC, Sadbhav IRB, Ashoka Capacite, PSP,

Jkumar Gayatri

Dilip, Simplex

State of the orderbook and expected growth over next 3 years

Ahluwalia, PNC, Ashoka, NCC

KNR, Sadbhav IRB, ITD

Cementation Capacite, PSP,

Jkumar, Gayatri NA

Dilip, Simplex

Relative valuations Sadbhav, Ashoka,

NCC, IRB PNC, Ahluwalia

ITD Cementation, KNR,

NA NA NA


Based on the above, we derive our pecking order as:

NCC scores on almost ALL parameters except for its working capital being a bit stretched; hence, it remains our top pick in the sector.

We find Ahluwalia and PNC/KNR equally attractive with primary difference between them being the sector in which they operate – Ahluwalia in buildings and PNC/KNR in roads. Investors might want to choose between these, depending on the sector they would like to take exposure to.

Lastly, we find Ashoka and Sadbhav equally attractive, but inferior to the above players. The only factor, overwhelmingly in their favour, is their highly inexpensive valuations – which, we believe, are a reflection of their higher capital requirement (Ashoka) and inferior growth profile (Sadbhav).

We believe IRB, and ITD Cementation will relatively underperform in this cycle and do not recommend them as BUYs.

We divide the stocks NOT in our active coverage into two categories – AVOID and GOOD. Under the AVOID category, we place stocks like JKumar, Simplex, Dilip, and Gayatri. We like Capacite and PSP, and place them under the GOOD category.

Our pecking order, based on performance on key parameters Active Coverage Passive Coverage

Top Pick NCC AVOID Dilip, JKumar

After that Ahluwalia/PNC AVOID Gayatri, Simplex

And then Ashoka/Sadbhav/KNR GOOD Capacite, PSP

And lastly IRB, ITD Cementation




Our Recommendations

Company

Mkt Cap

CMP Price

% Upside EPC Target

Multiple EPC Valuation BOT/Others

Valuation CMP implied

FY21 PE (EPC) Rs bn Rating Target

IRB Infra 51.3 146 NEUTRAL 170 16% 10.0 144 26 6.4 Ashoka Buildcon 36.2 129 BUY 190 47% 12.0 125 65 6.2 Sadbhav Engg 42.4 247 BUY 315 28% 13.0 218 97 9.1 NCC 66.1 110 BUY 180 64% 13.0 180 - 8.1 KNR 37.7 269 NEUTRAL 280 4% 15.0 242 38 14.0 ITD Cementation 22.7 132 SELL 115 -13% 13.0 115 - 14.8 PNC Infra 40.5 158 BUY 210 33% 14.0 169 41 9.6 Ahluwalia 21.6 322 BUY 430 34% 15.0 430 - 11.1

Source: Company, PhillipCapital India Research

Change in multiple / recommendations

Company CMP Prev Target

Multiple

Prev Price New Target Multiple

New Price Target

Rating (No Change) Target

IRB Infra 146 9.0 155 10.0 170 NEUTRAL Ashoka Buildcon 129 10.0 170 12.0 190 BUY Sadbhav Engg 247 8.0 230 13.0 315 BUY NCC 110 11.0 150 13.0 180 BUY KNR 269 11.0 220 15.0 280 NEUTRAL ITD Cementation 132 11.0 100 13.0 115 SELL PNC Infra 158 12.0 190 14.0 210 BUY Ahluwalia 322 12.0 350 15.0 430 BUY

Valuations Infrastructure sector – valuation table Company _____P/E_____ ___EV/EBITDA___ _____ROE_____ _____D/E_____ _____P/BV_____

FY20E FY21E FY20E FY21E FY20E FY21E FY20E FY21E FY20E FY21E

IRB Infra 8.8 NA 7.8 9.4 7.6 -0.7 2.4 2.4 0.7 0.6

Ashoka Buildcon 13.5 12.5 8.3 7.2 11.2 10.8 0.5 0.5 1.5 1.4

Sadbhav Engg 18.5 15.0 11.1 9.4 9.9 10.9 0.6 0.5 1.8 1.6

NCC 9.6 8.1 5.4 4.7 12.8 13.4 0.4 0.3 1.2 1.1

KNR 22.4 16.4 9.4 7.3 10.9 13.0 0.1 0.1 2.4 2.1

ITD Cementation 15.9 14.8 7.7 6.9 11.6 11.1 0.6 0.6 1.8 1.6

PNC Infra 15.9 12.9 8.8 7.4 11.2 12.2 0.4 0.5 1.8 1.6

Ahluwalia 12.9 11.1 6.8 5.7 18.3 17.5 0.0 0.0 2.4 1.9

Company ____Revenue____ ____EBITDA____ _____PAT_____ _____EPS_____ _____Debt_____

FY20E FY21E FY20E FY21E FY20E FY21E FY20E FY21E FY20E FY21E

IRB Infra 68,927 68,055 28,332 24,382 5,859 -574 16.7 -1.6 1,87,637 1,97,845

Ashoka Buildcon 46,150 55,380 5,769 6,922 2,690 2,903 9.6 10.3 12,099 14,099

Sadbhav Engg 43,130 50,031 4,960 5,754 2,286 2,824 13.3 16.5 13,847 12,847

NCC 1,45,434 1,65,795 15,998 18,237 6,852 8,207 11.4 13.7 22,501 20,501

KNR 25,015 31,269 4,127 5,159 1,685 2,301 12.0 16.4 2,003 1,003

ITD Cementation 33,026 37,980 3,633 4,178 1,430 1,529 8.3 8.9 6,886 7,886

PNC Infra 39,100 48,874 5,591 6,989 2,546 3,134 9.9 12.2 9,197 11,697

Ahluwalia 22,130 25,450 2,932 3,372 1,677 1,941 25.0 29.0 296 296

Company Orderbook Book- Revenue growth EBITDA Margin Earnings Growth ____WC Days___

Rs bn to-Bill FY20E FY21E FY20E FY21E FY20E FY21E FY20E FY21E

IRB Infra 122 2.9 4% -1% 41% 36% -35% -110% - -

Ashoka Buildcon 98 3.0 30% 20% 13% 13% -5% 8% 78 86

Sadbhav Engg 129 3.5 15% 16% 12% 12% -6% 24% 207 192

NCC 342 3.1 21% 14% 11% 11% 21% 20% 137 136

KNR 55 2.7 25% 25% 17% 17% -25% 37% 61 67

ITD Cementation 102 4.0 0% 15% 11% 11% -5% 7% 118 121

PNC Infra 145 5.2 35% 25% 14% 14% 4% 23% 140 138

Ahluwalia 63 3.8 20% 15% 13% 13% 28% 16% 116 127




Co

mp

anie

s Se

ctio

n



NCC Ltd (NJCC IN)

THE BEST stock to play the sector this cycle

INDIA | INFRASTRUCTURE | Company Update

25 March 2019

NCC is our top pick in the infrastructure sector. It is the second-largest company in the EPC space with a robust diversified orderbook and lean balance sheet. We see it benefitting immensely from the mammoth opportunity in the roads, buildings, metros, and irrigation segments – the company has a strong presence in ALL segments. After a weak performance over the last three years, FY19 is set to be a turnaround year for NCC – the company expected to report +50% yoy growth in topline. With record order inflow this year yet again (as in FY18), NCC is all set to traverse a high growth trajectory over the next few years. Simultaneously, its balance sheet should remain strong with its continuous efforts to divest non-core assets. Valuations too, are highly attractive.

FY19 to be a turnaround year for NCC NCC has delivered stupendous results in the first three quarters of FY19 – its 9MFY19 topline of

Rs 87bn (+68% yoy) places it well to meet (perhaps exceed) its FY19 revenue guidance of Rs

110bn (+45% yoy) – a number which seemed improbable at the beginning of the year. Its EBITDA

margins have expanded by 110bps yoy in 9MFY19 – and the management guidance of 11.0-11.5%

now appears easily achievable. At the same time, interest expense has remained stable at

4QFY18 levels, despite the debt increasing due to strong execution. Eventually, ALL aspects of its

9MFY19 results have reinforced our conviction about its superior execution capabilities.

Strong order inflow and orderbook, despite slowdown in road and metro segments YTD FY19 has seen dull order-award activity in roads and metros, which led to muted order

inflow for most companies, esp. single-segment road/metro companies. However, in this

environment, NCC has amassed order of ~Rs 200bn already – significantly beating its own

guidance of Rs 140bn. NCC’s size and presence across the infrastructure space has helped it grab

large orders in buildings, irrigation, and roads.

Its current orderbook (of Rs 342bn; 3.1x book-to-sales) provides high revenue visibility. With no

BOT/HAM projects in its book, NCC does not have to deal with issues related to financial closure

(FC) or funding the equity requirement of such projects. Some of its large orders (such as NBCC –

Rs 18bn or Mumbai-Nagpur expressway – Rs 29bn) will contribute very little to its topline in FY19

– paving way for a strong growth in FY20 too. High concentration of Andhra Pradesh state orders

at 42% remains the only minor concern in its orderbook.

Subsidiary performance a significant positive NCC’s subsidiaries (Middle East, infra, real estate) have historically been dragging its consolidated

performance, significantly below the standalone level. However, there has been a significant

revamp in performance YTD with the completion of ME projects and the company deciding to

shut down its ME business. Against losses of Rs 2.5/1.5bn in FY17/18, NCC’s subsidiaries have

reported profit of Rs 27mn in 9MFY19 – raising the possibility of much superior profitability at

the consol level in FY19, in line with its standalone profitability. Its effort to divest most of its land

parcels should lead to further cash accruals and freeing up of locked capital in subsidiaries.

Recurring litigations remain a concern Over the last year, NCC has been embroiled in multiple litigations related to projects that it has

already completed or sold off to investors. The three litigations (Sembcorp, Taqa, and Middle-

East) have led to a cumulative provision of ~Rs 1.3bn in the last four quarters and opened up the

possibility of more such litigations ahead. While the management maintains it does not foresee

any such issues in the future, we would still keep a keen eye out.

Outlook and valuation NCC has corrected significantly over the last year (CY18, -35%) and is trading at an FY21 P/E of 8x

– a discount to peers (average 10x). With a strong and diversified orderbook (3.1x book-to-sales)

and balance sheet (0.5x debt:equity), and topline/earnings CAGR of 30%/42% over FY18-21, we

do not see a better rerating candidate in the infrastructure space. We upgrade our target

multiple to 13x FY21 PE (from 11x earlier), which is still at a discount to peers (KNR, PNC,

Ahluwalia). Our target is Rs 180 (Rs 150 earlier) and we maintain BUY.

BUY (Maintain) CMP RS 110 TARGET RS 180 (+64%) COMPANY DATA

O/S SHARES (MN) : 601

MARKET CAP (RSBN) : 66.1

MARKET CAP (USDBN) : 0.96

52 - WK HI/LO (RS) : 137 / 63

LIQUIDITY 3M (USDMN) : 25.1

PAR VALUE (RS) : 2

SHARE HOLDING PATTERN, %

Dec 18 Sep 18 Jun 18

PROMOTERS : 18.1 18.1 18.1

FII / NRI : 17.5 17.5 17.0

FI / MF : 30.2 29.0 31.4

NON PRO : 15.1 14.3 13.7

PUBLIC & OTHERS : 19.1 21.1 19.8

PRICE PERFORMANCE, %

1MTH 3MTH 1YR

ABS 26.1 29.0 -15.9

REL TO BSE 19.9 23.2 -28.8

PRICE VS. SENSEX

KEY FINANCIALS

Rs mn FY19E FY20E FY21E

Net Sales 1,20,193 1,45,434 1,65,795

EBIDTA 13,942 15,998 18,237

Net Profit 5,976 6,852 8,207

EPS, Rs 9.4 11.4 13.7

PER, x 11.1 9.6 8.1

EV/EBIDTA, x 6.3 5.4 4.7

PBV, Rs 1.4 1.2 1.1

ROE, % 12.6 12.8 13.4

Debt/Equity 0.5 0.4 0.3

Source: PhillipCapital India Research Est.

Vibhor Singhal (+ 9122 6246 4109) [email protected] Deepika Bhandari (+ 9122 6246 4138) [email protected]

80

100

120

140

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Apr-16 Apr-17 Apr-18

NCC BSE Sensex


NCC LTD COMPANY UPDATE

Robust orderbook, driven by strong order inflow The orderbook is well diversified across segments

FY19 witnessed strong growth, after muted 3 years ... with stable and improving margins

Gross debt and leverage have been stable ... while working capital has largely remained stable


219 316 325 328 329 342

3.0

4.3 4.3 4.1

3.4

3.1

1.5

2.0

2.5

3.0

3.5

4.0

4.5

0

50

100

150

200

250

300

350

400

2Q

FY1

8

3Q

FY1

8

4Q

FY1

8

1Q

FY1

9

2Q

FY1

9

3Q

FY1

9

Bo

ok-

to-S

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(x)

Ord

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k (R

s b

n)

Orderbook (Rs bn) Book-to-Sales (x) (rhs)

Buildings & Housing, 42%

Roads, 25%

Water and Environment,

14%

Electrical, 5%

Irrigation, 5%

Metals, 0%

Power, 0% Mining, 7%

International, 1%

83 83 79 76 120 145 166

36%

0% -5% -4%

59%

21%

14%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

70%

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

180.0

FY15 FY16 FY17 FY18 FY19E FY20E FY21E

% Y

oY

Gro

wth

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HS

Rev

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Revenue % YoY Growth

6,4

94

7,3

77

7,1

52

8,5

49

13

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2

15

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8

18

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7

8%

9% 9%

11% 12%

11% 11%

2%

3%

4%

5%

6%

7%

8%

9%

10%

11%

12%

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000


OP

M (

%)

- R

HS

EBIT

DA

(Rs

mn

) EBITDA EBITDA Margins (rhs)

20

19

16

13

22

23

21

0.6 0.6

0.5

0.3

0.5 0.4

0.3

-

0.1

0.2

0.3

0.4

0.5

0.6

0.7

-

5

10

15

20

25


Leve

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(x)

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Stan

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(Rs.

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Standalone debt Leverage

60

140

171

226

200 195 195

79 73 71

82 70 70 70

150 146 144

165

140 137 136

50

70

90

110

130

150

170

190

210

230


Day

s

Debtor Inventory Working Capital



Sharp improvement in interest coverage ratio ... ... has led to strong growth in earnings and ROE


Order inflow in FY19 Project (Rs mn) Gross Value Segment State

Mumbai Nagpur expressay 28,500 Roads Maharashtra

Lucknow airport 8,860 Buildings UP

Kaleswaram irrigation project 4,580 Irrigation Telangana

Multiple Buildings orders 24,192 Buildings

Mining order 7,538 Mining

Total Orders won till Dec-18 128,150

Orders announced after in Jan/Feb-19 81,777

Total Orders won YTD FY19 2,09,927

Target for FY19 1,40,000


Improved subsidiary performance has boosted consolidated results in FY19 Rs mn FY14 FY15 FY16 FY17 FY18 9MFY19

Consolidated Revenue 74,632 95,129 95,273 90,006 83,906 91,346 EBITDA 7,570 9,997 9,967 6,697 8,794 11,238 Depreciation 2,354 2,766 2,482 2,026 1,715 1,441 Interest Expense 6,541 7,371 6,426 5,133 4,596 3,885 PAT 33 539 816 84 1,387 3,923 Standalone

Revenue 61,173 82,969 83,252 78,921 75,593 86,909 EBITDA 4,049 6,494 7,377 6,852 8,549 10,253 Depreciation 895 1,118 1,100 1,121 1,175 1,090 Interest Expense 4,660 5,736 5,089 3,957 3,789 3,343 PAT 405 1,118 2,402 2,556 2,868 3,896 Difference

Revenue 13,458 12,159 12,021 11,085 8,313 4,437 EBITDA 3,521 3,503 2,591 (455) 245 985 Depreciation 1,459 1,648 1,383 905 540 350 Interest Expense 1,881 1,636 1,337 1,176 806 543 PAT (372) (579) (1,586) (2,472) (1,481) 27

Implicit PAT of Subs (372) (579) (1,586) (2,472) (1,481) 27 Implicit Cash Profit of Subs 1,087 1,068 (203) (1,567) (940) 378


5,7

36

5,0

89

3,9

57

3,7

89

4,6

03

5,3

40

5,3

75

0.9

1.2

1.6 1.8

2.0 2.0

2.2

-

0.5

1.0

1.5

2.0

2.5

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000


Inte

rest

Co

vera

ge (

x) -

RH

S

Inte

rest

Exp

nse

(Rs.

mn

)

Interest Expense Interest Coverage

1,1

18

2,4

02

2,5

56

2,8

68

5,6

44

6,8

52

8,2

07

3.9

7.4 7.6 7.5

12.5 13.5

14.3

-

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

-800

200

1,200

2,200

3,200

4,200

5,200

6,200

7,200

8,200

9,200


% Y

oY

Gro

wth

- R

HS

PA

T (R

s m

n)

PAT ROE (%)



Financials (Standalone)

Income Statement Y/E Mar, Rs mn FY18 FY19E FY20E FY21E

Net sales 75,593 1,20,193 1,45,434 1,65,795

Growth, % -4 59 21 14

Total income 75,593 1,20,193 1,45,434 1,65,795

Employee expenses -3,641 -5,789 -7,005 -7,986

Other Operating expenses -35,638 -46,788 -56,613 -64,539

EBITDA (Core) 8,549 13,942 15,998 18,237

Growth, % 19.5 63.1 14.7 14.0

Margin, % 11.3 11.6 11.0 11.0

Depreciation -1,175 -1,467 -1,658 -1,743

EBIT 7,374 12,476 14,340 16,495

Growth, % 22.3 69.2 14.9 15.0

Margin, % 9.8 10.4 9.9 9.9

Interest paid -3,789 -4,603 -5,340 -5,375

Other Non-Operating Income 1,158 1,025 1,076 1,130

Pre-tax profit 3,677 8,423 10,076 12,250

Tax provided -809 -2,780 -3,224 -4,042

Profit after tax 2,868 5,644 6,852 8,207

Others (Minorities, Associates) 0 0 0 0

Net Profit 2,868 5,644 6,852 8,207

Growth, % 12.2 96.8 21.4 19.8

Net Profit (adjusted) 3,614 5,976 6,852 8,207

Unadj. shares (m) 601 601 601 601

Wtd avg shares (m) 601 601 601 601

Orderbook Y/E Mar, Rs bn FY18 FY19E FY20E FY21E

Orderbook 325 405 409 444

Growth YoY (%) 80% 25% 1% 8%

Book-to-Sales (x) 4.3 3.4 2.8 2.7

Order Inflow 220 200 150 200

Balance Sheet Y/E Mar, Rs mn FY18 FY19E FY20E FY21E

Cash & bank 659 816 1,398 1,275

Debtors 46,889 65,859 77,698 88,575

Inventory 16,956 23,051 27,891 31,796

Loans & advances 7,531 9,879 11,555 12,718

Total current assets 86,667 1,14,237 1,33,174 1,48,997

Investments 10,237 10,237 9,237 8,237

Gross fixed assets 15,519 19,019 20,019 21,019

Less: Depreciation -8,024 -9,491 -11,148 -12,891

Add: Capital WIP 816 816 816 816

Net fixed assets 8,311 10,344 9,686 8,944

Total assets 1,08,006 1,37,610 1,54,889 1,68,969

Current liabilities 52,589 68,085 78,716 87,291

Total current liabilities 52,589 68,085 78,716 87,291

Non-current liabilities 13,001 22,001 22,501 20,501

Total liabilities 65,589 90,086 1,01,216 1,07,791

Paid-up capital 1,201 1,201 1,201 1,201

Reserves & surplus 41,215 46,323 52,472 59,976

Shareholders’ equity 42,416 47,524 53,673 61,178

Total equity & liabilities 1,08,006 1,37,610 1,54,889 1,68,969

Source: Company, PhillipCapital India Research Estimates

Cash Flow Y/E Mar, Rs mn FY18 FY19E FY20E FY21E

Pre-tax profit 3,677 8,423 10,076 12,250

Depreciation 1,175 1,467 1,658 1,743

Chg in working capital -3,354 -11,917 -7,724 -7,371

Total tax paid -1,274 -2,780 -3,224 -4,042

Cash flow from operating activities 224 -4,806 785 2,579

Capital expenditure -3,089 -3,420 -1,000 -1,000

Chg in investments 50 0 1,000 1,000

Cash flow from investing activities -3,039 -3,420 0 0

Free cash flow -2,816 -8,227 785 2,579

Equity raised/(repaid) 5,413 87 0 0

Debt raised/(repaid) -2,766 9,000 500 -2,000

Cash flow from financing activities 2,379 8,384 -203 -2,703

Net chg in cash -436 158 582 -123

Valuation Ratios FY18 FY19E FY20E FY21E

Per Share data

EPS (INR) 4.8 9.4 11.4 13.7

Growth, % 3.9 96.8 21.4 19.8

Book NAV/share (INR) 70.6 79.1 89.4 101.9

FDEPS (INR) 6.0 9.9 11.4 13.7

CEPS (INR) 9.7 13.2 14.2 16.6

CFPS (INR) (1.6) (9.7) (0.5) 2.4

Return ratios

Return on assets (%) 5.3 6.9 6.9 7.0

Return on equity (%) 8.5 12.6 12.8 13.4

Return on capital employed (%) 9.9 13.5 13.8 14.4

Turnover ratios

Asset turnover (x) 1.9 2.5 2.5 2.5

Sales/Total assets (x) 0.8 1.0 1.0 1.0

Sales/Net FA (x) 10.3 12.9 14.5 17.8

Working capital/Sales (x) 0.4 0.4 0.4 0.4

Receivable days 226.4 200.0 195.0 195.0

Inventory days 81.9 70.0 70.0 70.0

Payable days 283.9 232.4 220.7 214.8

Working capital days 161.4 137.7 133.2 133.0

Liquidity ratios

Current ratio (x) 1.6 1.7 1.7 1.7

Quick ratio (x) 1.3 1.3 1.3 1.3

Interest cover (x) 1.9 2.7 2.7 3.1

Total debt/Equity (x) 0.3 0.5 0.4 0.3

Net debt/Equity (x) 0.3 0.4 0.4 0.3

Valuation

PER (x) 18.3 11.1 9.6 8.1

PEG (x) - y-o-y growth 1.2 0.2 0.7 0.4

Price/Book (x) 1.6 1.4 1.2 1.1

EV/Net sales (x) 1.0 0.7 0.6 0.5

EV/EBITDA (x) 9.2 6.3 5.4 4.7

EV/EBIT (x) 10.6 7.0 6.1 5.2



Ahluwalia Contracts (AHLU IN)

The Perfect Portfolio Stock


25 March 2019

We view ACIL as a perfect portfolio stock that would deliver healthy 20-25% annual returns to investors (even without any valuation rerating) driven by healthy earnings growth that is in turn propelled by a strong balance sheet and cashflow generation. It has a net-cash balance sheet, maintains tight control on WC, and has the best return profile (20% ROE) in the sector. Its presence in the buildings segment, which we expect to be the biggest beneficiary of govt. spending (driven by upcoming general elections, and the govt’s focus on Housing for All), will lead to strong topline and earnings growth over the next few years – translating into stupendous returns for investors.

Record order inflows in FY19 to boost growth prospects ACIL has reported strong order inflows YTD FY19. Against its guidance of Rs 12bn of inflows at the beginning of the year, it has recorded order inflows of over Rs 40bn – taking its orderbook to Rs 63.4bn – a strong 3.8x book-to-sales – providing high revenue visibility for the next three years. We note that ACIL tends to have lumpy order inflows, as it prefers to wait out aggressive bidding periods to win orders at its preferred margins. We expect this trend to continue – and the mammoth opportunity in the buildings segment to ensure that volatility in order inflows does not translate into volatility in earnings.

FY19 results impacted by external factors – FY20 to be much stronger: ACIL has reported muted performance in 9MFY18 – delivering only 5.2%/2.2% topline/earnings growth. The results for Q3FY19 were particularly disappointing – with only 15.9% yoy growth in topline. The execution in FY19 has been impacted by the NGT (National Green Tribunal) issue in the Delhi-NCR region – due to which construction activity has been impacted, following the orders of the Supreme Court. Delhi-NCR forms 40% of the company’s orderbook, hence the significant impact. Over the last few months, the issue is getting resolved and ACIL is wining more orders from the non-NCR region, which means growth in FY20 should be much better and less dependent on the projects in the NCR region.

Strongest balance sheet and return profile in the sector ACIL currently has a debt of only Rs 490mn with cash reserves of Rs 1.3bn (incl FDR), making it the only net cash company in the sector. Its working capital cycle of 90 days (debtor/inventory days of 163/35) is the leanest in the sector (second only to KNR). This translates into the strongest balance sheet in the sector. On the earnings front, the company has maintained a much superior return profile with an ROE of 20% – expected to get only better. Superior fundamentals make it the perfect portfolio stock in the infrastructure space.

Best-placed to capitalise the huge opportunity in buildings Buildings presents a mammoth opportunity in the infrastructure space, and ACIL is highly likely to benefit from this. The govt. has laid a strong emphasis on its 'Housing for All by 2022' scheme, under which pucca houses are being built under PMAY. Already large orders have been awarded under PMAY, and we expect the momentum to only improve. Also, initiatives such as Smart-Cities and higher institutional capex should also augur well for ACIL, which is uniquely positioned in the buildings space with waning competition. Lastly, many railway stations and tier-2/3 airport terminals are on the anvil to be modernized, which will offer incremental opportunity for the company.

Valuations are in line with sector despite its superior returns profile ACIL has corrected significantly over the last year (CY18, -22%), and is currently trading at 11x FY21 P/E – a premium to most companies in the sector but at discount to KNR and PNC. We believe the stock deserves a much higher multiple with its strong orderbook, huge opportunity, robust balance sheet, and superior returns profile. We upgrade our target multiple to 15x FY21PE (earlier 12x) – the highest in our coverage universe and in line with KNR. Our target is Rs 430 (earlier Rs 350). We maintain BUY.

BUY CMP RS 322 TARGET RS 430 (+34%) COMPANY DATA




52 - WK HI/LO (RS) : 445 / 244


PAR VALUE (RS) : 10


Dec 18 Sep 8 Jun 18

PROMOTERS : 58.0 58.0 58.0

FII / NRI : 17.7 18.8 18.8

FI / MF : 19.8 18.6 18.3

NON PRO : 1.8 1.6 1.8

PUBLIC & OTHERS : 2.8 3.0 3.1


1MTH 3MTH 1YR

ABS 33.0 21.8 -9.1

REL TO BSE 26.8 16.1 -21.9

PRICE VS. SENSEX

KEY FINANCIALS


Net Sales 18,442 22,130 25,450

EBIDTA 2,351 2,932 3,372

Net Profit 1,313 1,677 1,941

EPS, Rs 19.6 25.0 29.0

PER, x 16.4 12.9 11.1

EV/EBIDTA, x 8.6 6.8 5.7

PBV, x 2.9 2.4 1.9

ROE, % 19.1 20.1 19.2

Debt/Equity (x) 0.0 0.0 0.0



70

90

110

130

150

170


Ahluwalia BSE Sensex


AHLUWALIA CONTRACTS COMPANY UPDATE

The orderbook has started improving for the company… .. but it still largely dominated by East/North India


Consistently strong topline growth… … along with stable margins


Continuous reduction in debt has led to a net cash position… … with working capital remaining stable


30 33 36 31 43 43 53 63

1.9 2.0 2.1 1.8

2.8 2.6

3.1

3.8

-

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

-

10

20

30

40

50

60

70

1Q

FY1

8

2Q

FY1

8

3Q

FY1

8

4Q

FY1

8

1Q

FY1

9

2Q

FY1

9

3Q

FY1

9

Incl

N

ew/L

1

Bo

ok

to S

ales

(x)

Ord

er b

oo

k (R

s. B

n)


Commercial, 5%

Hospital, 43%

Infra, 19%

Institutional, 24%

Residential, 7%

Private, 14% Public, 86%

East, 46% West, 13%

South, 1%

North, 40%

Segment

Client

Region

11 12 14 16 18 22 25

10%

18%

14% 15%

12%

20%

15%

0%

5%

10%

15%

20%

25%

0.0

5.0

10.0

15.0

20.0

25.0

30.0


% Y

oY

Gro

wth

- R

HS

Rev

enu

e (R

s. B

n)


1,1

49

1,6

08

1,7

37

2,1

93

2,3

51

2,9

32

3,3

72

11%

13% 12%

13% 13%

13% 13%

0%

2%

4%

6%

8%

10%

12%

14%

16%

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000


OP

M (

%)

- R

HS

EBIT

DA

(Rs

mn

)

EBITDA OPM (%)

1,7

31

1,4

19

90

1

29

6

29

6

29

6

29

6

0.5

0.3

0.2

0.0 0.0

0.0 0.0

-

0.1

0.2

0.3

0.4

0.5

0.6

-

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000


Leve

rage

(x)

- R

HS

Stan

dal

on

e d

ebt

(Rs.

mn

)

Standalone debt Leverage 166 163

153 149 150 150 150

57 60 63

42 40 40 40

101 101 98 97 111

116 127

-

20

40

60

80

100

120

140

160

180


Day

s




Strong OCF/FCF generation …. … along with ‘best-in-the-sector’ return profile


Key ongoing projects in the orderbook (3QFY19)

Project

Gross Value

(Rs mn)

Net Value

(Rs mn)

HSCC Ltd: Construction of Hospital & academic campus at AIIMS Kalyani West Bengal 6,520 6,160 HSCC Ltd: Construction of Hospital & academic campus at AIIMS Nagpur 5,830 5,427 NBCC: Construction of Development & Redevelopment of Charbagh Railway Station Lucknow U.P 5,388 5,388 HSCC Ltd: Construction of Mother & Child, OPD Block & Other Associates Services in AIIMS Campus Ansari Nagar New Delhi 4,981 824 BCD: Construction of Govt . College & Hospital Chapra Bihar 4,254 4,254 South Asian University : Construction of university at Delhi 4,016 1,743 Amity University : Construction of university Campus at Kolkata 4,000 1,297 BCD: Construction of Govt . Dental College & Hospital Rahui Nalanda Bihar 3,834 3,834 AAI: Construction of Domestic Passenger Terminal Building at Dehradun Airport 3,532 3,532 NBCC: Construction of Superstructure & Infrastructure works for 2400 seater indoor auditorium works at Alipore Kolkata 3,147 2,834 HSCC Ltd: Construction of Residential Complex for National Cancer Institute at Jhajjar Haryana 3,130 415 WBTPO : Construction of renovation modernization of Milan Mela Complex Kolkata 2,613 2,432 CPWD: Construction of redevelopment of general pool Residential colony at New Delhi 2,550 2,515 HSCC Ltd: Construction of Hospital Building for Chittaranjan National Cancer Institute at Kolkata 2,441 524

Total 56,236 41,179


Key orders won in FY19

Project Rs mn

Hospital and Academic Campus at AIIMS at Kalyani 6,520 Hospital and Academic Campus at AIIMS at Nagpur 5,830 Development / Redevelopment of Charbagh Railway Station at Lucknow (UP) 5,388 Officer Enclave Gardanibagh at Patna (Bihar) 5,186 Govt. Medical College & Hospital Building at Chapra, Bihar 4,254 Govt. Dental College & Hospital at Rahui, Dist. Nalanda (Bihar) 3,835 Domestic Passenger Terminal Building at Dehradun Airport 3,533

Total

34,545


624 648

1092

787 774 797

1233

400 423

887

615

424

297

733

0

200

400

600

800

1,000

1,200

1,400


OC

F/FC

F (R

s m

n)

OCF FCF

20.8 20.3

18.0

21.2

20.2

21.0

19.9

22.7 22.2

18.6

20.5

19.1

20.1

19.2

15.0

17.0

19.0

21.0

23.0

25.0


ROCE (%) ROE (%)





Net sales 16,466 18,442 22,130 25,450

Growth, % 15 12 20 15

Total income 16,466 18,442 22,130 25,450



EBITDA (Core) 2,193 2,351 2,932 3,372

Growth, % 26.2 7.2 24.7 15.0

Margin, % 13.3 12.8 13.3 13.3

Depreciation -256 -262 -306 -359

EBIT 1,936 2,090 2,626 3,013

Growth, % 29.3 7.9 25.7 14.8

Margin, % 11.8 11.3 11.9 11.8

Interest paid -251 -200 -200 -200

Other Non-Operating Income 63 69 76 84

Pre-tax profit 1,749 1,959 2,502 2,897

Tax provided -594 -647 -826 -956

Profit after tax 1,154 1,313 1,677 1,941

Net Profit 1,154 1,313 1,677 1,941

Growth, % 33.8 13.7 27.7 15.8


Unadj. shares (m) 67 67 67 67

Wtd avg shares (m) 67 67 67 67

Orderbook Y/E Mar, Rs mn FY18 FY19E FY20E FY21E

Orderbook 30,742 57,301 70,171 84,721

Growth YoY (%) -13% 86% 22% 21%

Book-to-Sales (x) 1.9 3.1 3.2 3.3

Order Inflow 11,678 45,000 35,000 40,000


Cash & bank 1,247 1,645 1,919 2,628

Debtors 6,711 7,579 9,095 10,459

Inventory 1,891 2,021 2,425 2,789

Loans & advances 305 505 606 697

Total current assets 10,327 11,924 14,218 16,746

Investments 63 63 63 63


Less: Depreciation -485 -747 -1,053 -1,412


Net fixed assets 1,847 1,936 2,129 2,271

Total assets 12,454 14,139 16,627 19,297



Non-current liabilities 296 296 296 296

Total liabilities 6,230 6,628 7,463 8,215

Paid-up capital 134 134 134 134



Total equity & liabilities 12,454 14,139 16,627 19,297



Pre-tax profit 1,749 1,959 2,502 2,897

Depreciation 256 262 306 359

Chg in working capital -554 -800 -1,186 -1,067

Total tax paid -665 -647 -826 -956

Cash flow from operating activities 787 774 797 1,233

Capital expenditure -176 -350 -500 -500

Chg in investments 5 0 0 0

Cash flow from investing activities -171 -350 -500 -500

Free cash flow 615 424 297 733

Equity raised/(repaid) 25 -2 0 0

Debt raised/(repaid) -605 0 0 0

Dividend (incl. tax) -24 -24 -24 -24

Cash flow from financing activities -594 -26 -24 -24

Net chg in cash 22 398 273 709

Valuation Ratios

FY18 FY19E FY20E FY21E

Per Share data EPS (INR) 17.2 19.6 25.0 29.0

Growth, % 33.8 13.7 27.7 15.8


FDEPS (INR) 17.2 19.6 25.0 29.0

CEPS (INR) 21.1 23.5 29.6 34.3

CFPS (INR) 10.8 10.5 10.8 17.1

Return ratios Return on assets (%) 10.6 10.8 11.7 11.5

Return on equity (%) 20.5 19.1 20.1 19.2


Turnover ratios Asset turnover (x) 3.5 3.4 3.4 3.2

Receivable days 148.8 150.0 150.0 150.0

Inventory days 41.9 40.0 40.0 40.0

Payable days 150.4 142.4 135.2 130.0


Liquidity ratios

Current ratio (x) 1.7 1.9 2.0 2.1

Quick ratio (x) 1.4 1.6 1.6 1.8

Interest cover (x) 7.7 10.4 13.1 15.1


Net debt/Equity (x) (0.2) (0.2) (0.2) (0.2)

Valuation

PER (x) 18.7 16.4 12.9 11.1

PEG (x) - y-o-y growth 0.6 1.2 0.5 0.7

Price/Book (x) 3.5 2.9 2.4 1.9

EV/Net sales (x) 1.3 1.1 0.9 0.8

EV/EBITDA (x) 9.4 8.6 6.8 5.7

EV/EBIT (x) 10.6 9.7 7.6 6.4



PNC Infratech Ltd (PNCL IN)

THE growth story of this cycle …

INDIA | Infrastructure | Company Update

25 March 2019

PNC Infratech has hit a purple patch after a year of disappointing performance in FY18. It has a strong balance sheet (leverage 0.2x), robust orderbook of Rs 145bn (5.2x book-to-sales), and all of its HAM projects are about to start execution (having achieved financial closure). This places it on a perfect platform to launch itself into the next orbit over the next few years. We expect it to be one of the small local players that successfully transitions into a pan-India player, delivering superior returns along the way.

Strong orderbook to drive growth PNC has a robust orderbook of Rs 145bn (5.2x book-to-sales, including L1 of Rs 65bn) – the most impressive in the sector. Over the last four quarters, it has had a phenomenal run – accruing orders from NHAI as well as large order from state governments (UP, Maharashtra). While its order book has a high share of HAM projects (reduced considerably though, after it won sections of the Purvanchal and Mumbai-Nagpur expressways) – it is one of the few developers which has achieved FC for all (seven) its HAM projects, and expects to start executions on all of them (currently four) by Q2FY20. Overall, this ensures that the company doesn’t need to be aggressive in bidding for new projects, having secured enough order to achieve +20% growth over the next three years.

Strong execution of the last three quarters to continue PNC has reported super strong performance in 9MFY19, delivering a whipping 84%/33% topline/earnings growth. The results for Q3FY19 were also strong with 54% yoy growth in topline. The growth was driven by sub-par performance in FY18 (due to delay in receiving Appointed Dates ‘AD’ for five EPC projects) and strong order win, over last few quarters. With ADs expected for the remaining three HAM projects by Q1FY20, we see strong performance in FY20 and beyond.

Fully funded and operational BOT portfolio can provide unexpected benefits PNC has a fully funded and operational BOT portfolio of seven projects. The projects are reporting decent traffic growth, and we do not see the portfolio needing any parent support to fulfil its DSCR requirements. Concurrently, its HAM portfolio (Rs 90bn) is continuously growing – adding to the stock’s overall SoTP valuation.

Watch out for higher tax rate and management bandwidth PNC, like many other infrastructure companies (not all), has been availing the benefit of section 80IA – giving it exemption from paying tax – leading to zero (even negative) tax in earlier years. However, with the section 80IA now repealed, it will have to start paying higher taxes (full tax rate of 30% by FY21). This higher tax rate will lead to significantly lower operating cashflows, lower earnings growth (despite strong PBT growth), and lower ROEs. Hence, we believe, it will find it incrementally difficult to manage cashflows and maintain the strength of its balance sheet.

Also, PNC has been, hitherto, primarily a small north-India based road developer (90% of orderbook in UP/Bihar/MP, 100% in roads). Now, as it grows bigger in size, it will have to expand its business to new geographies/segments. This will translate into requirements of better equipment and WC management, and a test of its management bandwidth. Whether it will be able to manage a turnover of Rs 35-50bn over 40-50 construction sites (against a turnover of Rs 10-20bn over 15-20 sites) is a litmus test it will have to pass.

Outlook and valuation PNC has corrected significantly over the last year (CY18 -27%), and is currently trading at 10x FY21 P/E (adjusting for BOT/HAM value) – inline with the sector. We believe the stock deserves the high multiple with its strong orderbook, huge opportunity, and robust balance sheet. We upgrade our target multiple to 14x FY21 PE (earlier 12x) – slightly lower than ACIL and KNR (15x). Our price target is Rs 210 (BOT Rs 40 + EPC Rs 170). We maintain BUY.



MARKET CAP (RSBN) : 41


52 - WK HI/LO (RS) : 200 / 123


PAR VALUE (RS) : 2



PROMOTERS : 56.1 56.1 56.1

FII / NRI : 6.6 6.1 6.2

FI / MF : 22.4 22.1 21.8

NON PRO : 0.5 0.7 0.8

PUBLIC & OTHERS : 14.5 15.1 15.2


1MTH 3MTH 1YR

ABS 16.5 23.0 3.1

REL TO BSE 10.3 17.3 -9.8

PRICE VS. SENSEX

Source: Phillip Capital India Research

KEY FINANCIALS


Net Sales 28,963 39,100 48,874

EBIDTA 4,229 5,591 6,989

Net Profit 2,454 2,546 3,134

EPS, Rs 9.6 9.9 12.2

PER, x 16.5 15.9 12.9

EV/EBIDTA, x 10.8 8.8 7.4

PBV, x 2.0 1.8 1.6

ROE, % 12.8 11.8 12.9

Debt/Equity (%) 0.3 0.4 0.5



70

100

130

160

190

220


PNC Infra BSE Sensex


PNC INFRATECH LTD COMPANY UPDATE

A robust orderbook including the L1 projects ... .. equally divided between HAM and EPC projects

Execution picked up in FY19… ... while the margins remaining stable


Leverage is expected to increase to fund HAM equity... .... WC cycle has remained stable (excl debtor days)


51 48 80 73 66 61 80 145

3.3 3.4

5.5

3.9

3.0

2.4 2.9

5.2

-

1.0

2.0

3.0

4.0

5.0

6.0

-

20

40

60

80

100

120

140

160

1Q

FY1

8

2Q

FY1

8

3Q

FY1

8

4Q

FY1

8

1Q

FY1

9

2Q

FY1

9

3Q

FY1

9

Incl

N

ew/L

1

Bo

ok

to S

ales

(x)

Ord

er b

oo

k (R

s. B

n)


HAM - L1, 30%

EPC - L1, 14%

HAM UC, 20%

EPC UC, 35.6%

Non Roads, 1.0%

16 20 17 19 29 39 49

35% 29%

-16%

10%

56%

35%

25%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

0.0

10.0

20.0

30.0

40.0

50.0

60.0


% Y

oY

Gro

wth

- R

HS

Rev

enu

e (R

s. B

n)


2,1

66

2,6

60

2,2

10

3,1

88

4,2

29

5,5

91

6,9

89

14%

13% 13%

17%

15% 14% 14%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000


OP

M (

%)

- R

HS

EBIT

DA

(Rs

mn

) EBITDA OPM (%)

3,5

30

11

9 1,6

91

1,6

97

5,6

97

9,1

97

11

,69

7

0.5

0.0

0.1 0.1

0.3

0.4

0.5

(0.1)

-

0.1

0.2

0.3

0.4

0.5

0.6

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000


Leve

rage

(x)

- R

HS

Stan

dal

on

e d

ebt

(Rs.

mn

)


86 68

136

136 125 120 120

52

43 33

35 30 30 30

101 111

190 180

153 140 138

-

50

100

150

200

250


Day

s




PNC’s BOT portfolio – fully funded, operational and self-sufficient portfolio Project Type Stake Length TPC Debt Grant Equity COD Period Authority

% km (Rs mn) (Rs mn) (Rs mn) (Rs mn) years

Raibareli Jaunpur Annuity 100.0 166 8,374 6,978 - 1,396 Apr-16 17 NHAI

Bareilly Almora Toll 100.0 54 6,046 4,600 700 746 Oct-15 25 UPSHA

Ghaziabad Aligarh Toll 35.0 125 20,190 15,140 3,110 1,940 June-15 24 NHAI

Kanpur Ayodhya OMT 100.0 217 - - (1,557) - Aug-13 9 NHAI

Kanpur Kabrai Toll 100.0 123 4,590 2,685 1,230 675 May-15 12 NHAI

Gwalior Bhind Toll 100.0 108 3,403 2,350 270 783 Mar-13 14 MPRDC

Narela Ind area Mix 100.0 33 1,750 1,400 - 350 Oct-13 15 DSIIDC

Total

826 44,353 33,153

5,890


PNC’s HAM portfolio – all seven projects expected to be under construction by 2QFY20 Project Length TPC Debt Equity Grant Period FC AD

km (Rs mn) (Rs mn) (Rs mn) (Rs mn) years

Dausa Lalsot 83 8,200 3,710 660 3,830 17.5 Apr-17 May-17

Chitradurga Devnagree 73 13,380 6,060 1,070 6,250 17.5 Nov-17 Dec-17

Jhansi Khajuraho - I 76 13,420 6,040 1,280 6,100 17.5 Nov-17 May-18

Jhansi Khajuraho - II 85 12,620 5,900 1,040 5,680 17.5 Nov-17 Feb-18

Chakeri Allahabad 145 20,180 8,730 1,920 9,530 17.5 Sep-18 Awaited

Aligarh Kanpur 45 11,040 5,000 1,250 4,790 17.5 Nov-18 Awaited

Chalakere Hariyar 56 10,130 4,500 1,100 4,530 17.0 Dec-18 Awaited

Total 564 88,970 39,940 8,320 40,710

Source: Company, PhillipCapital India Research (*FC awaited)

Progress on key orders in the OB – EPC projects have mitigated the delay in HAM Projects (Rs mn) 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 3QFY19

Bhojpur-Buxar 4,770 4,770 4,770 4,770 4,740 4,740 4,670

Koilwar-Bhojpur 4,540 4,540 4,540 4,250 4,070 4,070 3,930

Nagina Kashipur 11,560 11,560 11,320 10,940 10,000 9,490 8,660

Varanasi Gorakhpur 8,100 7,850 7,450 6,540 5,740 5,380 4,450

Aligarh Moradabad 5,310 4,680 3,750 2,615 1,480 1,100 270

Dausa Laslot 6,550 5,670 4,850 3,500 2,950 2,400 2,250

Jhansi-Khajuraho - I - - 12,130 11,620 10,900 10,310 9,540

Jhansi-Khajuraho - II - - 11,180 10,720 9,850 9,390 8,360

Chitradurga Davanagere - - 12,070 11,570 10,730 9,300 8,180

Chakeri Allahabad - - - - - - -

Aligarh Kanpur - - - - - - -

Chalakere Hariyar - - - - - - -

Purvanchal Expway - - - - - - 25,200

Mumbai Nagpur - - - - - - -

Total 40,830 39,070 72,060 66,525 60,460 56,180 75,510



SoTP valuation

Business division FY21 EPS Equity Investment Multiple Valuation Per share

Rs Rs mn Rs mn Rs

EPC 12.2

14.0 43,874 171

BOT Road Projects

4,629 1.0 4,629 18

HAM Projects

8,320 0.7 5,824 23

Total

54,327 210






Net sales 18,566 28,963 39,100 48,874

Growth, % 10 56 35 25

Total income 18,566 28,963 39,100 48,874



EBITDA (Core) 3,188 4,229 5,591 6,989

Growth, % 44.3 32.6 32.2 25.0

Margin, % 17.2 14.6 14.3 14.3

Depreciation -772 -869 -1,088 -1,182

EBIT 2,416 3,359 4,503 5,807

Growth, % 44.1 39.0 34.1 29.0

Margin, % 13.0 11.6 11.5 11.9

Interest paid -307 -629 -1,192 -1,672


Pre-tax profit 2,339 3,106 3,637 4,477

Tax provided 171 -652 -1,091 -1,343

Profit after tax 2,510 2,454 2,546 3,134

Net Profit 2,510 2,454 2,546 3,134

Growth, % 19.7 (2.3) 3.8 23.1


Unadj. shares (m) 257 257 257 257

Wtd avg shares (m) 257 257 257 257


Orderbook 73,180 1,39,217 1,50,118 1,51,243

Growth YoY (%) 27% 90% 8% 1%

Book-to-Sales (x) 3.9 4.8 3.8 3.1

Order Inflow 34,236 95,000 50,000 50,000


Cash & bank 1,473 628 442 607

Debtors 6,900 9,919 12,855 16,068

Inventory 1,758 2,380 3,214 4,017

Loans & advances 4,128 5,158 6,427 8,034


Investments 4,948 7,444 10,772 13,268




Net fixed assets 4,175 5,806 5,718 5,036

Total assets 27,864 35,818 43,911 51,514











Pre-tax profit 2,339 3,106 3,637 4,477

Depreciation 772 869 1,088 1,182

Chg in working capital -345 -3,022 -2,841 -3,505

Total tax paid 173 -652 -1,091 -1,343

Cash flow from operating activities 2,940 301 793 811

Capital expenditure -1,391 -2,500 -1,000 -500

Chg in investments -272 -2,496 -3,328 -2,496

Cash flow from investing activities -1,663 -4,996 -4,328 -2,996

Free cash flow 1,277 -4,695 -3,535 -2,185

Equity raised/(repaid) 0 0 0 0

Debt raised/(repaid) 6 4,000 3,500 2,500


Cash flow from financing activities -159 3,850 3,350 2,350

Net chg in cash 1,118 -845 -186 165

Valuation Ratios



Growth, % 19.7 (2.3) 3.8 23.1


FDEPS (INR) 9.8 9.6 9.9 12.2

CEPS (INR) 12.8 13.0 14.2 16.8

CFPS (INR) 10.6 (0.3) 1.8 1.8


Return on equity (%) 14.9 12.8 11.8 12.9




Sales/Net FA (x) 4.8 5.8 6.8 9.1


Receivable days 135.7 125.0 120.0 120.0

Inventory days 34.6 30.0 30.0 30.0

Payable days 188.1 141.3 128.2 121.1


Liquidity ratios

Current ratio (x) 2.3 2.3 2.3 2.4

Quick ratio (x) 2.1 2.1 2.0 2.1




Valuation

PER (x) 16.1 16.5 15.9 12.9

PEG (x) - y-o-y growth 0.8 (7.3) 4.2 0.6

Price/Book (x) 2.2 2.0 1.8 1.6

EV/Net sales (x) 2.2 1.6 1.3 1.1

EV/EBITDA (x) 12.8 10.8 8.8 7.4

EV/EBIT (x) 16.9 13.6 10.9 8.9



KNR Construction (KNRC IN)

The ever-so-strong fundamental story


28 December 2018

KNR is one of our preferred picks in the infrastructure sector. It has one of the strongest balance sheets (leverage 0.2x) and the leanest working capital (debtor days of 60, inventory days of 15, NWC days of 40) in the sector. It is an extremely ‘value conscious’ company, willing to sit through long period without orders unless it gets them in its preferred range. While FY19 has been a modest year for the company due to weak orderbook at the beginning of the year – the strong orderbook assures a bright future. We expect KNR to rerate continuously, driven by it strong focus on value creation through operational efficiency and financial discipline.

Strongest balance sheet in the sector; Cube Highway deal ensures it will remain that way KNR currently has a debt of only Rs 2.4bn (leverage of 0.2x) – making it almost net cash. Its working capital cycle of 26 days (debtor/inventory days of 20/18) is the leanest in the sector. This translates into the strongest balance sheet in the sector – leading to confidence in the sustenance of a strong performance by the company.

KNR recently announced that it has signed a Share Purchase Agreement (SPA) with Cube Highways and Infra to sell its stake in 3 HAM projects – remaining hopeful of getting them to invest in the remaining 2 HAM projects too. Thus, KNR would have to invest only 50% of the equity required in HAM projects – which will also be recouped at the end of construction period of three years at more than book-value. The deal ensures that KNR’s balance sheet does not get stretched while funding the equity for HAM projects – as we are seeing (or expecting) for other developers such as Dilip, PNC, Ashoka and Sadbhav.

FY19 moderate results were in line with expectations; future much more sanguine KNR has reported muted performance in 9MFY19 – delivering only 9%/-11% topline/earnings growth. Q3FY19 results were particularly disappointing – with only 4% yoy growth in topline. FY19 execution has been impacted by KNR’s weak orderbook at the beginning of the year (Rs 23.2bn, 1.2x book-to-sales). While the company had won HAM orders of Rs 40bn in Mar-Apr 2018, the projects were awaiting Financial Closure (FC) and Appointed Date (AD), which meant it had very few orders to execute through FY19 – leading to muted growth. However, with FC achieved for 4/5 projects, and AD expected in next few weeks – we see strong topline growth for KNR in FY20 and beyond – earnings will obviously follow with its strong focus on the balance sheet.

Watch out for higher tax rate and management bandwidth: KNR, like many other infrastructure companies (not all), has been availing the benefit of section 80IA – giving it exemption from paying tax – leading to zero (even negative) tax in earlier years. However, with section 80IA now repealed, it will have to start paying higher taxes (full tax rate of 30% by FY21). This higher tax rate will lead to significantly lower operating cashflows, lower earnings growth (despite strong PBT growth), and lower ROEs. Hence, we believe it will find it incrementally difficult to manage cashflows and maintain the strength of its balance sheet.

Also, KNR has been, hitherto, primarily a small south-India-based road developer (90% of orderbook in 5 southern states, 96% in roads). Now, as it grows bigger in size, it will have to expand its business to new geographies/segments, which will translate into requirements of better equipment and WC management, and a test of its management bandwidth. Whether it will be able to manage a turnover of Rs 35-50bn over 40-50 construction sites (against a turnover of Rs 10-20bn over 15-20 sites) is a litmus test it will have to pass.

Outlook and valuation KNR has corrected significantly over the last year (CY18 -35%), but is still trading at 14x FY21 P/E (adjusting for BOT/HAM value) – a premium to most companies in the sector. While the company possesses a strong orderbook, huge opportunity and robust balance sheet – we believe the current valuations leave little room for any meaningful upside. We upgrade our target multiple to 15x FY21PE (earlier 11x) – highest in our coverage universe and in line with ACIL. Our price target is Rs 280 (earlier Rs 220). We maintain NEUTRAL.

NEUTRAL (Maintain) CMP RS 268 TARGET RS 280 (+4%) COMPANY DATA




52 - WK HI/LO (RS) : 339 / 163


PAR VALUE (RS) : 2



PROMOTERS : 55.4 55.4 55.4

FII / NRI : 3.0 3.4 3.3

FI / MF : 28.7 28.0 27.3

NON PRO : 3.0 3.0 3.5

PUBLIC & OTHERS : 10.0 10.3 10.5


1MTH 3MTH 1YR

ABS 23.5 35.1 -13.3

REL TO BSE 17.4 29.4 -26.1

PRICE VS. SENSEX


KEY FINANCIALS


Net Sales 20,012 25,015 31,269

EBIDTA 3,902 4,127 5,159

Net Profit 2,246 1,685 2,301

EPS, Rs 16.0 12.0 16.4

PER, x 16.8 22.4 16.4

EV/EBIDTA, x 9.8 9.4 7.3

PBV, x 2.7 2.4 2.1

ROE, % 17.7 11.5 13.9




80

130

180

230

280

330


KNR Construction

BSE Sensex


KNR CONSTRUCTION COMPANY UPDATE

The orderbook is slightly weak, as compared to peers … .. largely dominated by South Indian states

Weak growth in FY19, after strong growth FY17/18.... ... along with stable margin profile

One of the strongest balance sheets in the infra space ... ... with leanest working capital cycle


33 36 33 23 20 18 15 55

1.9 2.1

1.9

1.2 1.0 0.9

0.8

2.7

-

0.5

1.0

1.5

2.0

2.5

3.0

-

10

20

30

40

50

60

1Q

FY1

8

2Q

FY1

8

3Q

FY1

8

4Q

FY1

8

1Q

FY1

9

2Q

FY1

9

3Q

FY1

9

Incl

N

ew/L

1

Bo

ok

to S

ales

(x)

Ord

erb

oo

k (R

s b

n)


TN, 20%

AP, 21%

Karnataka, 36%

Kerala, 11%

Others, 11%

9 9 15 19 20 25 31 5%

3%

71%

25%

4%

25% 25%

-10%

0%

10%

20%

30%

40%

50%

60%

70%

80%

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0


% Y

oY

Gro

wth

- R

HS

Rev

enu

e (R

s. B

n)


1,2

61

1,5

29

2,2

96

3,8

61

3,9

02

4,1

27

5,1

59

14%

17%

15%

20% 20%

17% 17%

0%

5%

10%

15%

20%

25%

0

1,000

2,000

3,000

4,000

5,000

6,000


OP

M (

%)

- R

HS

EBIT

DA

(Rs

mn

)

EBITDA OPM (%)

96

2

1,1

67

1,4

41

2,2

03

2,5

03

2,0

03

1,0

03

0.2 0.2 0.2 0.2 0.2

0.1

0.1

-

0.1

0.2

0.3

0.4

-

500

1,000

1,500

2,000

2,500

3,000


Leve

rage

(x)

- R

HS

Stan

dal

on

e d

ebt

(Rs.

mn

)


74

52 39 44 43

45 50

15 14 14

13

13 15 18

153

68

18

50 52

61 67

-

20

40

60

80

100

120

140

160

180


Day

s




KNR has a decent size HAM portfolio – all projects expected to be under execution by 2QFY20

Project (Rs mn) Length (km) Period TPC Equity Grant Debt FC AD

Trichy Kallagam 39 17.0 9,100 962 4,318 3,820 4-Jan-19 Awaited

Meensurutti Chidambram 32 17.0 4,316 455 2,041 1,820 4-Jan-19 Awaited

Chittor Mallavaram 61 17.5 14,555 1,433 7,393 5,730 4-Jan-19 4-Jan-19

Ramsanpalle Mangloor 47 17.0 10,456 1,042 5,245 4,169 4-Oct-18 Awaited

KSHIP 166 9.0 10,153 534 7,485 2,134 Awaited Awaited

Total 345

48,580 4,426 26,481 17,673


The Cube Highways deal leads to significant value creation for the company

Project (Rs mn) Total Equity to

be invested Cube share

(49%) KNR Share

(51%) Consideration for

KNR stake P/BV

Trichy Kallagam 962 472 491 736 1.5

Meensurutti Chidambram 455 223 232 365 1.6

Chittor Mallavaram 1,433 702 731 1,521 2.1

Total 2,850 1,396 1,453 2,621 1.8


Progress on key orders in the OB – HAMs awaiting AD impacted execution in FY19

EPC Projects (Rs mn) 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 3QFY19

Hubli – Hospet Section 6,674 6,539 6,300 5,548 5,205 4,635 4,637

Thiruvananthapuram Bypass 3,774 4,476 4,140 3,048 2,707 2,319 1,741

Dindigul-Bangalore Road 3,530 3,052 2,805 2,131 1,686 1,239 1,077

Arcot Villupuram (Salem Q4) 2,355 2,187 2,049 1,617 1,395 1,250 200

Top 5 Road Projects 20,148 19,046 17,256 13,556 10,993 9,443 10,202

Other Road Projects 8,300 8,236 6,978 3,005 4,453 4,242 1,992

Irrigation Projects 4,940 8,589 9,092 6,705 4,354 4,630 3,199

Total 33,388 35,871 33,326 23,266 19,800 18,315 15,393

HAM Projects (Rs mn) Trichy Kallagam - - - 7,450 7,450 7,450 7,450

Meensurutti Chidambram - - - 3,500 3,500 3,500 3,500

Chittor Mallavaram - - - 11,900 11,900 11,900 11,900

Ramsanpalle Mangloor - - - 8,530 8,530 8,530 8,530

KSHIP - - - 9,000 9,000 9,000 9,000

Total - - - 40,380 40,380 40,380 40,380


SoTP valuation

Business division FY21 EPS Book Value Multiple Valuation Per share

Rs Rs mn Rs mn Rs

EPC 16.4

15.0x 34,511 245

BOT Projects 5,705 0.5x 2,852 20

3 HAM Projects (divested) 2,849 51% 1,453 10

2 HAM Projects

1,576 0.7x 1,103 8

Total Valuation

39,920 280






Net sales 19,317 20,012 25,015 31,269

Growth, % 25 4 25 25

Total income 19,317 20,012 25,015 31,269

Employee expenses -721 -747 -934 -1,167


EBITDA (Core) 3,861 3,902 4,127 5,159

Growth, % 68.2 1.1 5.8 25.0

Margin, % 20.0 19.5 16.5 16.5

Depreciation -1,341 -1,606 -1,854 -2,079

EBIT 2,520 2,296 2,274 3,080

Growth, % 52.1 (8.9) (1.0) 35.5

Margin, % 13.0 11.5 9.1 9.9

Interest paid -231 -294 -282 -188


Pre-tax profit 2,682 2,552 2,407 3,287

Tax provided 39 -306 -722 -986

Profit after tax 2,721 2,246 1,685 2,301

Net Profit 2,721 2,246 1,685 2,301

Growth, % 61.8 (17.5) (25.0) 36.5


Unadj. shares (m) 141 141 141 141

Wtd avg shares (m) 141 141 141 141


Orderbook 23.3 53.3 68.2 77.0

Growth YoY (%) -38% 129% 28% 13%

Book-to-Sales (x) 1.2 2.7 2.7 2.5

Order Inflow 4.9 50.0 40.0 40.0


Cash & bank 438 2,129 1,058 1,100

Debtors 2,320 2,358 3,084 4,283

Inventory 712 713 1,028 1,542

Loans & advances 1,802 1,919 2,741 3,255


Investments 5,356 6,106 7,607 8,357




Net fixed assets 3,936 3,830 3,226 2,147

Total assets 19,658 22,148 23,839 25,779











Pre-tax profit 2,682 2,552 2,407 3,287

Depreciation 1,341 1,606 1,854 2,079

Chg in working capital -1,898 -188 -1,326 -1,555

Total tax paid -553 -306 -722 -986

Cash flow from operating activities 1,572 3,664 2,213 2,825


Chg in investments -5 -750 -1,500 -750


Free cash flow -486 1,423 -538 1,075


Debt raised/(repaid) 762 300 -500 -1,000


Cash flow from financing activities 678 267 -533 -1,033

Net chg in cash 192 1,690 -1,071 42

Valuation Ratios



Growth, % 61.8 (17.5) (25.0) 36.5


FDEPS (INR) 19.3 16.0 12.0 16.4

CEPS (INR) 28.9 27.4 25.2 31.1

CFPS (INR) 8.4 22.1 12.8 17.3


Return on equity (%) 26.5 17.7 11.5 13.9



Receivable days 43.8 43.0 45.0 50.0

Inventory days 13.5 13.0 15.0 18.0

Payable days 134.4 128.3 108.3 96.1


Liquidity ratios

Current ratio (x) 1.5 1.8 1.8 2.0

Quick ratio (x) 1.4 1.7 1.7 1.7

Interest cover (x) 10.9 7.8 8.1 16.4


Net debt/Equity (x) 0.2 0.0 0.1 (0.0)

Valuation

PER (x) 13.9 16.8 22.4 16.4

PEG (x) - y-o-y growth 0.2 (1.0) (0.9) 0.4

Price/Book (x) 3.3 2.7 2.4 2.1

EV/Net sales (x) 2.0 1.9 1.5 1.2

EV/EBITDA (x) 10.3 9.8 9.4 7.3

EV/EBIT (x) 15.7 16.6 17.1 12.2



Sadbhav Engineering (SADE IN)

The promises – ‘might’ be fulfilled – this cycle


25 March 2019

We call SADE ‘a story of unfulfilled promises’. Over the last three years, the management had promised a lot – growth in EPC business, sale of BOT assets, reduction of debt at the standalone and Sadbhav Infra (SIPL) level – all of which remain promises. Topline growth for the EPC business has been 6% over last three years, and 2% in 9MFY19. Debt at the standalone level has come down only marginally in last quarter, and the stake sale in SIPL keeps getting pushed further every time. This has reflected in its stock price; it corrected by 58% over Feb-18 to Feb-19 – biggest correction in our coverage universe. While we have never been excited by the Sadbhav story, and have preferred other “companies” over it – the current valuations make the “stock” highly attractive. If it announces a deal to sell its BOT assets soon (which it should, hopefully), we expect SADE and its stock to outperform most of its peers. Maintain BUY.

FY19 results impacted by external factors – FY20 to be much stronger SADE has reported muted performance in 9MFY19, delivering only 2%/5% topline/earnings growth. Execution in FY19 has been impacted by a delay in commencement of execution on multiple road projects, as NHAI continues to defer awarding the Appointed Date (AD). However, three projects are expected to receive their ADs in Q4FY19 and four in Q1FY20, which should provide reasonable assurance for a strong performance in FY20 and beyond.

SIPL stake sale critical for both the EPC and BOT businesses SIPL has a portfolio of 12 BOT projects, which generate just enough cash to service its debt obligations. SIPL has also built a portfolio of 12 HAM projects that would require further equity infusion of ~Rs 10bn (Rs 13.6bn in total). With holdco debt of Rs 13.5bn at SIPL holdco, it will be difficult for SIPL to arrange this equity infusion amount without increasing the holdco debt. Inability to fund these projects (or delay) will lead to an adverse impact on SADE’s topline growth, with 50% of its current orderbook comprising of SIPL HAM orders.

Hence a stake sale in SIPL (which the company has been promising for over two years now) is highly critical to the performance of both the companies, and both the stocks (SADE and SIPL). This will provide a source of equity infusion for existing HAM projects and growth capital for the future (depending on the magnitude of the stake sale proceeds). It will also assuage any concerns related to SADE’s balance sheet getting stretched further.

EPC could do well and benefit from the mammoth opportunity SADE’s EPC business finally appears to be making decent progress, with recent HAM wins taking the orderbook to Rs 129bn (3.5x book-to-sales) – providing decent revenue visibility. We see stable margins and working-capital cycle. While the single-digit topline growth in FY19 (as expected) might be a tad disappointing, we see much stronger performance in FY20 and beyond, driven by the mammoth opportunity in roads.

Watch out for higher tax rate Sadbhav, like many other infrastructure companies, has been availing the benefit of section 80IA, which provided it with exemption from paying tax – leading to zero (even negative) tax in earlier years. However, with the section repealed, it will have to start paying higher taxes (full tax rate of 30% by FY20), which will significantly lower its operating cashflows, earnings growth, and ROEs. Hence, we believe that it would find it incrementally difficult to manage cashflows and maintain the strength of its balance sheet.

Outlook and valuation: Sadbhav is currently trading at 9x FY21 P/E (adjusting for SIPL stake) – discount to most peers. We believe that even considering all the disappointments and contingencies for future growth, it deserves a higher multiple because of its strong orderbook, huge opportunity, and robust execution track record. We upgrade our target multiple to 13x FY21 PE (earlier 8x) – still at a discount to peers KNR, PNC, Ahluwalia. Our target is Rs 315 (BOT Rs 101 + EPC Rs 214). We maintain BUY.

BUY (Maintain) CMP RS 247 TARGET Rs 315 (+28%)

COMPANY DATA




52 - WK HI/LO (RS) : 408 /162


PAR VALUE (RS) : 1



PROMOTERS : 46.6 46.5 46.5

FII / NRI : 15.9 16.8 16.6

FI / MF : 21.9 20.7 21.1

NON PRO : 0.5 0.7 0.6

PUBLIC & OTHERS : 15.1 15.4 15.3


1MTH 3MTH 1YR

ABS 50.7 23.8 -35.3

REL TO BSE 44.5 18.0 -48.2

PRICE VS. SENSEX


KEY FINANCIALS


Net Sales 37,504 43,130 50,031

EBIDTA 4,388 4,960 5,754

Net Profit 2,434 2,286 2,824

EPS, Rs 14.2 13.3 16.5

PER, x 17.4 18.5 15.0

EV/EBIDTA, x 12.7 11.1 9.4

P/BV, x 2.0 1.8 1.6

ROE, % 11.6 9.9 10.9




0 20 40 60 80

100 120 140 160 180


Sadbhav BSE Sensex


SADHBHAV ENGINEERING COMPANY UPDATE

EPC order book provides decent revenue visibility… … and is dominated by the recently won HAM projects

But for the surge of HAM orders in Feb-Apr 2018, SADE has reported muted order inflow over the last nine quarters

Order Inflow (Rs mn) 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 3QFY19

Transport

BOT/HAM 22,730 8,500 15,750 - - 31,800 - - -

EPC - - - 1,410 18,750 11,485 9,950 16,200 -

Irrigation - - - - 6,742 - - - -

Mining - - - - - - 3,171 - -

Total Inflow 22,730 8,500 15,750 1,410 25,492 43,285 13,121 16,200 -

Lackluster growth in FY19, after muted FY16-17-18… … while margins have remained stable

Leverage has gradually come down, and is at comfortable levels … with working capital getting a bit stretched recently


77 96 132 137 137 129

2.2

2.7

3.7 3.9 3.9 3.5

-

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

-

20

40

60

80

100

120

140

160

2Q

FY1

8

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FY1

8

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FY1

8

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FY1

9

2Q

FY1

9

3Q

FY1

9

Bo

ok

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(x)

Ord

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oo

k (R

s b

n)


Roads - BOT/HAM,

50%

Roads - EPC, 28%

Irrigation, 4%

Mining, 18%

30 32 33 35 38 43 50

26%

7%

4% 6%

7%

15% 16%

0%

5%

10%

15%

20%

25%

30%

0.0

10.0

20.0

30.0

40.0

50.0

60.0


% Y

oY

Gro

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HS

Rev

enu

e (R

s. B

n)


3,0

02

3,3

48

3,5

56

4,1

51

4,3

88

4,9

60

5,7

54

10.1%

10.5% 10.7%

11.8% 11.7%

11.5% 11.5%

9.0%

9.5%

10.0%

10.5%

11.0%

11.5%

12.0%

12.5%

0

1,000

2,000

3,000

4,000

5,000

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7,000


OP

M (

%)

- R

HS

EBIT

DA

(Rs

mn

)

EBITDA OPM (%)

10

,98

4

12

,20

7

17

,77

1

14

,84

7

14

,34

7

13

,84

7

12

,84

7

0.8 0.8

1.1

0.8

0.7

0.6

0.5

-

0.2

0.4

0.6

0.8

1.0

1.2

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000


Leve

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(x)

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Stan

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(Rs.

mn

)


101 111

151

173 164

156 149

23 20 15 15 16 16 14

138

169

211 233

220 207 192

-

50

100

150

200

250


Day

s




Toll collection growth for the portfolio has been in line with the industry

Toll Collection (Rs mn) 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 3QFY19 % YoY

Ahmedabad Ring road 211.3 250.4 245.3 238.8 232.2 242.1 -3%

Aurangabad Jalna 86.2 95.5 102.2 101.9 94.8 100.1 5%

Bijapur Hungund 296.7 300.2 318.9 315.9 315.3 295.7 -1%

Hyderabad Yadgiri 158.5 185.2 179.3 201.8 170.7 193.1 4%

Maharashtra Border Check Post 432.2 492.9 493.5 582.4 573.9 567.4 15%

Dhule Palasner 440.8 475.4 474.7 457.9 483.6 481.9 1%

Rohtak Panipat 250.1 284.4 290.0 302.5 264.3 262.4 -8%

Sreenathji Udaipur 264.7 273.1 261.7 282.4 280.4 310.8 14%

Rajsamand Bhilwara 110.3 107.5 104.0 115.2 120.1 133.5 24%

Rohtak Hisar 135.5 152.6 150.3 151.1 150.2 170.6 12%

SIPL Toll Collection 2,386 2,617 2,620 2,750 2,686 2,758

Like for Like 1,444 1,591 1,610 2,168 2,112 2,190

Total Growth 11% 17% 10% 14% 13% 5% Total Like-for-like growth 10% 16% 10% 10% 8% 3% Source: Company, PhillipCapital India Research

SIPL has a large HAM Portfolio – many projects still awaiting their FC/AD

HAM Portfolio (Rs mn)

Length

(km)

Project

cost

Project

Debt

Project

Equity Grant

FC AD

Rampur - Kathgodam - I 43.0 7,400 3,500 940 2,960 Nov-16 Mar-17

Rampur - Kathgodam - II 50.0 6,600 3,200 760 2,640 Nov-16 Oct-17

Bhavnagar – Talaja 48.0 8,190 3,931 983 3,276 Dec-16 Feb-17

Una – Kodinar 51.0 6,230 2,990 748 2,492 Dec-16 Feb-17

BRT Tiger Reserve - Blore 170.0 10,080 4,840 1,208 4,032 May-17 Aug-17

Waranga Mahagaon 66.8 10,710 5,140 1,290 4,280 Nov-17 May-18

Udaipur Bypass 23.8 8,910 4,270 1,076 3,564 Oct-17 Nov-17

Jodhpur Ring Road 74.6 11,610 5,309 1,657 4,644 Jul-18 Dec-18

Vizag Port Road 12.7 5,490 2,635 659 2,196 Awaited Awaited

Bhimasar Jn - Airport Jn 59.5 11,520 5,530 1,382 4,608 Nov-18 Awaited

Tumlur Shivamogga 48.5 10,080 4,838 1,210 4,032 Awaited Awaited

Vadodara Kim expressway 24.3 14,040 6,739 1,685 5,616 Awaited Awaited

Total 672.2 1,10,860 52,923 13,597 44,340


SADE Valuation

Division FY19 EPS

(Rs) Equity Value

(Rs mn) Multiple Equity Value

(Rs mn) Value per share (Rs)

EPC business 16.5

13.0 36,716 214

BOT business (SIPL)

32,053 0.8 17,601 103

Total

54,317 315






Net sales 35,051 37,504 43,130 50,031

Growth, % 6 7 15 16

Total income 35,051 37,504 43,130 50,031



EBITDA (Core) 4,151 4,388 4,960 5,754

Growth, % 16.7 5.7 13.0 16.0

Margin, % 11.8 11.7 11.5 11.5

Depreciation -979 -1,002 -1,132 -1,262

EBIT 3,172 3,386 3,828 4,491

Growth, % 24.1 6.7 13.1 17.3

Margin, % 9.1 9.0 8.9 9.0

Interest paid -1,167 -1,131 -1,057 -1,001


Pre-tax profit 2,163 2,705 3,265 4,035

Tax provided 44 -270 -980 -1,210

Net Profit 2,207 2,434 2,286 2,824

Growth, % 17.5 10.3 (6.1) 23.6

Unadj. shares (m) 172 172 172 172

Wtd avg shares (m) 172 172 172 172


Orderbook 132.5 125.0 131.9 156.8

Growth YoY (%) 72% -6% 5% 19%

Book-to-Sales (x) 3.8 3.3 3.1 3.1

Order Inflow 90.7 30.0 50.0 75.0


Cash & bank 127 1,111 1,157 981

Debtors 16,280 17,468 19,497 21,246

Inventory 1,643 1,747 2,009 1,782

Loans & advances 10,953 11,303 11,816 13,707

Other current assets 2,907 2,907 2,907 2,907


Investments 5,775 5,775 5,775 5,775




Net fixed assets 5,028 5,025 4,893 4,631

Total assets 43,706 46,330 49,048 52,022











Pre-tax profit 2,163 2,705 3,265 4,035

Depreciation 979 1,002 1,132 1,262

Chg in working capital 1,160 -853 -1,767 -2,158

Total tax paid -474 -270 -980 -1,210


Capital expenditure -771 -1,000 -1,000 -1,000

Chg in investments -80 0 0 0

Cash flow from investing activities -851 -1,000 -1,000 -1,000

Free cash flow 2,977 1,583 651 929


Debt raised/(repaid) -2,924 -500 -500 -1,000


Other financing activities -49 0 0 0

Cash flow from financing activities -3,079 -599 -605 -1,105

Net chg in cash -103 985 46 -177

Valuation Ratios



Growth, % 17.5 10.3 (6.1) 23.6


FDEPS (INR) 12.9 14.2 13.3 16.5

CEPS (INR) 18.6 20.0 19.9 23.8

CFPS (INR) 21.4 12.4 6.7 8.1

DPS (INR) 0.5 0.5 0.5 0.5


Return on equity (%) 11.8 11.6 9.9 10.9



Receivable days 169.5 170.0 165.0 155.0

Inventory days 17.1 17.0 17.0 13.0

Payable days 120.1 121.0 114.9 109.4


Liquidity ratios

Current ratio (x) 3.1 3.1 3.1 3.1

Quick ratio (x) 3.0 3.0 2.9 2.9


Dividend cover (x) 24.5 27.0 25.4 31.3



Valuation

PER (x) 19.2 17.4 18.5 15.0

Price/Book (x) 2.3 2.0 1.8 1.6

EV/Net sales (x) 1.6 1.5 1.3 1.1

EV/EBITDA (x) 13.8 12.7 11.1 9.4

EV/EBIT (x) 18.0 16.4 14.4 12.1



Ashoka Buildcon (ASBL IN)

Good business, but not without concerns …


25 March 2019

Ashoka Buildcon has an admirable business profile – a coveted BOT portfolio reporting strong traffic growth, and a robust EPC business, with strong orderbook and lean balance sheet. The company has reported a strong FY19 YTD – we expect the company to report robust earnings growth over the next few years, driven by its EPC + BOT business, and the mammoth opportunity in the roads segment. There remain, however, concerns regarding the company foraying into unrelated businesses (real estate, CGD) and the potential dilution of the company’s profile, to provide exit to SBI-McQ from its ACL business. Nonetheless, we believe the current valuations price those concerns to a large extent, and offer a favourable risk-reward profile.

Robust performance in FY19; strong orderbook and balance sheet to drive earnings ahead

Ashoka has reported strong performance in 9MFY19 – delivering a whipping 44%/53%

topline/earnings growth. The results for Q3FY19 were also strong – with 62% yoy growth in

topline. The growth was driven by strong order wins over the last few quarters. With ADs

expected for the remaining three HAM projects by Q1FY20 (FC for all five achieved) – we see

a strong performance in FY20 and beyond too. Its orderbook at Rs 97.5bn – stands at a

handsome 3.0x book-to-sales. Funding the HAM projects has led to an increase in

standalone debt to Rs 5.9bn – still at comfortable leverage of 0.3x. All along, the working

capital cycle remains in control – providing high level of comfort with the balance sheet. Coveted BOT portfolio in ACL; Exit for SBI-McQ cropping up as a serious concern Ashoka has reported strong traffic growth in its BOT portfolio (ACL), over the last few quarters. Dhankuni and Sambalpur projects, which were hitherto reeling under the pressure of mining ban in Odisha and Chhattisgarh, are now reporting robust traffic growth. We view the strong growth in toll collections for the overall portfolio as a testimony to its superior quality, which should ensure healthy returns over the life of its projects.

Ashoka holds 61% stake in ACL; 39% is held by SBI-McQ, which had invested Rs 8bn in ACL over FY11-14. Under the agreement, Ashoka needs to provide exit to SBI-McQ by June-19, or a guaranteed IRR – which translates into valuations of Rs 13.6bn for SBI-McQ’s stake in ACL. Given the market apathy towards BOT IPOs (SIPL, BRNL, IRB InvIT) – Ashoka will have to ‘pay’ the amount to SBI-McQ or do an asset swap (if SBI-McQ agrees). Both options warrant a significant negative impact on valuations of the company – given the much higher outflow expected compared to ACL’s valuation. We expect the deal overhang to remain on the stock, as the company searches for an option to minimize its impact.

Concern of ‘increasing business risk’ pacified for the time being We had downgraded Ashoka in April-17 (read note here) on its foray into unrelated businesses (city-gas distribution and real-estate projects) increasing the risk associated with its business. We had highlighted that it was THIS very ‘indiscriminate’ nature of investments that led to the downfall of infrastructure companies like IVRCL, Gammon, GMR, GVK, and JP Associates in the last cycle. Much to our and investors’ relief, the project was eventually cancelled. We hope the management would refrain from any such steps in the future – we would keep a keen eye on any such further ‘interests’.

Outlook and valuation Ashoka has corrected significantly over the last year (CY18, -25%), and is currently trading at 6x FY21 P/E (adjusting for ACL/ABL projects’ valuation) – one of the cheapest in the sector. We believe the stock deserves higher multiple with its strong orderbook, huge opportunity and robust balance sheet. We upgrade our target multiple to 12x FY21 PE (earlier 10x) – still at a discount to peers like KNR, PNC and Ahluwalia. Our price target is Rs 190 (BOT Rs 65 + EPC Rs 125). We maintain BUY.





52 - WK HI/LO (RS) : 197 / 93


PAR VALUE (RS) : 5



PROMOTERS : 54.3 54.3 54.1

FII / NRI : 4.3 4.6 4.9

FI / MF : 31.5 30.5 30.3

NON PRO : 4.3 5.0 4.7



1MTH 3MTH 1YR

ABS 21.9 7.2 -10.2

REL TO BSE 15.7 1.4 -23.1

PRICE VS. SENSEX


KEY FINANCIALS


Net Sales 35,500 46,150 55,380

EBIDTA 4,615 5,769 6,922

Net Profit 2,541 2,690 2,903

EPS, Rs 10.0 9.6 10.3

PER, x 12.8 13.5 12.5

EV/EBIDTA, x 9.2 8.3 7.2

P/BV, x 1.7 1.5 1.4

ROE, % 13.1 11.2 10.8




50

70

90

110

130

150

170

Apr-16 Apr-17 Apr-18 Ashoka Build BSE Sensex

http://backoffice.phillipcapital.in/Backoffice/Researchfiles/PC_-_Ashoka_Buildcon_Company_Update_-_Apr_2017_20170410153335.pdf


ASHOKA BUILDCON COMPANY UPDATE

Decent orderbook at 3x book-to-sales ... concentrated in road segment

Strong performance YTD in FY19, after muted FY16/17 … with very stable margin profile

Leverage has remained under control … with WC a bit stretched recently, but normalizing

The portfolio has reported strong toll growth over the last five quarters

Rs mn 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 3QFY19 YoY

Belgaum Dharwad 208 231 224 230 218 233 1%

Dhankuni Kharagpur 757 783 849 893 888 867 11%

Bhandara 150 168 174 167 160 168 0%

Durg bypass 185 202 207 195 193 199 -1%

Jarora Nayagaon 503 530 523 516 516 497 -6%

Sambalpur baragarh 142 166 180 180 173 181 9%

Total toll collection 1,945 2,080 2,158 2,181 2,148 2,146 3%

Total toll growth 14% 20% 12% 11% 10% 3%

Like for like growth 14% 20% 12% 11% 10% 3%

61 59 58 109 99 95 98

2.8 2.5 2.4

4.5

3.5

3.0 3.0

-

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

-

20

40

60

80

100

120

2Q

FY1

8

3Q

FY1

8

4Q

FY1

8

1Q

FY1

9

2Q

FY1

9

3Q

FY1

9

Incl

N

ew/L

1

Bo

ok

-to

- s

ales

(x)

Ord

erb

oo

k (R

s b

n)


Roads - BOT/HAM,

51%

Roads - EPC, 27%

Power, 22%

20 19 20 24 35 46 55

26%

-1% 4%

22%

45%

30%

20%

-10%

0%

10%

20%

30%

40%

50%

0.0

10.0

20.0

30.0

40.0

50.0

60.0


% Y

oY

Gro

wth

- R

HS

Rev

enu

e (R

s. B

n)


2,4

98

2,4

78

2,4

27

2,9

34

4,6

15

5,7

69

6,9

22

13%

13%

12% 12%

13%

13% 13%

10%

11%

12%

13%

14%

15%

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000


OP

M (

%)

- R

HS

EBIT

DA

(Rs

mn

) EBITDA OPM (%)

4 4 2 2 7 12 14

0.4

0.3

0.1 0.1

0.3

0.5 0.5

-

0.2

0.4

0.6

0.8

1.0

-

2

4

6

8

10

12

14

16


Leve

rage

(x)

- R

HS

Stan

dal

on

e d

ebt

(Rsm

n)


62

99 106

119 120 117 119

85

119

80

17 20 22 22 15

87 102

67 68 78

86

-

20

40

60

80

100

120

140


Day

s




Ashoka has a diversified BOT/Annuity/HAM portfolio

Project (Rs mn) Type Length (km) Stake (%) TPC Debt Project Equity Grant Expected COD Period

ACL Projects Bhandara Toll 94.2 51.0 5,350 3,750 1,500 100 Oct-10 20

Jarora Nayagaon Toll 85.1 62.0 8,350 5,620 2,730 (153) Sep-09 20

Belgaum Dharwad Toll 75.7 100.0 6,940 4,790 1,850 (310) May-11 30

Durg bypass Toll 92.1 51.0 5,870 4,100 1,770 - Feb-12 20

Sambalpur baragarh Toll 101.9 100.0 11,420 8,100 3,320 13 Sep-15 30

Dhankuni Kharagpur Toll 140.1 100.0 22,050 17,400 4,650 (1,261) Apr-12 25

Chennai ORR Annuity 30.5 50.0 14,500 10,800 1,730 1,970 - 20

Kharar Ludhiana HAM 82.7 100.0 13,880 6,000 1,634 6,246 UC 20

Anandpuram HAM

100.0 10,400 4,150 1,570 4,680 UC Total

619

98,760 64,710 20,754

ABL Projects Type Length (km) Stake (%) TPC Debt Project Equity Grant Expected COD Period

Mudhol Nipani (KSHIP) Annuity 107.9 100.0 4,710 2,570 780 1,360 Dec-16 10

Bagewadi - Saundatti Annuity 63.3 100.0 3,280 1,980 550 750 UC 10

Hungund - Talikot Annuity 58.0 100.0 2,940 1,990 293 657 UC 10

Total

229

10,930 6,540 1,623 2,767

New HAMs Length BPC Debt Equity Grant Period FC AD

Khairatunda - Barwa Adda 39.8 7,117 2,700 977 3,440 17.0 26-Sep-18 08-Mar-19 Tumkur Shaivamogga 54.0 7,406 2,750 988 3,668 17.0 17-Sep-18 Awaited Tumkur Shaivamogga 56.7 10,064 3,850 1,340 4,874 17.0 17-Sep-18 Awaited Belgaum Khanapur 30.0 7,457 2,950 1,082 3,425 17.5 17-Sep-18 Awaited Vadodara Kim expressway 13.0 14,831 6,000 2,083 6,748 17.5 08-Oct-18 10-Dec-18

Total

46,875 18,250 6,470 22,155


SoTP valuation

Project Equity Value

(Rs mn) Stake (%)

Ashoka Equity Value

(Rs mn) Per Share (Rs) Valuation methodology

ABL BOT Projects

Jarora Nayagaon 10,122 38 3,816 13.6 FCFE @ 13% CoE

KSHIP 501 100 501 1.8 FCFE @ 13% CoE

Two Annuity Projects 843 100 843 3.0 1x Book Value

Five HAM Projects 3,204 100 2,243 8.0 0.7x Book Value

Value to Ashoka Buildcon 21,140 11,932 42.5

ACL BOT Projects

Bhandara 1,134 51 578 2.1 FCFE @ 13% CoE

Jarora Nayagaon 10,122 62 6,306 22.5 FCFE @ 13% CoE

Belgaum Dharwad 3,103 100 3,103 11.1 FCFE @ 13% CoE

Durg bypass 1,943 51 991 3.5 FCFE @ 13% CoE

Sambalpur baragarh 2,961 100 2,961 10.5 FCFE @ 13% CoE

Dhankuni Kharagpur 6,574 100 6,574 23.4 FCFE @ 13% CoE

Chennai ORR 2,147 50 1,073 3.8 FCFE @ 13% CoE

Total 27,984

21,587 76.9

SBI-McQ Stake value in ACL 13,592

Net Value to Ashoka Buildcon 7,995 28.5

Holding company discount

20% 6,396 22.8

Value to Ashoka Buildcon 100.0% 6,396 22.8

ABL EPC Division 10x FY21 P/E

EPC division PAT 2,903 12.0 34,834 124.1 10x FY21 P/E

Value to Ashoka Buildcon 34,834 124.0

Total value of Ashoka Buildcon 53,162 190.0






Net sales 24,483 35,500 46,150 55,380

Growth, % 22 45 30 20

Total income 24,483 35,500 46,150 55,380

Raw material expenses -8,178 -11,859 -15,416 -18,500



EBITDA (Core) 2,934 4,615 5,769 6,922

Growth, % 20.9 57.3 25.0 20.0

Margin, % 12.0 13.0 12.5 12.5

Depreciation -532 -723 -1,003 -1,203

EBIT 2,402 3,892 4,766 5,719

Growth, % 25.2 62.0 22.5 20.0

Margin, % 9.8 11.0 10.3 10.3

Interest paid -485 -870 -1,920 -2,620

Other Non-Operating Income 978 950 998 1,047

Non-recurring Items 0 -398 0 0

Pre-tax profit 2,894 3,574 3,843 4,147

Tax provided -524 -1,033 -1,153 -1,244

Profit after tax 2,370 2,541 2,690 2,903


Net Profit 2,370 2,541 2,690 2,903

Growth, % 34.6 19.0 (4.6) 7.9

Unadj. shares (m) 281 281 281 281

Wtd avg shares (m) 281 281 281 281


Orderbook 58,489 97,989 1,31,839 1,61,460

Growth YoY (%) -17% 68% 35% 22%

Book-to-Sales (x) 2.4 2.8 2.9 2.9

Order Inflow 12,924 75,000 80,000 85,000


Cash & bank 1,235 931 618 817

Debtors 10,117 13,130 16,437 19,724

Inventory 1,459 2,431 3,161 3,490

Loans & advances 8,077 10,699 13,276 15,173



Investments 13,182 16,440 20,316 21,933




Net fixed assets 2,324 3,601 4,098 3,895

Total assets 39,269 50,107 60,780 67,907





Paid-up capital 936 1,404 1,404 1,404






Pre-tax profit 2,894 3,574 3,843 4,147

Depreciation 532 723 1,003 1,203

Chg in working capital -393 -3,614 -3,434 -3,093

Total tax paid -570 -1,033 -1,153 -1,244

Cash flow from operating activities 2,464 -350 260 1,013


Chg in investments -117 -3,258 -3,876 -1,617


Free cash flow 1,331 -5,608 -5,116 -1,604

Equity raised/(repaid) 1,415 0 0 0

Debt raised/(repaid) -406 5,500 5,000 2,000

Other financing activities -1,547 0 0 0

Cash flow from financing activities -734 5,303 4,803 1,803

Net chg in cash 597 -304 -312 199

Valuation Ratios



Growth, % 34.6 19.0 (4.6) 7.9


FDEPS (INR) 8.4 10.0 9.6 10.3

CEPS (INR) 10.3 14.0 13.2 14.6

CFPS (INR) 5.3 (4.6) (2.6) (0.1)


Return on equity (%) 12.3 13.1 11.2 10.8



Receivable days 150.8 135.0 130.0 130.0

Inventory days 21.8 25.0 25.0 23.0

Payable days 301.6 245.8 216.7 198.8


Liquidity ratios

Current ratio (x) 1.3 1.4 1.5 1.5

Quick ratio (x) 1.2 1.3 1.3 1.4




Valuation

PER (x) 15.3 12.8 13.5 12.5

Price/Book (x) 1.9 1.7 1.5 1.4

EV/Net sales (x) 1.5 1.2 1.0 0.9

EV/EBITDA (x) 12.5 9.2 8.3 7.2

EV/EBIT (x) 15.2 10.9 10.0 8.7



IRB Infrastructure (IRB IN)

A weak ‘left-over’ business


25 March 2019

IRB has (or rather, had) a coveted BOT portfolio of 20 BOT projects across the country. Its expertise in traffic forecast and toll management, along with strong execution capability, was a potent combination. However, both its EPC and BOT businesses currently face serious growth concerns. The EPC orderbook, at 3x book-to-sales, does not exude confidence – as very few BOT projects are expected to be awarded in the Bharatmala Paryojna. Toll collection on the depleted BOT portfolio remains muted. More importantly, IRB migrating to HAM/EPC projects (not by choice of course) means it is abandoning its core strength of managing the life-cycle of a BOT project. We maintain NEUTRAL on lack of near-to-medium term earnings growth visibility; inexpensive valuations keep the downside limited.

InvIT listing boosts balance sheet, but weakens BOT portfolio IRB accrued gross cash of Rs 22bn through InvIT, by hiving-off of seven of its BOT projects into ‘IRB InvIT’. This led to gross debt reduction of Rs 43bn, reducing leverage to 2.4x (FY18) from 3.2x (FY16) and providing it with growth capital to invest in future projects.

However, because of the InvIT listing, IRB is ‘left’ with 13 BOT projects – eight under construction (or recently commissioned). Of the five remaining, the cash-cow Mumbai-Pune will be decommissioned in FY20, leading to a significant reduction in toll revenues and cash-flow – which will be almost impossible to substitute by the new projects in its portfolio. In fact, on our numbers, IRB will report a NET LOSS in FY21 – due to the exit of Mumbai-Pune and commencement of premium payment at its Rajasthan projects – unless the company divests any of it loss-making projects (as proposed, to the InvIT).

So while we see the InvIT listing as big positive step for the infrastructure sector (read our detailed report on InvIT here), and it has significantly boosted IRB’s balance sheet, it has surely led to a deterioration of its overall growth profile.

Mammoth opportunity in roads, but nor for IRB

Most road developers are expected to benefit from the surge in order awards expected in the road segment from the 83,000km ‘Bharatmala Paryojna’. However, less than 10% of the projects are expected to be awarded on a BOT basis. It is this lack of opportunity that makes IRB appear lacking growth options. While the company has moved to HAM projects (which it once derided), we see intense competition there as an impediment to meaningful returns. In TOT projects, too, IRB will find it extremely difficult to beat foreign players (as already seen in the first two rounds) and generate higher returns than its cost of capital. So while the orderbook (Rs 122bn, 2.9x book-to-sales) provides decent revenue visibility – it is the future growth potential (with the absence of BOT projects) that remains our primary concern.

Vadodara and Agra projects continue to struggle In IRB’s ‘leftover’ BOT portfolio, Vadodara and Agra projects continue to report muted traffic growth and financials that are below expectations. Considering that the investors concerns (aggressive bidding in Vadodara and parallel highway in Agra project) have come true, concerns will now surface about management’s repetitive aggressive bidding for projects.

Outlook and valuation With a mix of BOT and HAM projects in its portfolio, and share of EPC revenues increasing in its overall revenues, there is now little to differentiate between IRB and other players like Ashoka/Sadbhav. We prefer pure EPC companies (like NCC, Ahluwalia) or companies with a better mix of EPC/BOT/HAM projects (like Ashoka, Sadbhav) than IRB – which has had to abandon its core competency of managing BOT projects’ lifecycle.

IRB’s stock is currently trading at 9x FY20 P/E – a significant discount to peers; perhaps an acknowledgement of its lack of growth options. We do not see much upside from current levels, but inexpensive valuations will keep downside limited. We upgrade our target multiple to 10x FY21 PE (earlier 9x) – still the lowest in our coverage universe. We maintain our NEUTRAL rating with a target of Rs 170 (BOT Rs 20 + EPC Rs 150).

NEUTRAL (Maintain) CMP RS 146 TARGET RS 170 (+16%) COMPANY DATA




52 - WK HI/LO (RS) : 286 / 110


PAR VALUE (RS) : 10



PROMOTERS : 57.5 57.5 57.4

FII / NRI : 23.0 21.0 20.7

FI / MF : 12.1 13.3 14.1

NON PRO : 1.3 1.8 2.0



1MTH 3MTH 1YR

ABS 24.8 -0.8 -30.8

REL TO BSE 18.6 -6.6 -43.7

PRICE VS. SENSEX


KEY FINANCIALS


Net Sales 65,979 68,927 68,055

EBIDTA 29,805 28,332 24,382

Net Profit 9,002 5,859 -574

EPS, Rs 25.6 16.7 (1.6)

PER, x 5.7 8.8 (89.3)

EV/EBIDTA, x 6.6 7.8 9.4

P/BV, x 0.8 0.7 0.6

ROE, % 14.0 7.6 (0.7)




0

30

60

90

120

150

180


IRB Infra (LHS) BSE Sensex

http://backoffice.phillipcapital.in/Backoffice/Researchfiles/PC_-_IRB_Infrastructure_-_Apr_2017_20170427162506.pdf


IRB INFRASTRUCTURE COMPANY UPDATE

The transfer of projects to InvIT had mixed impact on IRB’s health


Like-for-like toll collection in the ‘left-over’ portfolio has been muted

Gross Toll Revenue (Rs mn) 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 3QFY19 YoY QoQ

Mumbai - Pune 2,278 2,134 2,332 2,271 2,309 2,148 2,372 2% 10% Vadodara Ahmedabad 916 865 1,007 1,020 1,041 982 1,126 12% 15% Agra Etawah 247 243 286 247 231 204 231 -19% 13% Other Projects 227 216 248 247 245 248 251 1% 1% Kaithal Rajasthan - 42 167 161 166 189 217 30% 15% Solapur Yedeshi - - - 47 174 169 167 -1% 3 Rajasthan Projects - 115 731 1,113 1,260 1,199 1,166 60% -3%

Total 3,668 3,615 4,771 5,106 5,426 5,139 5,530 16% 8%

Like for like comparison 3,421 3,458 3,873 3,785 3,826 3,582 3,980 3% 11%

Like for like excl Mumbai-Pune 1,143 1,324 1,541 1,514 1,517 1,434 1,608 4% 12%

Total Growth 23% 23% 48% 58% 48% 42% 16%

Like for like Growth 15% 17% 20% 17% 4% 4% 3%

Like for like Growth excl Mumbai-Pune 4% 10% 11% 8% 9% 8% 4%


Over next two years, Mumbai-Pune going out and start of premium on Rajasthan projects will impact the BOT financials

BOT Revenue estimates

Rs mn FY18 FY19E FY20E FY21E

Mumbai - Pune 9,022 9,203 3,414 -

Vadodara Ahmedabad 3,830 4,375 4,915 5,524

Agra Etawah 1,023 807 1,185 1,294

Goa Kundapur - - 1,858 2,025

Solapur Yedeshi - 870 949 1,033

Yedeshi Aurangabad - - 2,299 2,507

Kaithal - Rajasthan 374 749 816 978

3 Rajasthan Projects 2,010 5,499 6,005 2,954

InvIT Projects - - - -

Other Projects 936 1,128 948 1,048

Less Rev share (915) (1,473) (1,556) (2,070)

Total BOT Revenue 16,280 21,157 20,832 15,295

BOT PAT estimates

Rs mn FY18 FY19E FY20E FY21E

Mumbai - Pune 5,220 4,228 1,879 -

Vadodara Ahmedabad (3,965) (4,888) (5,833) (6,901)

Agra Etawah 18 (247) (1,369) (1,358)

Goa Kundapur - - (287) (201)

Solapur Yedeshi - (351) (312) (269)

Yedeshi Aurangabad - - (391) (288)

Kaithal - Rajasthan (584) (944) (916) (849)

3 Rajasthan Projects 1,542 4,022 4,423 (310)

InvIT Projects - - - -

Other Projects 898 579 515 577

Total BOT Revenue 3,129 2,400 (2,290) (9,599)


IRB InvIT

Benefits to IRB

Cash accrual of Rs 22bn

Gross debt reduction of Rs

43bn

Losses to IRB

Topline reduction of Rs

13bn

Growing projects of the

portfolio go out



EPC order book provides decent revenue visibility … … over 2/3rd

of the orderbook is yet to start execution


SOTP valuation

DCF Valuation Project Cost

(Rs mn)

Length

(kms)

Equity Value

(Rs mn)

Per share

(Rs)

Operational BOT Projects NPV at 13% CoE

Pune-Nashik 737 30 452 1 Thane-GHB 2,469 15 418 1 Mumbai-Pune 13,017 95 - - Vadodara - Ahmedabad 48,800 196 (14,178) (40) Total Value 65,023 336 (13,309) (38)

New BOT projects NPV at 15% CoE

Goa - Kundapur 21,030 192 7,098 20 Solapur Yedeshi 13,030 99 2,712 8 Yedeshi Aurangabad 26,420 190 8,620 25 Kaithal - Rajasthan 20,660 166 (1,605) (5) Agra - Etawah 25,230 125 (5,925) (17) KUA-1 21,000 125 2,273 6 KUA-2 20,880 114 3,312 9 KUA-3 15,260 90 1,444 4 Total Value 1,63,510 1,100 17,928 51

3 HAM Projects 55,650 119 4,690 13

Total BOT Value 9,310 26

E&C Business 10x FY21 P/E

FY20E PAT 6,588 Assumed P/E 10 Value to IRB 65,879 187

Total EPC Value 65,879 187

Total IRB Equity Value 75,189 214

Discount 20%

Total IRB Equity Value 60,151 170


Break-up of PC estimates

Segmental Break-up (Rs mn) FY18 FY19E FY20E FY21E

EPC Segment

Revenue 39,734 43,711 48,095 52,760

EBITDA 12,544 11,365 11,062 12,135

EBITDA Margins 32% 26% 23% 23%

PAT 6,932 5,706 5,999 6,588

BOT Segment

Revenue 18,894 22,268 20,832 15,295

EBITDA 15,937 18,440 17,270 12,247

EBITDA Margins 84% 83% 83% 80%

PAT 2,264 3,296 (140) (7,162)


82 74 151 141 132 122

2.0 1.8

3.7 3.8 3.5

2.9

-

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

-

20

40

60

80

100

120

140

160

2Q

FY1

8

3Q

FY1

8

4Q

FY1

8

1Q

FY1

9

2Q

FY1

9

3Q

FY1

9

Bo

ok

-to

- s

ales

(x)

Ord

erb

oo

k (R

s b

n)


Ongoing BOT, 33%

Yet to start - BOT, 25%

Yet to start - HAM, 42%



Financials (Consolidated)


Net sales 56,941 65,979 68,927 68,055

Growth, % -3 16 4 -1

Total income 56,941 65,979 68,927 68,055

Raw material expenses -23,966 -31,230 -35,431 -38,574



EBITDA (Core) 26,794 29,805 28,332 24,382

Growth, % (12.1) 11.2 (4.9) (13.9)

Margin, % 47.1 45.2 41.1 35.8

Depreciation -5,440 -5,444 -5,800 -7,345

EBIT 21,353 24,361 22,532 17,037

Growth, % (2.7) 14.1 (7.5) (24.4)

Margin, % 37.5 36.9 32.7 25.0

Interest paid -9,667 -11,011 -15,314 -17,840

Other Non-Operating Income 1,267 0 0 0

Pre-tax profit 14,640 15,116 8,847 728

Tax provided -5,444 -6,113 -2,988 -1,302

Profit after tax 9,197 9,002 5,859 -574


Net Profit 9,197 9,002 5,859 -574

Growth, % 28.5 (2.1) (34.9) (109.8)

Unadj. shares (m) 351 351 351 351

Wtd avg shares (m) 351 351 351 351


Cash & bank 12,678 15,505 18,033 18,882

Debtors 1,326 904 944 932

Inventory 4,873 4,881 5,099 5,034

Loans & advances 2,267 3,615 3,777 3,729



Investments 9,455 9,455 9,455 9,455

Gross fixed assets 3,71,950 3,72,450 3,72,950 3,73,450


Add: Capital WIP 0 32,874 72,425 94,685

Net fixed assets 3,67,193 3,95,123 4,29,374 4,44,789

Total assets 4,04,032 4,35,722 4,72,922 4,89,062


Total current liabilities 1,38,399 1,62,500 1,87,780 1,97,988

Non-current liabilities 1,55,811 1,54,878 1,53,861 1,52,331

Total liabilities 3,47,107 3,71,350 3,96,305 4,05,499

Paid-up capital 3,515 3,515 3,515 3,515



Total equity & liabilities 4,04,032 4,35,722 4,72,922 4,89,062



Pre-tax profit 14,640 15,116 8,847 728

Depreciation 5,440 5,444 5,800 7,345

Chg in working capital 59,242 -792 -746 -889

Total tax paid -4,794 -6,113 -2,988 -1,302



Chg in investments -7,939 0 0 0


Free cash flow 5,898 -19,719 -29,138 -16,879

Equity raised/(repaid) -15 0 7,942 9,076

Debt raised/(repaid) -1,309 24,100 25,281 10,207

Dividend (incl. tax) -1,555 -1,555 -1,555 -1,555

Other financing activities -3,417 0 0 0

Cash flow from financing activities -6,296 22,545 31,667 17,728

Net chg in cash -398 2,826 2,529 849

*Equity raised for FY20-21 represents the grant component of BOT projects

Valuation Ratios


Per Share data EPS (INR) 26.2 25.6 16.7 (1.6)

Growth, % 28.5 (2.1) (34.9) (109.8)


FDEPS (INR) 26.2 25.6 16.7 (1.6)

CEPS (INR) 41.6 41.1 33.2 19.3

CFPS (INR) 203.7 33.8 26.4 12.4

DPS (INR) 3.8 3.8 3.8 3.8


Return on equity (%) 16.2 14.0 7.6 (0.7)




Sales/Net FA (x) 0.2 0.2 0.2 0.2

Working capital/Sales (x) (0.7) (0.6) (0.6) (0.6)


Inventory days 31.2 27.0 27.0 27.0

Payable days 631.4 537.1 484.8 454.9

Working capital days (266.3) (230.6) (222.1) (228.4)

Liquidity ratios

Current ratio (x) 0.5 0.5 0.6 0.6

Quick ratio (x) 0.4 0.4 0.5 0.5


Dividend cover (x) 6.9 6.8 4.4 (0.4)



Valuation

PER (x) 5.6 5.7 8.8 (89.3)

Price/Book (x) 0.9 0.8 0.7 0.6

EV/Net sales (x) 3.1 3.0 3.2 3.4

EV/EBITDA (x) 6.6 6.6 7.8 9.4

EV/EBIT (x) 8.3 8.1 9.8 13.5



ITD Cementation (PNCL IN)

Consistently inconsistent …

INDIA | Infrastructure | Company Update

25 March 2019

ITDC’s financial performance has traced the path of a sinusoidal curve with remarkable perfection. It was the perfect turnaround story over CY14-16 – with topline growth, margin expansion, and debt reduction leading to robust earnings growth – to be followed by the CY16/17 period of recurring disappointment (0%/-30% topline growth). Over the last four quarters, however, the company has revived its operations and reported 25% growth in 12MFY19 (FY19 = 15 months). While the current state of operations appears stable and its orderbook strong – we continue to NOT like the stock due to its volatile performance and inferior positioning with respect to opportunities in the infrastructure space. All along, it remains one of the most expensive stock in the sector (15x FY21 PE). Maintain SELL Turn-backs after turnarounds – traversing a perfect sinusoidal curve ITDC’s financial performance has traced the path of a sinusoidal curve with remarkable perfection. It was the perfect turnaround story over CY14-16 – with topline growth, margin expansion, debt reduction leading to robust earnings growth and stupendous stock returns. However, over CY16-18, recurring disappointment on the execution front translated into ZERO revenue growth in CY16 and 30% decline in CY17 – despite which the stock remained resolute. However, over the last year, the stock has corrected much more than other sector stocks – perhaps a delayed acknowledgement of the poor performance of the company. However, over the last four quarters, ITDC has revived its operations and reported 25% growth in 12MFY19 (FY19 = 15 months) with stable margins. Its orderbook, too, appears strong at Rs 102bn – 4x book-to-sales. While there has been an increase in debt over last four quarters (from Rs 4.9bn in Dec-17 to Rs 5.6bn in Sep-18) – the leverage still remains manageable at 0.5x. We believe the company can report decent 25% CAGR in topline and earnings, over next three years – until the usual volatility resurfaces. Strong orderbook; reduction in scope of Bangalore metro orders a small dampener ITDC has seen strong order inflows over the last two years; its current orderbook is Rs 102bn, 4x book-to-sales. A large part of these orders has been received from the metro and ports segment – its strength domains. The recent reduction of scope (~20%) of the Bangalore metro orders has been a minor dampener – as it impacts ITDC’s growth opportunity and margins – the management now expects 8-9% margins from the project as opposed to 10-12% earlier. As per the management comments, it expects to, at best, break-even in the project – which will impact the overall margins for the next three years.

Unattractive positioning with respect to segments with maximum opportunity ITDC has a weak presence in key segments such as roads, buildings and irrigation where we expect the largest order award opportunity over the next five years. The three segments constitute only 15% of its current orderbook and it has been many quarters since it worked on any large project in these segments. On the other hand, it has formidable positioning in the ports segment where not much order award opportunity is visible, even in the government’s plans. Hence, we believe ITDC might miss out on capitalizing the mammoth opportunity in the infrastructure space. The only solace is its strong presence in the metros segments, which will also see a significantly large order opportunity.

Outlook and valuation: ITDC has corrected significantly over the last year (CY18 -48%), and is currently trading at 15x FY21 P/E – the most expensive stock in the sector. While we do not like the ITDC story, we believe the stock benefit from the rub-off effect of the rerating of the whole sector. We upgrade our target multiple to 13x FY21PE (earlier 11x) – in line with our multiple for NCC and Sadbhav. Our target is Rs 115 (earlier Rs 100). We continue to see the risk-reward unfavourable at current levels. Maintain SELL.

SELL (Maintain) CMP RS 132 TARGET RS 115 (-13%) COMPANY DATA




52 - WK HI/LO (RS) : 177 / 96


PAR VALUE (RS) : 1



PROMOTERS : 46.6 46.6 46.6

FII / NRI : 2.7 2.9 3.0

FI / MF : 29.9 29.6 29.4

NON PRO : 4.8 4.2 4.1

PUBLIC & OTHERS : 16.0 16.6 16.9


1MTH 3MTH 1YR

ABS 28.8 22.1 -18.8

REL TO BSE 22.6 16.4 -31.6

PRICE VS. SENSEX


KEY FINANCIALS

Rs mn FY19E* FY20E FY21E

Net Sales 32,968 33,026 37,980

EBIDTA 3,956 3,633 4,178

Net Profit 1,510 1,430 1,529

EPS, Rs 8.8 8.3 8.9

PER, x 15.0 15.9 14.8

EV/EBIDTA, x 6.8 7.7 6.9

P/BV, x 2.1 1.8 1.6

ROE, % 13.7 11.6 11.1

Debt/Equity (%) 0.5 0.6 0.6


*FY19 will comprise of five quarters Vibhor Singhal (+ 9122 6246 4109) [email protected] Deepika Bhandari (+ 9122 6246 4138) [email protected]

70

90

110

130

150

170

190

210


ITD Cementing BSE Sensex


ITD CEMENTATION COMPANY UPDATE

Orderbook has remained strong ... ... but 75% of it is concentrated in metro/ports segment

Source: Companies, Phillip Capital India Research

Execution picked up in FY19 after disappointing years since CY15.. ..while margins have shown a remarkable turnaround


Leverage, has come down consistently while WC too has released significant capital


82 81 75 91 91 92 96 102

3.8 3.7 3.6

4.1 3.8

3.7 3.7 4.0

-

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

- 10 20 30 40 50 60 70 80 90

100 110

2Q

FY1

7

3Q

CY1

7

4Q

CY1

7

1Q

FY1

9

2Q

FY1

9

3Q

FY1

9

4Q

FY1

9

Incl

N

ew/L

1

Bo

ok

to S

ales

(x)

Ord

er b

oo

k (R

s. B

n)


Hydro/Tunnels/Irrigation,

15%

Specialist Works, 2%

Buildings, 0%

Urban Infra/MRTS,

38%

Industrial, 0%

Marine, 34%

Transport, 11%

Government, 32% PSU, 58% Private, 10%

Segment

Client

17 31 29 21 33 33 38

9%

79%

-4%

-30%

60%

0%

15%

-40%

-20%

0%

20%

40%

60%

80%

100%

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

CY14 CY15 CY16 CY17 FY19E FY20E FY21E

% Y

oY

Gro

wth

- R

HS

Rev

enu

e (R

s. B

n)


91

1

1,9

16

2,6

43

2,7

15

3,9

56

3,6

33

4,1

78

5%

6%

9%

13%

12%

11% 11%

0%

2%

4%

6%

8%

10%

12%

14%

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500


OP

M (

%)

- R

HS

EBIT

DA

(Rs

mn

)

EBITDA OPM (%)

7,6

53

6,0

07

3,5

62

4,8

86

5,8

86

6,8

86

7,8

86

1.3

1.2

0.6

0.8

0.5 0.6 0.6

-

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000


Leve

rage

(x)

- R

HS

Stan

dal

on

e d

ebt

(Rs.

mn

)


94

40

30 43

65 60 58

240

140

14 28 35 28 25

208

85 37 65

121 118 121

-

50

100

150

200

250

300


Day

s



ITD CEMENTATION COMPANY UPDATE

Financials (Consolidated) - FY19* will comprise of five quarters Income Statement Y/E Mar, Rs mn CY17 FY19E FY20E FY21E

Net sales 20,605 32,968 33,026 37,980 Growth, % -30 60 0 15 Raw material expenses -6,224 -9,959 -9,976 -11,473 Employee expenses -2,574 -4,118 -4,125 -4,744 Other Operating expenses -9,093 -14,935 -15,292 -17,586 EBITDA (Core) 2,715 3,956 3,633 4,178 Growth, % 2.7 45.7 (8.2) 15.0 Margin, % 13.2 12.0 11.0 11.0 Depreciation -577 -782 -796 -940 EBIT 2,137 3,175 2,837 3,238 Growth, % (2.0) 48.5 (10.6) 14.1 Margin, % 10.4 9.6 8.6 8.5 Interest paid -876 -1,212 -1,149 -1,477 Other Non-Operating Income 353 275 275 230 Share of Profit from JVs/Exceptional -357 0 155 274 Pre-tax profit 1,257 2,238 2,118 2,264 Tax provided -528 -727 -688 -736 Profit after tax 729 1,510 1,430 1,529 Growth, % 42.4 107.1 (5.3) 6.9 Net Profit (adjusted) 729 1,510 1,430 1,529 Unadj. shares (m) 155 172 172 172 Wtd avg shares (m) 155 172 172 172

Orderbook Y/E Mar, Rs mn CY17 FY19E FY20E FY21E

Orderbook 75,132 97,164 1,14,138 1,26,158

Growth YoY (%) 14% 29% 17% 11%

Book-to-Sales (x) 3.6 3.7 3.5 3.3

Order Inflow 29,902 55,000 50,000 50,000

Balance Sheet Y/E Mar, Rs mn CY17 FY19E FY20E FY21E

Cash & bank 1,158 1,700 1,511 1,663

Debtors 2,429 4,697 5,429 6,035

Inventory 1,574 2,529 2,534 2,601

Loans & advances 10,709 15,807 17,192 19,770


Investments 6 6 6 6


Less: Depreciation -836 -1,617 -2,413 -3,353


Net fixed assets 5,003 5,721 6,175 6,735

Total assets 23,888 33,468 35,855 39,820










Cash Flow Y/E Mar, Rs mn CY17 FY19E FY20E FY21E

Pre-tax profit 1,257 2,238 2,118 2,264



Total tax paid -525 -727 -688 -736

Cash flow from operating activities -73 -2,266 121 712


Chg in investments 0 0 0 0


Free cash flow -1,743 -3,766 -1,129 -788

Equity raised/(repaid) 0 3,368 0 0

Debt raised/(repaid) 1,324 1,000 1,000 1,000

Cash flow from financing activities 1,248 4,308 940 940

Net chg in cash -495 543 -189 152

Valuation Ratios

CY17 FY19E FY20E FY21E


Growth, % 42.4 87.1 (5.3) 6.9


FDEPS (INR) 4.7 8.8 8.3 8.9

CEPS (INR) 8.4 13.3 13.0 14.4

CFPS (INR) 0.7 (14.8) (1.8) 1.2


Return on equity (%) 11.8 13.7 11.6 11.1




Sales/Net FA (x) 4.6 6.1 5.6 5.9



Inventory days 27.9 34.9 28.0 25.0

Payable days 254.1 254.4 201.6 191.5


Liquidity ratios

Current ratio (x) 1.3 1.5 1.6 1.7

Quick ratio (x) 1.2 1.4 1.5 1.6




Valuation

PER (x) 28.1 15.0 15.9 14.8

PEG (x) - y-o-y growth 0.7 0.2 (3.0) 2.1

Price/Book (x) 3.3 2.1 1.8 1.6

EV/Net sales (x) 1.2 0.8 0.8 0.8

EV/EBITDA (x) 8.9 6.8 7.7 6.9

EV/EBIT (x) 11.3 8.5 9.9 8.9



Pas

sive

Co

vera

ge



Capacite Infraprojects (CAPACITE IN)

High-tech, High-rise – Stock for the future


25 March 2019

Capacite Infraprojects Ltd (CIL) is one of the ‘new kids on the block’ – a small Mumbai-based developer that is focussed on the real-estate segment – that got listed 18 months ago (Sep-2017). It is one of the preferred contractors for buildings in Mumbai such as private residential (high-rise and super high-rise), commercial, and institutional. It has grown exponentially over the last five years (67% CAGR over FY14-18) with improving EBITDA margins and a strong balance sheet. Over the last six months, it has also diversified into govt. projects, de-risking its profile. With the real estate sector looking set for an up-cycle, companies like CIL are well positioned to benefit from the mammoth opportunity.

Strong performance in FY19; balance sheet strength to ensure the continuity CIL has reported strong performance in 9MFY19, delivering a whipping 35%/24% topline/earnings growth. The results for Q3FY19 were also strong, with 23% yoy growth in topline. The growth was driven by the strong order wins over the last few quarters. CIL has a lean balance sheet with debt of Rs 2.6bn as on Q3FY19 (almost net cash). Its working capital appears comfortable with debtor/inventory/NWC days of 125/60/81 days (incl. retention money). It generates decent operating cashflows and has one of the best return ratios in the industry (ROE/ROCE of 15%/15%).

Highest book-to-sales orderbook in the sector; diversification in progress CIL’s current order book of Rs 123bn (77% residential, 82% west India) stands at a handsome 7.4x book-to-sales (highest in the sector) and provides high revenue visibility for the next many years. Over last three quarters, it has diversified into the public sector and received orders worth whopping Rs 44bn from MMRDA and Rs. 4.8bn from MCGM – taking the public share of its orderbook to 45%, de-risking its profile significantly. Higher share of the high-margin ‘Super High Rise’ segment (28% of the OB vs. 19% in FY17) should also translate into higher profitability.

Strong presence in the real estate segment, driven by superior capabilities CIL is well positioned in the real estate segment, with strong capabilities in concrete, composite steel structures, MEP, and finishing works. Its use of own modern-system formwork and latest technology in construction have helped it grab multiple marquee repeat orders from its clients, which include Lodha, Wadhwa, Oberoi, Godrej, Prestige, Purvankara, and Rustomjee. Over the last few years, it has also moved up the value chain by undertaking high-margin ‘lock and key’ (finishing, MEP, and interiors) and ‘design and build’ (designing-to-finishing) projects, along with its core business of ‘shell and core’ (pure construction) projects.

GST and RERA to provide a mammoth opportunity, along with PMAY and Smart Cities Apart from the pent-up demand in the real estate sector, recent policy initiatives – GST (leading to shift from unorganised to organised sector) and RERA (leading to higher transparency and accountability) – are expected to benefit contractors such as CIL, who generally work with already RERA-compliant clients in the organized segment. At the same time, we see a mammoth opportunity from various government incentives such as PMAY, Smart Cities, and AMRUT.

Comparison with Ahluwalia Contracts inevitable – we like the latter more CIL’s closest comparative in the listed space is Ahluwalia Contracts (ACIL). Both companies have strong orderbooks at 3.8x (ACIL) and 7.4x (CIL) book-to-sales. ACIL has a leverage of 0x, NWC days of 90 days, and ROE of 18% against 0x, 81days and 15% for CIL, respectively. The primary difference lies in the break-up of the orderbook – only 14% of ACIL’s orderbook comprises of private clients vs. 55% for CIL. With all these metrics, CIL currently trades at 10x FY21 PE (consensus) vs. ACIL at 12x (our estimate). We like the CIL story.

NOT RATED CMP RS 234 COMPANY DATA




52 - WK HI/LO (RS) : 373/ 171


PAR VALUE (RS) : 10



PROMOTERS : 43.8 43.8 43.8

FII / NRI : 7.2 6.6 6.8

FI / MF : 5.5 5.5 5.6

NON PRO : 19.7 19.5 18.9

PUBLIC & OTHERS : 23.9 24.6 24.8


1MTH 3MTH 1YR

ABS 26.3 -0.6 -25.6

REL TO BSE 20.1 -6.3 -38.4

PRICE VS. SENSEX


KEY FINANCIALS

Rs mn FY16 FY17 FY18

Net Sales 8,040 11,251 13,356

EBIDTA 1,045 1,502 2,033

Net Profit 477 693 787

EPS, Rs 82.8 17.2 11.6

PER, x 2.9 13.8 20.4

EV/EBIDTA, x 2.5 7.1 7.2

P/BV, x 0.8 3.2 2.1

ROE, % 42.0 29.5 15.0




0

20

40

60

80

100

120

140

Oct-17 Mar-18 Aug-18 Jan-19

Capacite BSE Sensex


CAPACITE INFRAPROJECTS COMPANY UPDATE

CIL has the strongest orderbook in the sector... ... but concentrated in residential segment


The company has multiplied its revenues by 5x in three years, with 400bps margin expansion over the same period


The balance sheet too, has eased up over this period – with leverage falling and working capital cycle remaining lean


47 52 57 106 109 119

3.9 4.2 4.3

7.2 6.8 7.1

-

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

-

20

40

60

80

100

120

140

2Q

FY1

8

3Q

FY1

8

4Q

FY1

8

1Q

FY1

9

2Q

FY1

9

3Q

FY1

9

Bo

ok

-to

- s

ales

(x)

Ord

erb

oo

k (R

s b

n)


Comm & Inst, 23%

Residential, 77%

East, 0%

West, 82%

South, 11%

North, 7%

Private, 55% Govt, 45%

Type

Region

Client Type

2

5

8

11

13 13 191%

59% 40%

19% 35%

0

0.5

1

1.5

2

2.5

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

FY14 FY15 FY16 FY17 FY18 9MFY19

% Y

oY

Gro

wth

- R

HS

Rev

enu

e (R

s. B

n)


14

8

59

2

1,0

45

1,5

02

2,0

33

1,8

15

9%

12%

13% 13%

15%

14%

0%

2%

4%

6%

8%

10%

12%

14%

16%

0

500

1,000

1,500

2,000

2,500


OP

M (

%)

- R

HS

EBIT

DA

(Rs

mn

)

EBITDA OPM (%)

810

1,001

1,561 1,641

1,871 3.5

1.8 0.9

0.5 0.2

-

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

-

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000


Leve

rage

(x)

- R

HS

Stan

dal

on

e d

ebt

(Rs.

mn

)


157

104

120 121 127

80 72

91

55 59 29

(7)

40

40

133

(20)

-

20

40

60

80

100

120

140

160

180


Day

s



CAPACITE INFRAPROJECTS COMPANY UPDATE

Financials (Standalone) Income Statement Y/E Mar, Rs mn FY15 FY16 FY17 FY18

Net sales 5,052 8,040 11,251 13,356

Growth, % 191 59 40 19

Total income 5,052 8,040 11,251 13,356



EBITDA (Core) 592 1,045 1,502 2,033

Growth, % 300.7 76.4 43.8 35.4

Margin, % 11.7 13.0 13.4 15.2

Depreciation -87 -153 -179 -672

EBIT 506 892 1,323 1,361

Growth, % 306.7 76.4 48.3 2.9

Margin, % 10.0 11.1 11.8 10.2

Interest paid -132 -294 -415 -398


Pre-tax profit 444 726 1,056 1,207

Tax provided -136 -249 -363 -420

Profit after tax 308 477 693 787

Net Profit 308 477 693 787

Growth, % 509.0 55.0 45.4 13.6

Net Profit (adjusted) 308 477 693 787



Orderbook Y/E Mar, Rs mn FY15 FY16 FY17 FY18

Orderbook 22,660 28,050 46,024 56,820

Growth YoY (%) 34% 24% 64% 23%

Book-to-Sales (x) 4.5 3.5 4.1 4.3

Order Inflow 10,782 13,430 29,225 24,152

Balance Sheet Y/E Mar, Rs mn FY15 FY16 FY17 FY18

Cash & bank 367 361 496 3,237

Debtors 1,442 2,645 3,734 4,647

Inventory 998 2,005 1,704 2,156





Less: Depreciation -111 -263 -442 -1,115


Net fixed assets 1,655 2,374 3,324 4,100

Total assets 4,994 8,453 10,768 17,337






Reserves & surplus 520 1,626 2,552 6,816

Shareholders’ equity 569 1,704 2,988 7,495



Cash Flow Y/E Mar, Rs mn FY15 FY16 FY17 FY18

Pre-tax profit 444 726 1,056 1,207


Chg in working capital 78 -1,069 -420 -1,188

Total tax paid -87 -212 -218 -273

Cash flow from operating activities 522 -402 598 418

Capital expenditure -900 -872 -1,130 -1,448

Chg in investments 0 50 8 -191

Cash flow from investing activities -900 -822 -1,121 -1,639

Free cash flow -379 -1,224 -523 -1,221

Equity raised/(repaid) 30 674 592 3,719

Debt raised/(repaid) 192 560 80 230

Dividend (incl. tax) 0 0 0 0

Cash flow from financing activities 222 1,218 671 3,949

Net chg in cash -157 -6 148 2,728

Valuation Ratios

FY15 FY16 FY17 FY18


Growth, % 395.9 33.1 (79.2) (32.6)


FDEPS (INR) 62.3 82.8 17.2 11.6

CEPS (INR) 79.8 109.5 21.7 21.5

CFPS (INR) 91.0 (76.9) 15.9 7.3


Return on equity (%) 76.9 42.0 29.5 15.0




Sales/Net FA (x) 4.0 4.0 3.9 3.6

Working capital/Sales (x) (0.1) 0.1 0.1 0.1

Receivable days 104.2 120.1 121.1 127.0

Inventory days 72.1 91.0 55.3 58.9

Payable days 273.0 259.5 219.0 237.7

Working capital days (33.3) 23.6 24.3 44.2

Liquidity ratios

Current ratio (x) 1.0 1.2 1.2 1.6

Quick ratio (x) 0.7 0.8 0.9 1.4



Net debt/Equity (x) 1.1 0.7 0.4 (0.2)

Valuation

PER (x) 3.8 2.9 13.8 20.4

PEG (x) - y-o-y growth 0.0 0.1 (0.2) (0.6)

Price/Book (x) 2.1 0.8 3.2 2.1

EV/Net sales (x) 0.4 0.3 1.0 1.1

EV/EBITDA (x) 3.0 2.5 7.1 7.2

EV/EBIT (x) 3.6 2.9 8.1 10.8



PSP Projects (PSPPL IN)

Small in size, big in capability – Stock for the future


25 March 2019

PSP Projects is one of the ‘new kids on the block’ – a small Gujarat-based developer, focussed on the real-estate segment – that got listed two years ago (May-2017). It possesses core domain expertise in building factories, hospitals, educational institutes, commercial and residential buildings in Gujarat and Maharashtra states. It has built multiple projects for pharma and chemicals companies in Gujarat (Torrent Pharma, Cadilla, Zydus, Nirma) and won the prestigious Rs 15.7bn project to build a Diamond Bourse (SDB) at Khajod, Surat, Gujarat – a project that served as a prefect launch-pad into the big league. With the real estate sector looking set for an up-cycle, companies like PSP are well positioned to benefit from the mammoth opportunity. We like the company and its execution capabilities, though geographical concentration and inexperience in handling large diverse projects remains our primary concern.

Strong execution in FY19; future appears sanguine PSP has reported strong performance in 9MFY19 – delivering a whipping 51%/45% topline/earnings growth. The results for Q3FY19 were also strong – with 53% yoy growth in topline. The growth was driven by strong execution on the SDB project – the project is ~18% complete and has clocked revenues of Rs 2.3bn in 9MFY19.

Robust orderbook provides high revenue visibility; concentration risk fading away PSP currently has an orderbook of Rs 27bn (including Rs 13bn SDB project) – a decent 2.8x book-to-sales. Order accretion for 9MFY19 was Rs 8bn, largely repeat orders from existing clients. Management appears confident about replenishing execution for FY19 with an order pipeline of over Rs 30bn.

PSP’s orderbook concentration (93% Gujarat) has always been a cause for concern. It has traditionally been very strong in Gujarat – it won an affordable housing project from GHB (Gujarat Housing Board) in 2015, and the Surat Diamond Bourse project in 2018. However, recently, PSP bagged its first ever project in Maharashtra worth Rs 1.8bn for an affordable housing project in Pandharpur – taking the share of Gujarat in the orderbook to 88%. It could have been even higher had a Rs 5bn private-sector real-estate order not been terminated (due to unfavorable advances and milestone payments). The diversification is thus helping address one of the primary concerns with the company.

Strong balance sheet, and tight control on working capital PSP has a strong balance sheet with a net cash position and relies more on its FD/OD limits to fund growth. The company, surprisingly, has a negative cash conversion cycle (FY18) with debtor/inventory of 60/17 days and creditor days of 145, leading to NWC days of -35. The company has managed this with strong discipline and good relations with its suppliers. Its NWC has also been aided by the fact that most of its clients have been private real estate developers in Gujarat – unlike peers like Ahluwalia that primarily work with govt. entities where debtors days tend to be much higher. As PSP grows, it would need to expand to govt. entities and outside Gujarat; we expect its WC cycle to then fall in line with the industry average. Even so, its current balance sheet lends sound support to the robust growth expected, driven by its strong orderbook over the next three years.

Watch out for management bandwidth PSP has been a small west-India-based buildings developer (88% of orderbook in Gujarat). On its low base, it was able to report growth while maintaining margins, and restricting its business to Gujarat. As it grows bigger, it will have to expand its business to new geographies, which should translate into requirements of better equipment and WC management, and most importantly, it will be a test of its management bandwidth. Whether it will be able to manage a turnover of Rs 10-20bn over 15-20 construction sites (against a turnover of Rs 5-10bn over 5-10 sites) is a litmus test it will have to pass.





52 - WK HI/LO (RS) : 596 / 359


PAR VALUE (RS) : 10



PROMOTERS : 73.3 73.0 72.4

FII / NRI : 1.8 1.9 1.7

FI / MF : 5.5 7.7 7.9

NON PRO : 3.9 3.9 4.0

PUBLIC & OTHERS : 15.5 13.5 13.9


1MTH 3MTH 1YR

ABS 19.6 21.8 -1.3

REL TO BSE 13.4 16.1 -14.2

PRICE VS. SENSEX

KEY FINANCIALS


Net Sales 4,580 4,008 7,298

EBIDTA 393 659 1,014

Net Profit 251 416 644

EPS, Rs 78.5 11.6 17.9

PER, x 5.9 40.4 26.1

EV/EBIDTA, x 2.6 25.0 14.6

P/BV, x 2.3 15.7 5.6

ROE, % 44.6 48.2 31.4




70

100

130

160

190

220

250

280

Jun-17 Dec-17 Jun-18 Dec-18

PSP Project BSE Sensex


PSP PROJECTS COMPANY UPDATE

Orderbook has received a massive boost from the SDB project... ... the orderbook however, remains conc in Gujarat


Remarkable growth over the last four years (though a weak FY17), along with strong expansion in margins


Exceptionally strong balance sheet, with negative net leverage, and negative working capital cycle


12 27 26 24 26 27

2.2

4.4

3.5

3.0 2.9 2.8

-

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

-

5

10

15

20

25

30

2Q

FY1

8

3Q

FY1

8

4Q

FY1

8

1Q

FY1

9

2Q

FY1

9

3Q

FY1

9

Bo

ok

-to

- s

ales

(x)

Ord

erb

oo

k (R

s b

n)


Institutional, 79%

Industrial, 7%

Govt, 6%

Govt Residential,

7%

Residential, 1%

Rajasthan, 3%

Maharashtra, 7%

Karnataka, 2%

Gujarat, 88%

Segment

State

2,104 2,805 4,580 4,008 7,298 7,058

-18%

33%

63%

-12%

82%

51%

-25%

-5%

15%

35%

55%

75%

-2,000

-1,000

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000


% Y

oY

Gro

wth

- R

HS

Rev

enu

e (R

s m

n)


167 224 393 659 1,014 991

8%

8% 9%

16%

14% 14%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

0

200

400

600

800

1,000

1,200


OP

M (

%)

- R

HS

EBIT

DA

(Rs

mn

)

EBITDA OPM (%)

251 329 452 677 216

0.7 0.7 0.7 0.6

0.1

-

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1.0

100

300

500

700

900

1,100

1,300


Net

Deb

t:Eq

uit

y (x

) -

RH

S

Stan

dal

on

e d

ebt

(Rs.

mn

)


24

31

8

49

58

3 5 3 3

17

50

32

8

53

78

-

10

20

30

40

50

60

70

80

90


Day

s



PSP PROJECTS COMPANY UPDATE


Net sales 2,805 4,580 4,008 7,298

Growth, % 33 63 -12 82

Total income 2,805 4,580 4,008 7,298

Employee expenses -238 -140 -208 -286


EBITDA (Core) 224 393 659 1,014

Growth, % 33.9 75.2 67.9 53.8

Margin, % 8.0 8.6 16.5 13.9

Depreciation -52 -71 -76 -112

EBIT 172 322 584 902

Growth, % 31.8 86.8 81.3 54.5

Margin, % 6.1 7.0 14.6 12.4

Interest paid -25 -31 -75 -87


Pre-tax profit 213 394 642 999

Tax provided -72 -143 -226 -355

Profit after tax 141 251 416 644

Net Profit 141 251 416 644

Growth, % 39.6 78.8 65.6 54.7

Net Profit (adjusted) 141 251 416 644



Orderbook Y/E Mar, Rs bn FY15 FY16 FY17 FY18

Orderbook 4,472 3,381 7,292 25,590

Growth YoY (%) -1% -24% 116% 251%

Book-to-Sales (x) 1.6 0.7 1.8 3.5

Order Inflow 2,777 3,490 7,919 25,596


Cash & bank 848 938 1,018 2,232

Debtors 239 103 533 1,162

Inventory 42 40 30 335




Gross fixed assets 507 755 823 1,196

Less: Depreciation -175 -243 -315 -425


Net fixed assets 335 512 508 788

abcd Total assets 1,864 2,281 3,147 5,854



Non-current liabilities 329 452 677 216



Reserves & surplus 461 625 783 2,667

Shareholders’ equity 469 657 1,071 3,027




Pre-tax profit 213 394 642 999


Chg in working capital 153 19 -524 14

Total tax paid -74 -150 -229 -359

Cash flow from operating activities 343 333 -36 766

Capital expenditure -201 -248 -71 -392

Chg in investments -37 -54 -36 -11

Cash flow from investing activities -238 -302 -107 -403

Free cash flow 105 31 -143 363

Equity raised/(repaid) 0 24 256 1,421

Debt raised/(repaid) 78 123 225 -461

Dividend (incl. tax) -19 -72 0 0

Cash flow from financing activities 59 59 223 851

Net chg in cash 164 90 80 1,214

Valuation Ratios

FY15 FY16 FY17 FY18


Growth, % 39.6 (55.3) (85.3) 54.7


FDEPS (INR) 175.7 78.5 11.6 17.9

CEPS (INR) 240.3 100.6 13.7 21.0

CFPS (INR) 416.3 137.7 (1.1) 22.3


Return on equity (%) 34.4 44.6 48.2 31.4


Turnover ratios Asset turnover (x) (11.6) (15.5) (31.7) 79.3


Sales/Net FA (x) 10.8 10.8 7.9 11.3

Working capital/Sales (x) (0.2) (0.2) (0.1) (0.1)


Inventory days 5.5 3.2 2.8 16.8

Payable days 146.4 98.7 138.6 147.5

Working capital days (78.7) (66.4) (40.0) (33.6)

Liquidity ratios

Current ratio (x) 1.2 1.1 1.4 1.6

Quick ratio (x) 1.2 1.1 1.4 1.5

Interest cover (x) 6.9 10.5 7.8 10.4


Net debt/Equity (x) (1.1) (0.7) (0.3) (0.7)

Valuation

PER (x) 2.7 5.9 40.4 26.1

PEG (x) - y-o-y growth 0.1 (0.1) (0.5) 0.5

Price/Book (x) 0.8 2.3 15.7 5.6

EV/Net sales (x) (0.1) 0.2 4.1 2.0

EV/EBITDA (x) (0.6) 2.6 25.0 14.6

EV/EBIT (x) (0.8) 3.1 28.2 16.4



Dilip Buildcon (DBL IN)

A running bicycle – lower the speed, and it topples !


25 March 2019

Dilip Buildcon (DBL) is the most famous ‘new kid on the block’ – with its stock having gone from 240 (listing price) to 1,200 in less than two years – and then falling to 400 in the next eight months. It is a Madhya Pradesh (MP)-based EPC contractor with core domain expertise in roads and irrigation, known for an integrated business model with a large equipment base and strong in-house execution capabilities. It has repeatedly completed projects ahead of schedule and grabbed early completion bonus leading to ‘unheard of’ EBITDA margins of 18-20%. Over the last five years, it reported a topline/earnings CAGR of 35%/26% - FY19 is expected to be tad moderate at 25%/30%. We are not excited by the story.

Capital intensive model in an already capital-intensive industry – like a running bicycle DBL’s “unique” model of trying to mechanize/automate the construction process in a country where labour is (and will be for the foreseeable future) easily available, amplifies the capital requirement, of an already capital-intensive industry. We see DBL operations like a bicycle that remains balanced as long it runs fast enough, but any slowdown, and it topples. Over the next few years, as DBL grows, it will face the triple whammy of lower topline growth (large base effect), lower margins (limited scope of early completion bonus and expanding beyond its home territory), and higher tax outflow (80IA benefit going away). This coupled with already leveraged balance sheet, equity requirement for HAM projects and high WC requirements, we expect DBL’s balance sheet to keep worsening.

Fully integrated EPC operations creates a cash guzzler DBL’s USP has been its large in-house fleet of construction equipment from top global suppliers (Caterpillar etc.) and centralised procurement processes for all raw materials, deployed by highly skilled employees. However, its flipside is excessive capital needs. High capex (since it owns its entire equipment fleet) also translates into significant capital needs. Over FY13-18, DBL spent Rs 23bn to buy mining and other road equipment, which led to a ballooning of debt (Rs 10bn in FY14 swelled to Rs 27bn in FY18). Also, to ensure efficient utilization of its equipment base, DBL keeps a higher inventory level (90 days in FY18 vs. industry average of 60).The business is essentially a cash guzzler.

The real test of the business model is over the next few years We believe DBL was able to sustain its cash-guzzling business model over the last few years, because it was executing projects in its comfort zone – roads and MP. Geographical and segmental familiarity helped it execute ahead-of-schedule and grab early completion on many projects (Rs 2.2bn in the last three years). This, along with the tax benefits under section 80IA helped finance its high WC and capex requirements.

As DBL grows (FY19 topline of ~Rs 100bn) it will have to expand beyond MP and roads. We see early signs of this already happening. Its margins have already fallen from 22% (FY15) to 17.5% (FY19) as the share of MP orders has fallen to 13% from 98%. If the company is not able to maintain margins – it will lead to a domino effect – reducing PAT margins and OCF – leading to higher debt and leverage – in-turn leading to higher interest expense – eventually leading to still lower PAT margins and OCF. A vicious loop!

Highly stretched balance sheet might soon require fresh capital DBL’s current debt of Rs 31bn translates into leverage of 1.1x (industry average of 0.4x) – one of the highest in the industry. The debt has increased over the last year, despite Rs 2bn of cash infusion from BOT stake sale. With Rs 16bn of equity infusion required in its mammoth HAM portfolio of 12 projects (non-Shrem portfolio), we believe that DBL will soon run out of cash and the need for fresh capital.

Outlook and valuation Adjusted for the HAM value, DBL is currently trading at 11x FY21 PE (consensus estimates) – slight premium to sector average – unwarranted in our opinion. We find the business model of the company (operational + financial) highly precarious.





52 - WK HI/LO (RS) : 1248 / 312


PAR VALUE (RS) : 10



PROMOTERS : 75.6 75.6 75.6

FII / NRI : 9.2 10.2 9.5

FI / MF : 6.4 6.6 6.5

NON PRO : 2.2 1.9 2.6



1MTH 3MTH 1YR

ABS 46.7 51.4 -31.2

REL TO BSE 40.5 45.7 -44.1

PRICE VS. SENSEX


KEY FINANCIALS


Net Sales 40,853 50,976 77,459

EBIDTA 7,992 9,923 14,028

Net Profit 2,208 3,609 6,203

EPS, Rs 18.9 26.3 45.2

PER, x 35.6 25.5 14.9

EV/EBIDTA, x 12.9 11.8 8.4

P/BV, x 7.4 5.0 3.8

ROE, % 23.2 24.8 28.8


Source: PhillipCapital India Research Est. Vibhor Singhal (+ 9122 6246 4109) [email protected] Deepika Bhandari (+ 9122 6246 4138) [email protected]

50

150

250

350

450

550

Aug-16 Aug-17 Aug-18

Dilip Buildcon BSE Sensex


DILIP BUILDCON COMPANY UPDATE

Orderbook is moderate, providing limited revenue visibility... ... conc. in roads, but gradually spreading out of MP


The company appears to be growing too fast, to soon ... ... and margins have been steadily coming down


While leverage has come down, it still remains high (vs peers), and working capital cycle remains high (esp inventory)


142 124 239 241 239 231

2.2

1.8

3.1 2.8 2.8

2.5

-

0.5

1.0

1.5

2.0

2.5

3.0

3.5

-

50

100

150

200

250

300

2Q

FY1

8

3Q

FY1

8

4Q

FY1

8

1Q

FY1

9

2Q

FY1

9

3Q

FY1

9

Bo

ok

-to

- s

ales

(x)

Ord

erb

oo

k (R

s b

n)


MP, 13%

Chhatisgarh, 0%

Maharashtra, 26%

UP, 9%

AP, 7% Telangana,

5%

Goa, 4%

Others, 36%

Roads, 81%

Mining, 14% Metro, 2%

State

Segment

23 26 41 51 77 65

21% 13%

56%

25%

52%

26%

0%

10%

20%

30%

40%

50%

60%

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0


% Y

oY

Gro

wth

- R

HS

Rev

enu

e (R

s. B

n)


4,7

00

5,6

55

7,9

92

9,9

23

14

,02

8

11

,54

8

20%

22%

20% 19% 18% 18%

0%

5%

10%

15%

20%

25%

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000


OP

M (

%)

- R

HS

EBIT

DA

(Rs

mn

)

EBITDA OPM (%)

11

,63

1

21

,83

8

25

,11

4

25

,63

4

27

,70

6

1.6

2.6

2.4

1.4

1.1

-

0.5

1.0

1.5

2.0

2.5

3.0

-

5,000

10,000

15,000

20,000

25,000

30,000


Leve

rage

(x)

- R

HS

Stan

dal

on

e d

ebt

(Rs.

mn

)


136

152

91 69 62 70

102

113 116

87

132

164

132 125

100

40

60

80

100

120

140

160

180


Day

s




DBL recently divested its entire BOT portfolio (18 BOT and 6 HAM projects – 14 operational) to Shrem Group of Companies (Chhatwal Group Trust), for a consideration of Rs 16bn – 1.05x BV. The transaction will lead to net cash accrual of Rs 7.6bn for the company. The transaction was an interesting one as 1. Shrem Group had no prior investment in infrastructure space, and invested an

amount as high as Rs 16bn as its first investment in the space 2. It is the first transaction in the BOT space, where a buyer has bought under-

construction projects.

DBL divested its entire BOT portfolio of 24 projects to Shrem Group

Projects Equity Invested (Rs mn) Equity to be invested (Rs mn) No of Projects

Operational BOTs 4,537 126 14

Under Construction BOTs 2,219 960 4

Under Construction HAMs 64 7,331 6

Total 6,820 8,416 24

Total Portfolio Equity 15,236

Sale value 16,000

P/BV 1.05

Net cash accrual for DBL 7,584


DBL has amassed a huge HAM portfolio, with large equity requirement

HAMs after divestment

(Rs mn)

Length

(kms)

BPC Debt Equity Grant FC AD

Chandikhole Bhadrak 75 15,220 7,306 1,522 6,392 Sep-18 Dec-18

Gorhar Khairatunda 40 9,170 4,402 917 3,851 WIP Awaited

Nidagatta Mysore 61 22,830 10,958 2,283 9,589 Docs Subm Awaited

Mangloor Tel/Maha border 49 9,360 4,493 936 3,931 WIP Awaited

Bangalore Nidagatta 56 21,900 10,512 2,190 9,198 Docs Subm Awaited

Byrapura Challakere 50 8,417 4,040 842 3,535 Sep-18 Dec-18

Anandapuram Anakapalli 51 20,130 9,662 2,013 8,455 Jan-19 Jan-19

Sangli Solapur (Pckg - 4) 57 11,410 5,477 1,141 4,792 Docs Subm Awaited

Sangli Solapur (Pckg - 2) 52 10,294 4,941 1,029 4,323 Docs Subm Awaited

Sangli Solapur (Pckg - 1) 41 11,024 5,292 1,102 4,630 Feb-18 Awaited

Churhat Bypass 15 10,040 4,819 1,004 4,217 Oct-18 Dec-18

Bellary Byrapura 55 13,139 6,307 1,314 5,518 Docs Subm Awaited

Total 602 1,62,934 78,208 16,293 68,432


A drop in EBITDA margins will lead to significant deterioration in DBL’s cashflow profile Rs mn FY15 FY16 FY17 FY18 FY19E FY20E FY21E FY19E FY20E FY21E

Assuming stable margins Assuming declining margins

Revenue 26,241 40,853 50,976 77,459 96,823 1,16,188 1,33,616 96,823 1,16,188 1,33,616 % YoY 13% 56% 25% 52% 25% 20% 15% 25% 20% 15% EBITDA 5,655 7,992 9,923 14,028 16,944 20,333 23,383 16,944 18,590 20,042

% YoY 20% 41% 24% 41% 21% 20% 15% 21% 10% 8%

EBITDA Margin 21.6% 19.6% 19.5% 18.1% 17.5% 17.5% 17.5% 17.5% 16.0% 15.0%

PBT 1,884 2,501 3,601 6,637 8,574 9,985 11,775 8,574 8,067 7,910 Tax 510 293 -9 434 429 2,996 3,533 429 2,420 2,373 Tax rate 27% 12% 0% 7% 5% 30% 30% 5% 30% 30%

PAT 1,374 2,208 3,609 6,203 8,145 6,990 8,243 8,145 5,647 5,537 % YoY -44% 61% 63% 72% 31% -14% 18% 31% -31% -2% PAT Margin 5.2% 5.4% 7.1% 8.0% 8.4% 6.0% 6.2% 8.4% 4.9% 4.1%

OCF -874 -504 1,967 221 -1,593 1,131 4,928 -1,593 -211 2,222 OCF as % of EBITDA -15% -6% 20% 2% -9% 6% 21% -9% -1% 11%

Debt 21,838 25,114 25,634 27,706 36,006 42,006 46,006 36,006 44,006 50,006 Leverage 2.6 2.4 1.4 1.1 1.1 1.1 1.0 1.1 1.2 1.2


View the profile of the Shrem group here

http://www.shrem.in/




Net sales 26,241 40,853 50,976 77,459

Growth, % 13 56 25 52

Total income 26,241 40,853 50,976 77,459

Employee expenses -347 -873 -1,025 -1,524

Other Operating expenses -898 -1,983 -2,099 -1,827

EBITDA (Core) 5,655 7,992 9,923 14,028

Growth, % 20.3 41.3 24.1 41.4

Margin, % 21.6 19.6 19.5 18.1

Depreciation -1,179 -1,835 -2,274 -2,750

EBIT 4,476 6,158 7,649 11,278

Growth, % 14.4 37.6 24.2 47.5

Margin, % 17.1 15.1 15.0 14.6

Interest paid -2,653 -3,814 -4,162 -4,644


Pre-tax profit 1,884 2,501 3,601 6,637

Tax provided -510 -293 9 -434

Profit after tax 1,374 2,208 3,609 6,203

Net Profit 1,374 2,208 3,609 6,203

Growth, % (44.1) 60.8 63.5 71.9


Unadj. shares (m) 117 117 137 137

Wtd avg shares (m) 117 117 137 137


Orderbook 74,747 1,07,787 1,75,683 2,38,881

Growth YoY (%) 45% 44% 63% 36%

Book-to-Sales (x) 2.8 2.6 3.4 3.1

Order Inflow 49,379 73,893 1,18,872 1,40,657


Cash & bank 2,342 1,059 1,137 1,613 Debtors 11,289 9,119 10,165 16,040 Inventory 9,476 15,803 16,639 20,262 Loans & advances 1,495 886 2,113 5,599 Total current assets 27,260 32,886 39,901 64,332 Investments 2,789 2,898 4,695 2,415 Gross fixed assets 15,297 19,415 24,276 28,520 Less: Depreciation -3,407 -5,211 -7,451 -10,201 Add: Capital WIP 0 0 0 0 Net fixed assets 11,890 14,204 16,825 18,319 Total assets 45,049 52,837 66,493 93,477





Paid-up capital 1,171 1,171 1,368 1,368






Pre-tax profit 1,884 2,501 3,601 6,637

Depreciation 1,179 1,835 2,274 2,750


Total tax paid -216 -80 -7 -126

Cash flow from operating activities -580 -291 1,951 529


Chg in investments -959 -109 -1,797 2,280


Free cash flow -8,217 -4,548 -4,741 -1,435

Equity raised/(repaid) 99 0 4,300 0

Debt raised/(repaid) 10,208 3,276 520 2,072

Dividend (incl. tax) 0 -7 -4 -3

Cash flow from financing activities 9,891 3,266 4,818 1,911

Net chg in cash 1,674 -1,283 78 476

Valuation Ratios

FY15 FY16 FY17 FY18


Growth, % (44.1) 60.8 39.5 71.9


FDEPS (INR) 11.7 18.9 26.3 45.2

CEPS (INR) 21.8 34.5 42.9 65.2

CFPS (INR) 17.3 (6.0) 29.6 28.2


Return on equity (%) 17.4 23.2 24.8 28.8




Sales/Net FA (x) 2.9 3.1 3.3 4.4


Receivable days 157.0 81.5 72.8 75.6

Inventory days 131.8 141.2 119.1 95.5

Payable days 250.0 179.1 189.1 226.7


Liquidity ratios

Current ratio (x) 1.9 2.0 1.8 1.6

Quick ratio (x) 1.3 1.0 1.1 1.1




Valuation

PER (x) 57.3 35.6 25.5 14.9

PEG (x) - y-o-y growth (1.3) 0.6 0.6 0.2

Price/Book (x) 9.3 7.4 5.0 3.8

EV/Net sales (x) 3.7 2.5 2.3 1.5

EV/EBITDA (x) 17.4 12.9 11.8 8.4

EV/EBIT (x) 21.9 16.7 15.3 10.5



JKumar Infra (JKIL IN)

Too many hits – difficult to regain the trust now


25 March 2019

JKumar has had a torrid ride, over the last three years. Since its QIP in Oct-15, which was preceded by record order inflow, it has been mired in controversies that have completely shaken investor confidence in its corporate governance standards. While the earlier ‘BMC issue’ resulted in the company being blacklisted (expected to have limited impact), the later issue of ‘shell company’ appeared more serious, and just when it was believed that it was over, SEBI restarted the investigation under the ‘shell company’ issues in Oct-18 – this time, with much more serious allegations of ‘misrepresenting the financials’. Hereafter, we believe it will be extremely difficult for the company to win back investor confidence.

Investor confidence shaken after twin controversies JKIL’s stock had taken a beating in May-16 due to the BMC issue, where it was blacklisted because of executing ‘shoddy work’ on some of the 35 road projects that the BMC inspected. The issue was highly politicized in the run up to the BMC election in Mar-17 – and caused the stock to significantly underperform its peers and the broader index. The issue has thereafter subsided, but not closed yet.

Later, in Aug-2017, SEBI temporarily suspended trading in JKumar’s stock (and 161 other listed companies) under a directive from the Ministry of Corporate Affairs (MCA) – where it was identified as a ‘shell company’ by the ministry (read the circular here). JKIL appealed against the order in SAT and subsequently, the stay on trading of its securities was lifted. Thereafter, in a series of to-and-fro communications, SEBI has asked JKIL for various business and financial documents, which the company provided.

However, in Oct-18, SEBI reinitiated the investigation under the Shell Company issue, and passed an interim order (read the order here) to conduct a forensic audit of JKIL’s books of accounts, as it suspected the company to have “misrepresented its financials” for FY09, FY10, and FY11. The investigation was primarily into JKIL's relations with PACL Ltd (earlier Pearl Agrotech Ltd) – a real estate development company accused of running a Ponzi scheme and duping investors of Rs 490bn over 1998-2014 (read here and here). JKIL had executed construction work for PACL in Rajasthan, MP, and TN states over FY09-11, which was further sub-contracted to various companies.

Allegations in the latest investigation are very serious in nature, and the company too, has not helped its cause by not providing all the documents sought from it. With these back-to-back ‘incidents’ within two years, we believe it will be an arduous task for the management to win back investor confidence.

Strong orderbook – but concentration a worry JKIL has a strong orderbook of Rs 125bn (4.6x book-to-sales) – providing high revenue visibility. However, almost 50% of the orderbook comprises of two orders from the Mumbai metro line 3 (underground) – where execution is expected to face major hurdles, given the difficult landscape and history of underground projects in the city. Along with that, almost 75% of the orderbook is in Maharashtra, which lends ‘high concentration risk’.

Watch out for management bandwidth JKIL has been, hitherto, primarily a small West-India based road/metro developer (75% of orderbook in Maharashtra, 97% in roads/metros). On its low base, it was able to report growth, while maintaining margins, while restricting its business to Maharashtra. But now, as it grows bigger, it will have to expand its business to new geographies. This will mean better WC management and a test of its management bandwidth. Whether it will be able to manage a turnover of Rs 35-50bn over 40-50 construction sites (against a turnover of Rs 10-20bn over 15-20 sites) is a litmus test it would have to pass.

Outlook and valuation: JKIL is currently trading at 6x FY21PE (consensus estimates) – a discount to most peers; justified, we believe, given the corporate governance issues surrounding it.





52 - WK HI/LO (RS) : 309 / 104


PAR VALUE (RS) : 5



PROMOTERS : 44.1 43.9 43.9

FII / NRI : 23.4 25.5 23.7

FI / MF : 7.5 8.5 11.0

NON PRO : 7.7 7.4 6.5

PUBLIC & OTHERS : 17.3 14.7 14.9


1MTH 3MTH 1YR

ABS 51.9 45.5 -43.2

REL TO BSE 45.7 39.8 -56.1

PRICE VS. SENSEX


KEY FINANCIALS


Net Sales 14,086 16,042 20,507

EBIDTA 2,483 2,506 3,213

Net Profit 985 1,073 1,366

EPS, Rs 13.0 14.2 18.1

PER, x 12.5 11.5 9.0

EV/EBIDTA, x 5.7 4.5 3.7

P/BV, x 1.0 0.9 0.8

ROE, % 9.5 8.0 9.4




0

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180

Apr-16 Apr-17 Apr-18 JK Infra BSE Sensex

http://www.bseindia.com/markets/MarketInfo/DispNewNoticesCirculars.aspx?page=20170807-31

https://beta.bseindia.com/xml-data/corpfiling/AttachLive/69c3ac40-9a61-440e-aad2-1cc26b3db6b1.pdf

https://www.firstpost.com/corporate-business/magnetic-pillows-to-a-rs-50000-cr-empire-how-pacl-nirmal-singh-bhangoo-made-it-big-1985531.html

https://www.dnaindia.com/business/report-suspected-shell-cos-have-links-with-pacl-sources-2527118


JKUMAR INFRA COMPANY UPDATE

Strong orderbook provides high revenue visibility ... ... but is highly concentrated in Metro/ Maharashtra


Poor execution in FY16/17/18 – strong pickup in FY19 ... while margins have remained stable

Leverage remains under control... ... while working capital might be stretched a bit


82 75 83 93 105 125

4.8

3.6 3.6 3.7 3.8

4.6

-

1.0

2.0

3.0

4.0

5.0

6.0

-

20

40

60

80

100

120

140

3Q

FY1

8

4Q

FY1

8

1Q

FY1

9

2Q

FY1

9

3Q

FY1

9

Incl

New

/L1

Bo

ok

to S

ales

(x)

Ord

erb

ok

(Rs

bn

)


Civil, 10%

Transport, 89%

Flyover, 12%

Elevated Metro, 23% Underground

Metro, 37%

Roads, 18%

Others, 11%

Delhi, 20%

Gujarat, 3%

Maharashtra, 75%

UP, 3%

0% 20% 40% 60% 80% 100%

Type

Sector

State

12 13 14 16 21 18

19% 13%

5%

14%

28%

53%

0%

10%

20%

30%

40%

50%

60%

0.0

5.0

10.0

15.0

20.0

25.0


% Y

oY

Gro

wth

- R

HS

Rev

enu

e (R

s. B

n)


2,0

58

2,5

06

2,4

83

2,5

06

3,2

13

3,0

22

17%

19% 18%

16% 16% 17%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

0

500

1,000

1,500

2,000

2,500

3,000

3,500


OP

M (

%)

- R

HS

EBIT

DA

(Rs

mn

)

EBITDA OPM (%)

5,5

71

5,3

34

3,5

37

4,1

73

4,7

85

1.0

0.7

0.3 0.3 0.3

-

0.2

0.4

0.6

0.8

1.0

1.2

-

1,000

2,000

3,000

4,000

5,000

6,000


Leve

rage

(x)

- R

HS

Stan

dal

on

e d

ebt

(Rs.

mn

)


41 55

77 111

94

174

148 126

146 145

196

229

258 283

206

-

50

100

150

200

250

300


Day

s




Apr-16: The BMC issue – as it played out

Date Event

Apr-16

BMC, in its investigation of 35 road projects across the city, finds 'shoddy work' on almost all of them

Recommends black-listing of six companies involved in those projects - Mahavir Road Infra, Relcon Infra Projects, KR Infra Projects, RPS Infra Projects, RK Madani and Jkumar Infraprojects

BMC suspends two chief engineers connected with the projects inspected and black-lists the six firms

BMC files a police complaint against the companies under sections 420 (cheating), 197 (issuing or signing false certificate), and 120(b) (criminal conspiracy) of the Indian Penal Code (IPC)

May-16 JKIL receives Rs 1.9bn orders from Municipal Corp of Greater Mumbai (MCGM)

JKIL receives Rs 3.6bn order for Mumbai Metro Phase 2 project, from Mumbai Metropolitan Regional Development Authority (MMRDA)

Jun-16 Police arrest 22 junior-rung officials of the six contractors

The minister of state (Urban Development) “suggests” invoking Maharashtra Control of Organized Crime Act (MCOCA) against the contractors

Jul-16 JKIL receives Rs 50bn orders for Mumbai Metro Phase 3 project, from Mumbai Metro Rail Corporation (MMRC)

Widespread protests in the city and the state legislative assembly by various bodies and political parties

Aug-16 BMC cancels Rs 1.9bn orders awarded to JKIL by MCGM Income tax department conducts raids on offices of the company

Source: Media, PhillipCapital India Research

Aug-17: SEBI temporarily suspends trading under directive from MCA In Aug-17, SEBI temporarily suspended trading in JKumar’s stock (and 161 other listed companies) under a directive from the Ministry of Corporate Affairs (MCA), as it was identified as a ‘shell company’ by the ministry. SEBI also directed exchanges to implement the following measures for the companies:

JKIL appealed against the order in SAT and subsequently, the stay on trading of

its securities was lifted.

Thereafter, in a series of to-and-fro communications, SEBI has asked JKIL for

various business and financial documents, which the company provided.

Oct-18: SEBI reinitiates the investigation under the Shell Company issue, and passes an interim order to conduct a third party forensic audit of its accounts In Oct-18, SEBI passed an interim order, to conduct forensic audit of JKIL’s books of accounts, as it suspects the company to have “misrepresented its financials” for FY09, FY10 and FY11. The company has been given 30 days to file its response.

SEBI claimed that it suspected JKIL to have: 1. Booked "revenues from contracts with entities when no such contracts were

prima facie intended for execution at all" 2. Misused "books of accounts to reflect the flow of funds in order to create an

appearance of revenue creation" 3. Created "entries of revenue in respect of the contracts, in the books of the

Company thereby also misrepresenting its financials"

Key observations by SEBI, in the Interim order:

JKIL has NOT submitted its ARs and account details for the period FY07-14

JKIL has NOT submitted "work completion certificates", for any of the work executed for PACL, and the same executed by sub-contractors for JKIL.

Discrepancies in area of land in sub-contract agreements (531 vs 1487 acres).

JKIL’s agreements with PACL, and sub-contractors are neither notarized nor are on stamp papers. Also NOT been signed on all pages, but only on the last page.

JKIL has earned only 1-2% operating margins on the work executed for PACL, via its sub-contractors - much lower than its overall operating margin of 16-17%.

Multiple invoices, raised on different dates, have the same invoice numbers.

JKIL has NOT submitted documents depicting “working for estimating the value of contracts”, citing these as internal documents, which it does not preserve - a practice violating Section 2 and Section 209 of the Companies Act, 1956.

JKIL has NOT provided the Khasra/SD no of the land parcels, on which the work for PACL was executed - thus making it impossible to identify which invoices are for which land parcels, and if they are genuine.

(Read the SEBI circular here).

(Read SEBI Interim Order here)

http://www.bseindia.com/markets/MarketInfo/DispNewNoticesCirculars.aspx?page=20170807-31

https://www.bseindia.com/xml-data/corpfiling/CorpAttachment/2018/9/69c3ac40-9a61-440e-aad2-1cc26b3db6b1.pdf




Income Statement Y/E Mar, Rs mn FY15 FY16 FY17 FY18

Net sales 13,432 14,086 16,042 20,507

Growth, % 13 5 14 28

Total income 13,432 14,086 16,042 20,507

Employee expenses -741 -784 -1,267 -1,971


EBITDA (Core) 2,506 2,483 2,506 3,213

Growth, % 21.7 (0.9) 0.9 28.2

Margin, % 18.7 17.6 15.6 15.7

Depreciation -474 -512 -556 -727

EBIT 2,032 1,971 1,950 2,485

Growth, % 18.8 (3.0) (1.1) 27.5

Margin, % 15.1 14.0 12.2 12.1

Interest paid -768 -616 -662 -703


Pre-tax profit 1,395 1,529 1,599 2,067

Tax provided -451 -544 -525 -701

Profit after tax 944 985 1,073 1,366

Net Profit 944 985 1,073 1,366

Growth, % 12.3 4.4 9.0 27.3

Net Profit (adjusted) 944 985 1,073 1,366




Orderbook 41,530 40,294 93,350 74,800

Growth YoY (%) 0% -3% 132% -20%

Book-to-Sales (x) 3.1 2.9 5.8 3.6

Order Inflow 13,430 12,850 69,099 1,957


Cash & bank 1,548 1,736 5,229 5,106

Debtors 2,008 2,956 4,861 5,288

Inventory 5,431 4,861 6,436 8,143

Loans & advances 797 1,040 106 160


Investments 11 1,789 3 150


Less: Depreciation -1,740 -511 -1,049 -1,770

Add: Capital WIP 633 675 712 1,262

Net fixed assets 4,933 4,975 5,827 8,423

Total assets 16,922 19,637 27,633 33,615











Pre-tax profit 1,395 1,529 1,599 2,067


Chg in working capital -1,650 -1,224 933 828

Total tax paid -451 -544 -525 -701

Cash flow from operating activities -233 273 2,563 2,922

Capital expenditure -399 -554 -1,408 -3,323

Chg in investments 12 -1,778 1,786 -147

Cash flow from investing activities -388 -2,332 378 -3,470

Free cash flow -620 -2,059 2,942 -549

Equity raised/(repaid) 1,463 4,088 0 108

Debt raised/(repaid) -238 -1,796 636 611


Cash flow from financing activities 956 2,245 553 425

Net chg in cash 336 187 3,495 -124

Valuation Ratios

FY15 FY16 FY17 FY18


Growth, % (3.1) (11.1) 9.0 27.3


FDEPS (INR) 14.6 13.0 14.2 18.1

CEPS (INR) 22.0 19.8 21.5 27.7

CFPS (INR) (5.6) 1.3 29.8 34.8


Return on equity (%) 13.8 9.5 8.0 9.4



Receivable days 54.6 76.6 110.6 94.1

Inventory days 147.6 126.0 146.4 144.9

Payable days 112.5 91.6 252.5 284.0


Liquidity ratios

Current ratio (x) 3.2 4.0 2.3 1.8

Quick ratio (x) 1.8 2.5 1.6 1.2



Net debt/Equity (x) 0.5 0.1 (0.1) (0.0)

Valuation

PER (x) 11.1 12.5 11.5 9.0

PEG (x) - y-o-y growth (3.6) (1.1) 1.3 0.3

Price/Book (x) 1.3 1.0 0.9 0.8

EV/Net sales (x) 1.1 1.0 0.7 0.6

EV/EBITDA (x) 5.7 5.7 4.5 3.7

EV/EBIT (x) 7.0 7.2 5.8 4.8



Simplex Infrastructure (SINF IN)

Getting old; but not growing ...


25 March 2019

Simplex Infrastructure (SINF) is a Calcutta-based EPC company, present across diversified segments of buildings, roads, ports, metros, and irrigation, across the country. Established in 1924, it is one of the survivors of the last cycle. Just like NCC and ITDC, it has managed to transform itself by doubling its earnings and maintaining healthy inflow of orders over FY14-18. However, with a leverage of 2.2x and an NWC cycle of 250 days (FY18), it has a much inferior balance sheet than most other players. We believe many things need to fall into place over the next two years for the company to report earnings growth in line with peers.

Disappointing performance over last five years; FY19 no different A sample data point – SINF reported a topline of Rs 59bn in FY12. Over the next SIX years, its topline grew by a CAGR of -0.4% and the company reported topline of Rs 58bn in FY18. It has not been able to cross the Rs 60bn mark after almost touching it six years ago. Even in FY19, despite a strong orderbook, the company has reported topline/earnings growth of only 8%/2% – a huge disappointment compared to strong results by its peers.

Strong order inflows over the last two years SINF has reported strong order inflows in the last two years, particularly FY17/18. While in FY18, the order inflow was strong at Rs 77bn, the order inflow YTD FY19 has been muted at Rs 24bn – taking its orderbook to Rs 168bn (2.7x book-to-sales). While the orderbook is fairly spread across segments and geographies, it provides moderate revenue visibility for ext two years – which is also dependent on strong execution by the company.

Balance sheet significantly stretched – remains a BIG concern SINF currently has debt of Rs 35bn; its leverage of 1.7x is significantly higher than the industry average of 0.4x. Over the last four quarters, its gross debt has only risen (from Rs 33bn to Rs 35bn) due to high debtor days (at 92) because of non-receipt of payment of old receivables and delay in payments for few projects. With no BOT/real-estate assets to divest (potential source of capital) and incremental working capital requirement for supporting revenue growth over next few years, we believe it will be difficult for the company to reduce leverage from here.

No clarity on payment from NHAI and other govt. bodies Just like HCC, Simplex’s stock rose sharply after the NITI AYOG circular in Sep-16, which directed all central government bodies to pay developers 75% of the claims that have been awarded in their favour. SINF currently has Rs 18bn of claims under arbitrations. While HCC has realized Rs 15bn of cash receipts since the directive, SINF is yet to receive any significant amount (Rs 2.8bn received). We believe encashment of these claims is paramount for it to deleverage its balance sheet. Without this, its balance sheet will only deteriorate from here.

Well positioned to capitalise the huge opportunity: We expect huge order opportunity in the infrastructure sector (especially buildings, roads, metros, and irrigation). SINF has a significant presence in all these segments (excluding irrigation) where the order award momentum has been strong and/or is expected to pick-up over the next three years. Its presence and experience of having worked across the country should also shield it from any unexpected development in any specific state. We expect decent order inflow for the company over the next three years.

Hunger for growth missing? SINF was established in 1928 – almost nine decades ago. It is perhaps one of the oldest companies in the construction space – but still has a topline of only Rs 60bn – much lower than NCC (Rs 120bn, much younger) and Dilip Buildcon (Rs 95bn, even younger than NCC). Somewhere, we find the management not aggressive enough or lacking growth aspirations. With multiple aggressive ‘new kids on the block’ like Dilip, KNR and PNC, we fear the company might not be able to withstand tough competition. We find the overall profile of the company unattractive.





52 - WK HI/LO (RS) : 630 / 131


PAR VALUE (RS) : 10



PROMOTERS : 49.3 49.3 49.3

FII / NRI : 11.0 10.4 10.3

FI / MF : 20.7 20.2 20.4

NON PRO : 10.1 2.8 2.6

PUBLIC & OTHERS : 8.9 17.4 17.5


1MTH 3MTH 1YR

ABS 20.7 -9.5 -67.0

REL TO BSE 14.5 -15.3 -79.9

PRICE VS. SENSEX


KEY FINANCIALS


Net Sales 59,046 56,075 57,662

EBIDTA 6,822 6,162 6,689

Net Profit 1,061 1,203 1,170

EPS, Rs 21.4 24.3 23.6

PER, x 7.8 6.8 7.0

EV/EBIDTA, x 6.2 6.7 6.4

P/BV, x 0.6 0.5 0.5

ROE, % 7.4 8.1 7.4



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Simplex Infra BSE Sensex


SIMPLEX INFRASTRCUTURES COMPANY UPDATE

A decent orderbook providing revenue visibility ... ... well diversified across country and segments


Revenue growth has been muted for the last six years, while margins have expanded, though lower than expectations


Balance sheet remains fairly stretched, with high leverage, and high working capital cycle (esp debtor days)


173 173 186 178 168 168

3.0 3.1

3.2

3.0

2.8 2.7

2.5

2.6

2.7

2.8

2.9

3.0

3.1

3.2

3.3

155

160

165

170

175

180

185

190

2Q

FY1

8

3Q

FY1

8

4Q

FY1

8

1Q

FY1

9

2Q

FY1

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3Q

FY1

9

Bo

ok

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Ord

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oo

k (R

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n)


Piling, 3%

Power, 16

Industrial, 2%

Roads & Bridges, 18%

Marine, 3%

Buildings, 22%

Urban, 26%

Domestic, 97%

Foreign, 3%

Govt, 80% Prvate, 20%

Segment

Geo

Client

55 56 59

56 58

45

-5%

1%

6%

-5%

3%

8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

-30.0

-20.0

-10.0

0.0

10.0

20.0

30.0

40.0

50.0

60.0


% Y

oY

Gro

wth

- R

HS

Rev

enu

e (R

s. B

n)


5,1

59

5,6

20

6,8

22

6,1

62

6,6

89

5,3

20

9%

10%

12%

11%

12% 12%

6%

7%

8%

9%

10%

11%

12%

13%

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000


OP

M (

%)

- R

HS

EBIT

DA

(Rs

mn

)

EBITDA OPM (%)

13

,97

8

14

,42

2

14

,25

0

15

,30

3

16

,34

6

2.1

2.2

2.4

2.2 2.2

1.0

1.5

2.0

2.5

12,500

13,000

13,500

14,000

14,500

15,000

15,500

16,000

16,500

17,000


Leve

rage

(x)

- R

HS

Stan

dal

on

e d

ebt

(Rs.

mn

)


139 142

80 100 92

57 62

45 49 48

204

235 214

236 255

-

50

100

150

200

250

300


Day

s



SIMPLEX INFRASTRCUTURES COMPANY UPDATE


Net sales 55,816 59,046 56,075 57,662

Growth, % 1 6 -5 3

Total income 55,816 59,046 56,075 57,662



EBITDA (Core) 5,620 6,822 6,162 6,689

Growth, % 8.9 21.4 (9.7) 8.6

Margin, % 10.1 11.6 11.0 11.6

Depreciation -1,368 -2,036 -1,978 -1,834

EBIT 4,252 4,787 4,184 4,855

Growth, % 11.8 12.6 (12.6) 16.0

Margin, % 7.6 8.1 7.5 8.4

Interest paid -3,843 -4,286 -4,454 -4,709

Other Non-Operating Income 530 981 1,615 1,363

Pre-tax profit 939 1,482 1,346 1,509

Tax provided -315 -421 -143 -340

Profit after tax 624 1,061 1,203 1,170

Net Profit 624 1,061 1,203 1,170

Growth, % 3.1 70.0 13.3 (2.8)

Net Profit (adjusted) 624 1,061 1,203 1,170



Orderbook Y/E Mar, Rs bn FY15 FY16 FY17 FY18

Orderbook 161 141 165 186

Growth YoY (%) 6% -13% 17% 13%

Book-to-Sales (x) 2.9 2.4 2.9 3.2

Order Inflow 64 39 81 79


Cash & bank 227 233 329 1,049

Debtors 21,654 12,890 15,294 14,508

Inventory 9,524 7,281 7,464 7,561

Loans & advances 8,220 3,984 4,830 5,854


Investments 1,476 1,281 1,339 1,341




Net fixed assets 11,208 12,935 11,845 11,076

Total assets 78,393 79,156 84,176 92,143











Pre-tax profit 939 1,482 1,346 1,509

Depreciation 1,368 2,036 1,978 1,834

Chg in working capital -4,652 1,092 -1,518 -3,347

Total tax paid -469 -1,542 123 -189

Cash flow from operating activities -2,814 3,068 1,928 -192

Capital expenditure -407 -3,762 -888 -1,081

Chg in investments -136 195 -58 -2

Cash flow from investing activities -543 -3,567 -945 -1,083

Free cash flow -3,357 -499 983 -1,275

Equity raised/(repaid) -45 134 0 0

Debt raised/(repaid) 2,957 1,737 -737 2,115


Cash flow from financing activities 2,777 505 -887 1,980

Net chg in cash -580 6 96 704

Valuation Ratios

FY15 FY16 FY17 FY18


Growth, % 3.1 70.0 13.3 (2.8)


FDEPS (INR) 12.6 21.4 24.3 23.6

CEPS (INR) 40.3 62.6 64.3 60.7

CFPS (INR) (89.3) 44.8 6.7 (30.3)


Return on equity (%) 4.4 7.4 8.1 7.4




Sales/Net FA (x) 4.8 4.9 4.5 5.0


Receivable days 141.6 79.7 99.5 91.8

Inventory days 62.3 45.0 48.6 47.9

Payable days 215.4 209.5 251.4 279.7


Liquidity ratios

Current ratio (x) 2.2 2.2 2.0 2.0

Quick ratio (x) 1.9 1.9 1.8 1.8




Valuation

PER (x) 13.2 7.8 6.8 7.0

PEG (x) - y-o-y growth 4.3 0.1 0.5 (2.6)

Price/Book (x) 0.6 0.6 0.5 0.5

EV/Net sales (x) 0.7 0.7 0.7 0.7

EV/EBITDA (x) 7.2 6.2 6.7 6.4

EV/EBIT (x) 9.5 8.8 9.8 8.8



Gayatri Projects (GAYP IN)

Too much load, to be able to fly …


25 March 2019

Gayatri Projects Ltd (GPL) is a Hyderabad based EPC player, present across segments of roads, irrigation, mining and power. Over the last two years, the company has seen a remarkable transformation – reporting strong growth in topline/earnings and grabbing a large share of EPC orders. Its EPC order book now stands at Rs 173bn (5.3x book-to-sales), spread across roads (69%), irrigation (22%), and mining (4%). The strong orderbook can lead to strong topline growth over FY18-21, but earnings growth might remain muted due to its stretched balance sheet and limited avenues to deleverage it.

Focus on EPC business with record order inflows over the last three years Over the last three years, GPL has received record order inflows – Rs 59/32/78bn in FY17/FY18/9MFY19 – from roads, irrigation, and mining. Its book swelled from Rs 62bn in FY15 to Rs 173bn in 9MFY19. Currently, at 5.3x book-to-sales, it provides high revenue visibility for at least three years. The management has guided for 30% topline growth in FY19 (downgraded from the earlier 45-50%). In FY20, it expects to touch Rs 50bn topline – while the orderbook provides adequate visibility for the same, we remain sceptical because of its stretched balance sheet.

Working capital to expand; balance sheet to be stretched with expected growth GPL currently has a debt of Rs 16bn at a standalone level; leverage of 1.4x is significantly higher than ALL industry peers (average of 0.4x, some net cash like KNR and Ahluwalia). Its working capital, is at comfortable levels currently, with debtor/inventory/NWC days of 142/37/66. With a strong orderbook and aggressive topline guidance, we expect incremental working capital to lead to higher leverage, with no avenue (such as divestment of assets) to support cash requirements. At the same time, foray into new segments might require additional capex, which will add further strain to the balance sheet.

Listing of road BOT assets has not added much value; call option for power assets GPL hived off its Rs 6bn BOT portfolio (seven projects, all operational) into a separate entity – Gayatri Highways Ltd (GHL) and listed it on the exchanges in June-18. GPL holds 26% stake in this entity, while the promoter group holds another 35%. Since listing, GHL has lost 90% of its value, and currently commands a market-cap of only Rs 215mn.

GPL holds 13% stake in Rs 6.7bn power portfolio of two thermal power projects (1320MW each, both operational, but only one has PPA/FSA). GPL also has a call option with Sembcorp (JV partner) to increase its stake to 30% (by investing Rs 9bn).

We do not see much value accretion from either division. The BOT portfolio value has been consistently eroding, and with spate of BOT projects available for sale, it will be difficult for GPL to extract any value out of GHL. On the other hand, it will be extremely difficult for SGPP (the second power plant) to sign an FSA/PP in the current environment – limiting the upside potential from the assets.

Outlook Investor interest in GPL can be gauged from the fact that its board had taken an enabling resolution to raise Rs 10bn of equity capital in Dec-17. In Mar-18, it managed to raise only Rs 2bn through its QIP, which has turned out to be completely inadequate to support its growth in the wake of the strong orderbook and already high leverage. We find the overall profile of the company unattractive.





52 - WK HI/LO (RS) : 220 / 146


PAR VALUE (RS) : 2



PROMOTERS : 45.0 45.0 45.0

FII / NRI : 46.1 46.5 39.6

FI / MF : 3.6 3.6 3.8

NON PRO : 4.5 4.8 4.3



1MTH 3MTH 1YR

ABS 2.3 -3.3 -20.2

REL TO BSE -3.9 -9.0 -33.1

PRICE VS. SENSEX


KEY FINANCIALS


Net Sales 18,122 21,154 29,123

EBIDTA 2,603 3,234 4,677

Net Profit 580 704 1,881

EPS, Rs 3.3 4.0 10.0

PER, x 46.1 38.0 15.0

EV/EBIDTA, x 17.0 14.0 9.7

P/BV, x 3.2 3.6 2.5

ROE, % 7.6 8.9 20.2




80

130

180

230


Gayatri Proj BSE Sensex


GAYATRI PROJECTS COMPANY UPDATE

GIL has a strong orderbook .. ... well diversified across segments and geography


Over the last two years, the company has shown a remarkable turnaround in execution and operating margins


The QIP has repaired the balance sheet to some extent, but it still remains quite stretched


119 140 132 129 170 173

5.0 5.0 4.5

4.2

5.2 5.3

-

1.0

2.0

3.0

4.0

5.0

6.0

-

20

40

60

80

100

120

140

160

180

200

2Q

FY1

8

3Q

FY1

8

4Q

FY1

8

1Q

FY1

9

2Q

FY1

9

3Q

FY1

9

Bo

ok

-to

- s

ales

(x)

Ord

erb

oo

k (R

s b

n)


Road - EPC, 69%

Road - BOT, 0%

Railways, 2%

Irrigation, 22%

Land Developent,

3%

Mining, 4%

UP, 26% Odisha, 16%

Bihar, 4%

Maharasthra, 11%

AP & Telangana,

22% Others, 21%

Segment

State

18 16 18 21 29 23

-10% -12%

13% 17%

38%

17%

-20%

-10%

0%

10%

20%

30%

40%

50%

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0


% Y

oY

Gro

wth

- R

HS

Rev

enu

e (R

s. B

n)


2,6

97

2,0

76

2,6

03

3,2

34

4,6

77

3,8

15

15% 13%

14% 15%

16% 16%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000


OP

M (

%)

- R

HS

EBIT

DA

(Rs

mn

)

EBITDA OPM (%)

6,6

60

6,8

25

8,4

60

7,4

10

11

,22

9

2.3

2.6

2.3

2.8

1.7

1.6

1.8

2.0

2.2

2.4

2.6

2.8

3.0

-

2,000

4,000

6,000

8,000

10,000

12,000


Leve

rage

(x)

- R

HS

Stan

dal

on

e d

ebt

(Rs.

mn

)


189 142 126 130

142

48 55 31

62 37

213

254

278

71 53

-

50

100

150

200

250

300

350


Day

s



GAYATRI PROJECTS COMPANY UPDATE


Net sales 16,011 18,122 21,154 29,123

Growth, % -12 13 17 38

Total income 16,011 18,122 21,154 29,123



EBITDA (Core) 2,076 2,603 3,234 4,677

Growth, % (23.0) 25.4 24.2 44.6

Margin, % 13.0 14.4 15.3 16.1

Depreciation -282 -375 -432 -547

EBIT 1,794 2,229 2,803 4,130

Growth, % (25.2) 24.2 25.8 47.4

Margin, % 11.2 12.3 13.2 14.2

Interest paid -1,487 -1,602 -2,014 -2,394


Pre-tax profit 351 697 941 1,825

Tax provided -130 -117 -237 55

Profit after tax 221 580 704 1,881

Net Profit 221 580 704 1,881

Growth, % (53.7) 163.1 21.4 167.1

Net Profit (adjusted) 221 580 704 1,881

Unadj. shares (m) 151 177 177 187

Wtd avg shares (m) 151 177 177 187


Orderbook 48,385 1,09,740 1,29,330 1,32,000

Growth YoY (%) -12% 127% 18% 2%

Book-to-Sales (x) 3.0 6.1 6.1 4.5

Order Inflow 9,607 79,477 40,743 31,793


Cash & bank 1,452 1,800 1,970 2,426

Debtors 6,236 6,240 7,546 11,337

Inventory 2,420 1,549 3,601 2,930

Loans & advances 11,260 14,435 7,119 5,266


Investments 9,475 11,822 10,561 10,169




Net fixed assets 2,081 2,269 3,334 3,350

Total assets 35,122 38,872 44,781 49,861











Pre-tax profit 351 697 941 1,825


Chg in working capital -3,324 -99 -366 -2,440

Total tax paid -154 -180 -229 -105

Cash flow from operating activities -2,845 793 777 -173

Capital expenditure -20 -562 -1,496 -563

Chg in investments 0 -2,347 1,261 392

Cash flow from investing activities -20 -2,909 -236 -171

Free cash flow -2,865 -2,117 542 -344

Equity raised/(repaid) 0 1,064 -1,671 1,906

Debt raised/(repaid) 2,358 1,411 1,382 -1,139


Cash flow from financing activities 2,303 2,466 -372 799

Net chg in cash -562 349 169 455

Valuation Ratios

FY15 FY16 FY17 FY18


Growth, % (53.7) 124.3 21.4 152.9


FDEPS (INR) 1.5 3.3 4.0 10.0

CEPS (INR) 3.3 5.4 6.4 13.0

CFPS (INR) (4.7) (8.3) 61.3 13.3


Return on equity (%) 3.3 7.6 8.9 20.2




Sales/Net FA (x) 7.2 8.3 7.6 8.7


Receivable days 142.1 125.7 130.2 142.1

Inventory days 55.2 31.2 62.1 36.7

Payable days 264.6 256.3 335.2 284.3


Liquidity ratios

Current ratio (x) 2.1 2.3 1.2 1.2

Quick ratio (x) 1.9 2.1 1.0 1.1




Valuation

PER (x) 103.5 46.1 38.0 15.0

PEG (x) - y-o-y growth (1.9) 0.4 1.8 0.1

Price/Book (x) 3.3 3.2 3.6 2.5

EV/Net sales (x) 2.4 2.4 2.1 1.6

EV/EBITDA (x) 18.9 17.0 14.0 9.7

EV/EBIT (x) 21.8 19.8 16.2 11.0



Appendix: Mammoth opportunity over next 5 years Our bottom‐up analysis indicates that Rs 21trillion of investment opportunity is already on the anvil – to be awarded over the next five years. Large part of this awarding will actually take place in the next three years.

Mammoth opportunity in the sector, on the anvil

Bottom-up analysis of the opportunity - segmental Roads Length, km Cost, Rs bn

Irrigation

Cost, Rs bn

Bharatmala 83,677 6,923

State plans

3,000

NRLP

2,000

Total 83,677 6,923

Total

5,000

Metros Length, km Cost, Rs bn Buildings Units Cost Rs bn

Operational cities 164 790

PMAY 22 mn 3,130

Under construction 212 777

Smart Cites /AMRUT 100/500 1,000

Under development 511 1,117

IITs/IIMs/AIIMs 6/9/12 441

Total 886 2,684

Total

4,571


The opportunity can be broadly divided into following segments: 1) Buildings: Rs 4.5trillion opportunity driven by ‘Pradhan Mantri Awas Yojna’

(PMAY) under the ‘Housing for All’ scheme and spend on Smart-Cities/AMRUT. 2) Roads: Rs 7trillion opportunity envisaged under the ‘Bharatmala Paryojna’ –

looking to build economic corridors and expressways 3) Irrigation: Rs 5trillion opportunity as an extension of the current state

expenditure on irrigation, and the incremental spending on the ‘National River Linking Programme’ (NRLP).

4) Metros: Rs 2.7trillion opportunity provided by new phases of metros in 14 cities where metros projects are under-construction, and 12 more cities that are planning a metro, over the next three years.

5) Ports, airports: A rather smaller opportunity, driven by the port capacity expanding plan under ‘Sagarmala’ and 18 new Greenfield airports planned across the country.



Buildings Housing for All Under this programme, the government has set an ambitious target of achieving Housing-For-All by 2022 – marking 75 years of the country’s independence. The government envisages pucca houses with water connections, toilet facilities, and 24x7 electricity. Pradhan Mantri Awaas Yojana (PMAY): The government intends to construct 22mn affordable houses by spending of Rs 3trillion by 2022 under PMAY:

12mn units in urban – Rs 1.86trillion

10mn units in rural – Rs 1.27trillion Rural housing National Gramin Awaas Mission (NGAM): The government plans to spend Rs 3.5trillion to build ~30mn houses for the homeless by 2022, in rural areas. NGAM will replace the Indira Awaas Yojana (IAY) that covered BPL families only. Urban housing

The central government will provide assistance under the following components: o Slum redevelopment scheme: This involves redevelopment of slums with

the participation of private developers aided by a central grant of Rs 100k per beneficiary. State governments can use this grant as VGF (viability gap funding) for any slum redevelopment scheme.

o Affordable housing through interest subsidy: An interest subsidy of 6.5% on housing loans up to tenure of 15 years to EWS and LIG beneficiaries will be provided for loan amounts up to Rs 600k.

o Affordable housing in partnership with the private sector: Central assistance of Rs 150k per beneficiary, to promote housing stock for urban poor with the involvement of private/public sectors – 35% of proposed units to be earmarked for the EWS category.

o Subsidy for beneficiary-led individual construction or enhancement: Central assistance of Rs 150k (each) to eligible urban poor beneficiaries to help them build own houses or undertake improvements to an existing one.

Until February-2019 a total of 4.1mn urban housing units have been ‘grounded’, of the total 7.9mn units to be constructed under the various components of the scheme – a handsome 52%. For these, Rs 397bn of financial assistance from Centre has been released – out of the total Rs 1.2trillion to be released. States like Gujarat, Tamil Nadu, Telangana and MP exceed national average, while states of Maharashtra and UP fare poorly.

Over 50% implementation of PMAY across the country, even better for some states

Source: MoHUA (click here for the link)

58%

46% 48%

79%

65%

43%

59% 69%

26%

52% 55%

70%

80%

36%

61% 53% 52%

0%

50%

100%

AP

Bih

ar

Ch

hat

tisg

arh

Gu

jara

t

Jhar

khan

d

Kar

nat

aka

Ker

ala

MP

Mah

aras

htr

a

Ori

ssa

Raj

asth

an

Tam

ilNad

u

Tela

nga

na

Utt

ar P

rad

esh

Wes

t B

enga

l

Top

-15

Sta

tes

All

Stat

es &

UTs

% of Houses grounded for construction - Feb-2019

Source: http://www.pmindia.gov.in/en/news_updates/housing-for-all-by-2022-mission-national-mission-for-urban-housing/

BPL – Below Poverty Line EWS – Economically Weaker Sections LIG – Low Income Groups

http://mohua.gov.in/upload/uploadfiles/files/PMAY_Master_All.pdf

http://www.pmindia.gov.in/en/news_updates/housing-for-all-by-2022-mission-national-mission-for-urban-housing/





Smart Cities and AMRUT The much-hyped flagship scheme of Smart Cities entails a central outlay of Rs 1trillion. With an equal or more contribution expected from state governments, the total spend will exceed Rs 2trillion. There are two schemes under this project: Smart City project This aims to enhance the quality of life in 100 selected cities with 24-hour water and power supply, world-class transportation systems, better education and recreational facilities, e-governance, and environment-friendly atmosphere. The project will be implemented by an SPV – 50:50 JV between state government and the city corporation. The SPV will manage the entire development process, including approval of plan, release of funds, and implementation/monitoring of the plan. It will be headed by a full-time CEO, with nominees from central and state government, and urban local body (ULB) on its board. The central government will provide Rs 500bn for the scheme, translating into Rs 1bn per annum per city for five years. An equal amount will be contributed by the SPV. Thus, a total of Rs 1trillion will be invested for development of Smart Cities. Cities selected have started project preparations and implementation:

The projects launched by Ahmedabad are "sewage treatment plant, housing project, and smart learning in municipal schools".

Bhubaneswar launched "railway multi-modal hub, traffic signalisation project, and urban knowledge centre".

New Delhi Municipal Council launched "mini-sewerage treatment plants, 444 smart class rooms, WiFi, smart LED streetlights, city surveillance, command and control centre".

AMRUT (Atal Mission For Rejuvenation and Urban Transformation) The AMRUT project is a rehash of the Jawaharlal Nehru National Urban Renewal Mission (JNNURM). Under AMRUT, state governments will get the flexibility of designing schemes based on the needs of identified cities (unlike JNNURM). State governments will submit annual action plans to the Centre for the funds to be released. Against Rs 364bn funds invested under JNNURM over FY05-14, AMRUT aims to spend Rs 500bn over the next five years. AMRUT seeks to ensure basic infrastructure for 500 cities. Under this, the central government will provide each city with Rs 1bn for improving its amenities. The state government/ULB will also invest an equal amount, implying total investment of Rs 1trillion. The central assistance will be provided as:

50% of project cost for cities and towns with a population below 1mn

33% of project cost for those with population above 1mn. Cities that will be covered under AMRUT include:

All cities and towns with a population of over 0.1mn with notified municipalities.

All capital cities of states not covered in Smart City

All cities/towns classified as Heritage Cities by MoUD.

13 cities and towns on the stem of main rivers with a population above 75,000 and less than 0.1mn.

10 cities from hill states, islands and tourist destinations (not more than 1 from each state).

The central government will provide Rs 500bn for the scheme, translating into each city getting Rs 1bn per annum for five years

AMRUT aims to spend Rs 500bn over the next five years, ensuring basic infrastructure for 500 cities



State-wise allocation of Smart and AMRUT cities

Source: Smart city, AMRUT websites (% indicates share of urban population in the state)

Education institutions Over the last few years, we have seen a renewed impetus from various governments – central and state – on improving the quality of the existing educational institutions and setting up new ones. Since IITs, IIMs, and AIIMs remain the only educational institutions of some global recognition, various governments have announced new institutes under these umbrellas. These steps will not only improve the standard of higher education in the country, but also present a huge opportunity for EPC companies, who can expect significant incremental order inflow from these projects over the next five years.

Huge opportunity from various IITs, IIMs and AIIMs being set up across the country

Approx Existing institutes New institutes planned

Cost per institute

Year City Year City Year City

IITs

Kharagpur Delhi 2008 Bhubaneswar 2008 Ropar 2015 Tirupati Bombay Guwahati 2008 Gandhinagar 2009 Indore 2015 Palakkad

Rs 20bn Kanpur Roorkee 2008 Hyderabad 2009 Mandi 2015 Chattisgarh Madras

2008 Jodhpur 2012 Varanasi (BHU) 2015 Goa

2008 Patna 2015 Dhanbad (ISM) 2015 Jammu

2015 Karnataka

IIMs

Kolkata Lucknow 2007 Shillong 2011 Kashipur 2015 Amritsar Rs 5bn Ahmedabad Kozhikode 2009 Rohtak 2011 Udaipur 2015 Sambalpur

Bangalore Indore 2010 Ranchi 2015 Nagpur 2015 Sirmaur district

2010 Raipur 2015 Visakhapatnam 2016 Jammu

2011 Tiruchirappalli 2015 Bodh Gaya

AIIMs

Delhi Patna

Assam

Jammu

Mangalagiri, AP Rs 8bn Bhopal Raipur

Bhathinda

Srinagar

Nagpur

Bhubaneswar Rishikesh

Bilaspur

Kalyani, WB

Saharsa, Bihar Jodhpur Kanpur

Gorakhpur

Tamil Nadu

Rae Bareli, UP

Source: Government documents



Roads FY18 was a strong year for NHAI and the roads sector. The NHAI and MoRTH cumulatively awarded 17,000km of road projects – the highest in the sector’s history. While the target was set at highly ambitious 25,000km – that the department achieved 17,000km, despite land acquisition and management change troubles, is really creditable. The pace of construction of highways also reached 28km/day from 14km/day in 2014.

NHAI + MoRTH have delivered a strong performance in FY16-17 – though FY18 has been dismal so far

Source: NHAI, PhillipCapital India Research

However, FY19 has been a pretty dismal year. Almost at the end of the financial year, NHAI has managed to award only 2,700km – against a target of 10,000km. The order award activity has been impacted by: 1) Recurring changes in NHAI’s management: NHAI recently got its fourth chairman

in three years when Mr. Deepak Kumar replaced Mr. YS Malik – who had replaced Mr. R. Chandra in 2016 – who in turn had come as a replacement for Mr. RP. Singh. These frequent changes have led to an overall slowdown in the order award process.

2) Land acquisition problems: NHAI’s resolution NOT to award any project unless 90% of the land in acquired. While this delays the order award process by few months, it has an overall positive impact – because projects once awarded will not be stuck due to land acquisition problems (as was the case earlier).

We believe NHAI (and MoRTH) will fall significantly short of its FY19 target – and would do well to achieve even 4,500km. However, we see a robust order award activity in FY20 and beyond, driven by the resolution of land acquisition problems, settling in of the new chairman, and the new pipeline (Bharatmala Paryojna) announced in late 2017.

Bharatmala Paryojna Bharatmala Paryojna is the mother scheme of highway development over the next 10 years – just like the current NHDP has been for the last 15. MoRTH has taken two years to prepare the detailed plan of this mammoth scheme, intended to decongest and expand the existing highway network of the country. The project plan was prepared in a highly scientific manner:

Identification of corridors in a scientific manner

Commodity-wise survey of freight movement across 600 districts

Mapping of shortest route for 12,000 routes carrying 90% of the freight

Technology-based automated traffic surveys over 1,500+ points across country

Satellite mapping of corridors to identify upgradation requirements

3,3

59

5,1

67

6,6

44

1,1

16

1,4

36

3,0

67

4,3

44

4,3

55

7,3

96

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00

-

1,000

2,000

3,000

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NHAI

Constructed Awarded

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

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15

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NHAI - Constructed NHAI - Awarded

MoRTH - Constructed MoRTH - Awarded



The plan envisages creation of a network of ~42,000km of economic corridors, inter-corridor, and feeder routes across the country:

44 economic corridors: ~26,200 km connecting economically important nodes

66 inter-corridor routes: ~8,400km of inter-corridor routes connecting economic corridors

116 feeder routes: ~7,600 km of shorter feeder routes for first / last mile connectivity

At the same time, it seeks to decongest the existing corridor network – for which 185 choke points were identified across the country and are planned to be removed by:

28 ring roads

45 bypasses

34 lane expansions

12 other interventions

+60 point – yet to be finalised The DPRs for these phases are already under preparation and order awards should start from January 2018. While a total of 66,000km was identified for the scheme, phase I will comprise of 24,800km to be built at a cost of Rs 3.8trillion. Including the balance work on NHDP and other schemes like Chardham, Sagarmala, the total expenditure on the roads segment over the next five years is expected to be Rs 6.9trillion – a mammoth opportunity !!

Bharatamala Paryojna – the mega plan for the highway sector Component Description Total length

identified (km) Length for

Phase I (km) Phase I outlay

(Rs bn)

Economic Corridor Development Lane expansion, de-congestion of existing National Corridors 13100 9,000 1,200 Inter-corridors and Feeder Roads Connection of economically important production &

consumption centers 26200 6,000 800

National Corridor Efficiency Improvement Inter-connection between economic corridors, first mile & last mile connectivity

15500 5,000 1,000

Border & International Connectivity Roads

Connectivity to border areas and boosting trade with neighboring countries

5300 2,000 250

Coastal & Port Connectivity Roads Connectivity to coastal areas to enable port-led economic development

4100 2,000 200

Expressways Greenfield expressways 1900 800 400

Sub-total (A) 66,100 24,800 3,850

Balance Road works under NHDP 10,000 10,000 1,500

Sub-total (A+B) 76,100 34,800 5,350

Roads under other existing schemes LWE, SARDP-NE, NHIIP, SetuBharatam, Char Dham 48,877 48,877 1,573

Grand Total 1,24,977 83,677 6,923

Source: MoRTH

Proposed transformation of the road network in India by Bharatmala

Source: MoRTH



Included in Bharatmala, are multiple other schemes that are currently under construction and/or various stages of development. Some of them are: 1) Sagarmala: Projects connecting major ports to the national highways. While part

of these projects have already been awarded, Sagarmala phase will address the cargo evacuation problem at major ports by upgrading the existing road network to 6/8 lanes. Capex: Rs 1.6trillion

2) CharDham Project: This phase, in its first part, would connect four religious places of Kedarnath, Badrinath, Gangotri, and Yamunotri in Uttarakhand with ‘disaster-proof’ two-lane roads. In its second part, the project would encompass enhancing connectivity to other religious places. Length: 2,500km. Capex - Rs 500bn (Phase I: Length: 900km; Capex: Rs 120bn)

Kick-starting the reform process Over the last three years, NHAI has unveiled a series of reforms, which have significantly resolved the logjam in various projects. Many projects awarded in FY11-14 were stuck due to various problems such as land acquisition, environmental clearance, right of way, and the financial state of developers. As a result of these reforms, the current government has been able to restore 104 stuck road projects across the country, over the last three years.

NHAI – Series of reforms to de-bottleneck the award ad execution Step Description Provided respite to Proposal extended to

Easier environmental

clearance norms

Delinking FC and EC, EC not required for linear

brownfield stretches

All projects that were stuck due to

clearances

All projects - 24 stuck projects cleared

due to this

Premium rescheduling Back-ending premium payments to align with the

cashflows

Developers facing low traffic on

operational projects

Extended to 20 projects; 12 more

projects eligible

Relaxation of exit

clause

100% exit allowed for pre-2009 projects also (earlier

only 76% was allowed)

Helps developers to rotate capital All projects awarded pre 2009

One-time fund infusion One-time fund infusion by NHAI, to complete the

project - NHAI would then recover its investment

through first right on toll collections

Projects facing significant cost

overruns

Extended to 16 projects - negative

response from banks

Extension of

concession period

For project that faced delays due to no fault of

developers

Projects facing significant time

overruns

34 projects with more than 18 month

delay have been identified

Hybrid annuity projects New projects - mix of annuity and toll - 40% project

cost to be funded by NHAI

Projects that were not feasible due

to low traffic

Tremendous response – 29 HAM

projects for 1600km awarded so far

Investment Trust Trusts with a portfolio of operational BOT projects to

float a separately listed entity

Developers stuck with large BOT

portfolios - helps them rotate

capital

IRB Infrastructure in late stages to list

the first InvIT

Source: NHAI

Funding the Bharatmala

As per the ministry’s plan, funding this mammoth plan should not be a major hurdle. The ministry is looking for Rs 2.9trillion over the next five year as funding from the government – in line with the Rs 640bn allocated in FY17.

It is looking to raise Rs 2trillion through market borrowings – in line with Rs 400bn raised in FY17.

The remaining funding is expected to come from PPP and monetization of NHAI’s toll projects – which also does not appear to be aggressive.

How will Bharatmala be funded – the ministry’s plan

Rs bn Bharatmala-I Other Schemes Total

CRF earmarked for NH 1,397 974 2,370

GBS –SARDP-NE, EAP, Counterpart Funds, etc. - 600 600

Expected monetization of NH 340 - 340

PBF –Toll Collections of NHAI 460 - 460

Market Borrowings 2,093 - 2,093

Private Investment (PPP) 1,060 - 1,060

Total 5,350 1,573 6,923

Source: MoRTH

CHARDHAM PROJECT



Metros MRTS is slowly becoming the poster-boy of development in every state. Every state government and city municipality in India wants to be able to boast of a metro network. Currently, ten cities in the country have an operational metro network – four of these became operational in the last one year. We see this segment as one of the biggest opportunities in the infrastructure sector over the next three years. Our bottom-up analysis indicates that currently, ten cities in India with operational and expanding metro networks, have a total investment of Rs 2.9trillion riding on them – Rs 1.2trillion yet to be awarded. Similarly, three more cities are expected to join the bandwagon over the next three years, entailing investments worth Rs 550bn (yet to be awarded). Additionally, metro projects in twelve more cities are in the development stage, entailing investments of Rs 1trillion. Thus, a mammoth order pipeline of Rs 2.8trillion will be awarded over next three years.

Metro projects – Rs 2.7trillion opportunity YET to be awarded

Metros _____Total_____ __Operational__ Under construction __To be awarded__

Length Cost Length Cost Length Cost Length Cost

km Rs bn km Rs bn km Rs bn km Rs bn

Operational cities 966 2,886 546 1,297 123 378 297 1,211

Under construction 278 1,027 - - 264 977 14 50

Under development 589 1,468 - - - - 589 1,468

Total 1,832 5,381 546 1,297 387 1,354 899 2,730

Operational metro projects Operational Metro

projects

Proposed

Length

(Km)

Project

Cost

(Rs bn)

Operational

Length

(Km)

Operational

Project

Cost (Rs bn)

Implementing

Agency

Current Status Current Status

Delhi Metro 455.1 1,254.3 349.2 704.3 DMRC Phases I , II, III operational Phase IV awarding in 2019 Kolkata Metro 41.9 67.0 28.1 67.0 IR & KMRCL North-South Corridor operational East-West Corridor by Dec-19 Bengaluru Metro 114.9 408.5 42.3 138.5 BMRCL Reach 1,2, 3 operational Phase II recently approved Gurgaon Metro 12.1 33.7 12.1 33.7 HUDA, IL&FS* Phase I operational in Nov-13 Phase II in Mar-17 Mumbai Monorail 20.1 11.1 8.9 11.1 MMRDA Phase I operational in Dec-13 Phase II by Apr-19 Mumbai Metro 11.4 43.0 11.4 43.0 R-Infra Phase I operational in June-2014 Multiple phases in diff stages Jaipur Metro 35.8 135.4 9.6 20.2 JMRC Phase I operational in June-2015 Phase II planned for 24km Chennai Metro 143.0 603.9 27.9 146.9 CMRL Line I operational in June-2015 Lucknow Metro 35.0 117.7 8.5 28.6 LMRC Phase 1A operational in June-17 EPC contracts for Phase 1B

awarded; Phase 2 delayed Kochi Metro Metro 25.6 51.5 18.2 36.6 KMRL Phase I partly operational in Sep-17 Hyderabad Metro 71.2 160.0 29.8 67.0 L&T* Part operational in Nov-17

Total 966.1 2,886.0 546.0 1,296.9

Under-construction metro projects Under Construction

Metro projects

Proposed

Length

(Km)

Stations

(No)

Project

Cost

(Rs bn)

Under

Construction

Length (Km)

Implementing

Agency

Current Status Expected CoD

Mumbai Metro 170.0 140.0 708.1 170.0 MMRDA,

CIDCO

Phases 2A, 2B, 3, 4, 6, 7A under construction

Phase 7 - 2019, Phase 2A - 2020, Phase 3 - 2021

Nagpur Metro 38.2 36 86.8 38.2 NMRCL All construction contracts awarded 2019

Ahmedabad Metro 37.9 32 117.3 37.9 MEGA All construction contracts awarded 2019/2020

Pune Metro 31.5 30 114.3 18.0 Contracts for 18km awarded - others in

awarding process 2019

Total 277.7 238 1,026.5 264.1


http://backoffice.phillipcapital.in/Backoffice/Researchfiles/PC_-_GV_18_April_2016_-_for_email_20160420132842.pdf



Planned metro projects

Planned Metro

projects

Length

(Km)

No. of

Stations

Project Cost

(Rs bn) Status

Mumbai Metro lines 109.5 69 465.3 DPR approved Kanpur Metro 36.0 29 105.0 DPR approved; foundation stone laid in Oct-16 Varanasi Metro 26.0 22 75.0 DPR approved in May-16 Meerut Metro 30.0 22 65.0 DPR submitted; yet to be approved Agra Metro 25.0 23 65.0 DPR submitted; yet to be approved Ludhiana Metro 28.8 27 87.0 DPR being prepared Chandigarh Metro 37.6 30 136.0 DPR being prepared Bhopal Metro 85.0 89 80.0 DPR approved in Dec-16 Indore Metro 107.0 75 120.0 DPR approved in Dec-16 Vijaywada Metro 26.0 25 67.7 Bids invited in Nov-16 Vizag Metro 42.5 41 134.9 DPR approved in Nov-16 Kozhikode Metro 13.3 14 25.1 DPR approved; foundation stone laid in Feb-16 Trivandrum Metro 21.8 19 42.2 DPR approved; foundation stone laid in Feb-16

Total 588.5 485 1,468 Source: PhillipCapital India Research

Mumbai metro masterplan – over 300km of metro length envisaged

Phase Name of Corridor Project Cost

(Rs bn)

Length

(km)

No. of

Stations

Implementing

Agency

Status

Line I Versova-Andheri-Ghatkopar 43 11.4 12 Reliance Infra Commissioned in Aug-14 Line 2 Dahisar-Charkop-Bandra-Mankhurd 174 42.1 39 MMRDA Under construction Line 2A Dahisar-DN Nagar (part of above) 64 18.6 17 MMRDA Under construction Line 2B DN Nagar - Bandra - Mankhurd 110 23.5 22 MMRDA Under construction Line 3 Colaba-Bandra-SEEPZ 244 33.5 27 MMRC Under construction Line 4 Wadala-Ghatkopar-Thane-Kasarvadavali 120 40.0 25 MMRDA Under construction Line 5 Thane-Bhiwandi-Kalyan 84 24.0 17 MMRDA Foundation stone laod in 18-12-18 Line 6 Jogeshwari-Vikhroli Link Road 67 14.5 13 MMRDA One stretch awarded; others TBA soon Line 7 Dahisar(E)-Andheri(E)-Bandra(E) 81 27.0 24 DMRC Plan & Funding approved Line 7A Andheri (E) – Dahisar (E) (part of above) 62 16.5 16 DMRC Under construction

Navi Mumbai Metro 41 23.4 20 CIDCO Under construction

Mumbai Monorail 25 20.1 18 MMRDA Phase I operational; Phase II by June-17

Line 9 Dahisar - Mira Road - Bhayandar 65 10.4 10 MMRDA Foundation stone laod in 18-12-18 Line 10 Gaimukh - Shivaji Chowk (Mira Road) 45 9.0 9 MMRDA DPRs approved Line 11 Wadala - CST 87 11.4 10 MMRDA DPRs approved Line 12 Kalyan - Dombivali - Taloja 41 20.8 17 MMRDA DPRs approved

Total 1,227 311 263


India metro system – total operational length has doubled over three years


Kolkata Delhi

Bengaluru Gurgaon

Mumbai - phase 1

Chennai, Jaipur

Bengaluru

Hyderabad, Lucknow, Kochi

Ahmedabad, Nagpur, Kolkata

Mumbai (1 phase),

Pune

Mumbai (2 phases)

0

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1984 2002 2005 2012 2013 2014 2015 2016 2017 2018 2019E 2020E 2021E

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ro n

etw

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Irrigation Irrigation has been the biggest driver of infrastructure spends across the years, and the momentum is expected to continue in 2019.

Top-15 India states are expected to spend Rs 984bn on irrigation projects in FY18

A similar spend would translate into an investment opportunity of Rs 3trillion over the next three years

States like Telangana, Karnataka, AP and MP – which are relatively ‘dry’ states – have always spent more on irrigation than other states.

Irrigation layout of the top-15 states in India

States (Rs bn) FY14 FY15 FY16 FY17 FY18 BE

Capex

FY18E

% of Capex

FY18E

AP 31.0 42.9 45.8 74.4 120.6 219.6 54.9%

Bihar 18.0 16.5 19.4 16.9 31.0 319.0 9.7%

Chattisgarh 16.8 15.4 23.4 22.0 25.7 145.0 17.7%

Gujarat 67.8 76.5 83.1 80.7 94.0 290.0 32.4%

Haryana 9.1 9.7 5.4 6.1 8.3 111.0 7.5%

Karnataka 63.8 77.8 74.0 90.0 133.0 320.0 41.6%

MP 45.4 41.3 64.8 83.0 94.0 307.0 30.6%

Maharashtra 78.8 70.1 85.8 84.5 55.5 299.0 18.6%

Orissa 22.1 28.5 40.6 57.0 70.5 208.0 33.9%

Punjab 3.6 6.6 7.5 15.8 8.7 62.0 14.1%

Rajasthan 10.8 12.7 13.9 20.2 24.0 226.0 10.6%

Tamil Nadu 9.7 12.4 10.8 15.0 29.0 278.0 10.4%

Telangana

95.4 145.6 226.7 411.3 55.1%

Uttar Pradesh 29.6 40.9 58.1 66.1 40.9 535.0 7.6%

West Bengal 7.2 13.7 21.8 13.7 22.0 192.0 11.5%

Total 413.8 464.9 649.8 791.0 983.9 3,922.9 25.1%

Source: State budgetary documents

National River Linking Program In addition to the ‘regular’ spend on irrigation by various state governments, we expect order award activity to start on the NRLP (National River Linking Programme) in 2019. Key features:

Plan to construct 30 ‘links’ to connect 34 large rivers in India – 14 links in the Himalayan component and 16 in the peninsular component

Each link to be a combination of dams, barrages, and canals

Totally, 50-60 large dams, multiple small dams and reservoirs, 15,000km length of canals are to be built in the project.

The project cost as estimated in 2002-03 was Rs 5.6trillion – the latest cost estimate is Rs 11.4trillion

Key benefits of the project:

Avoiding huge losses of life, property, and national wealth that occur because of droughts and/or floods that occur across the country each year

Irrigation of incremental 35mn ha. of land – 25mn ha. through surface water and 10mn ha. through higher use of ground water

Generation of 34GW of hydropower – leading to lower dependence on fossil fuels like coal and LNG

Providing employment to 1mn people over the next 10 years Key challenges:

Environmental cost (deforestation, soil-erosion)

Rehabilitation (and the prospective protests surrounding it)

Social unrest due to forced resettlement of PAP (project affected people)

Political consensus

http://backoffice.phillipcapital.in/Backoffice/Researchfiles/PC_-_GV_Nov_2017_for_release_20171123111944.pdf



Current status:

3 links are in advanced stages of being awarded – DPRs have been prepared, submitted and accepted; environmental clearances have been obtained; large part of land acquisition is also complete o Ken-Betwa link – in the states of UP and MP – proposes to transfer water

from water rich basin of Ken, to water deficit basin of the Betwa river. Total project cost is expected to be Rs 300bn (Rs 180bn for Phase I).

o Par-Tapi-Narmada – in the states of Maharashtra and Gujarat – intends to transfer water from the west flowing rivers of Tapi/Narmada to Saurashtra and Kutch. Total project cost is expected to be Rs 130bn.

o Damanganga-Pinjal – in the state of Maharashtra – proposes to divert surplus water of the Damanganga and Pinjal rivers for Mumbai city, to augment the city’s domestic water supply. Total project cost is expected to be Rs 30bn.

9 links – set of contiguous links on the east coast – feasibility reports have been submitted. Next step is to develop consensus amongst the states, which will lead to the preparation of the DPR. Total project cost of these 9 links is estimated to be Rs 1.5-2.0trillion in current prices.

Feasibility reports of other links are being prepared. This project will provide a huge boost to the construction sector (60-70% of project scope will be construction of dams and canals).

National River Linking Programme (NRLP) blue print

Source: CWC

Himalayan Component

1. Manas-Sankosh-Tista-Ganga

2. Kosi-Ghagra

3. Gandak-Ganga

4. Ghagra-Yamuna

5. Sarda-Yamuna

6. Yamuna-Rajasthan

7. Rajasthan-Sabarmati

8. Chunar-Sone Barrage

9. Sone Dam-Southern Tributaries of Ganga

10. Ganga (Farakka)-Damodar-Subernarekha

11. Subernarekha-Mahanadi

12. Kosi-Mechi

13. Farakka-Sunderbans

14. Jogighopa-Tista-Farakka

Peninsular Component

15. Mahanadi (Manibhadra) – Godavari

(Dowlaiswaram)

16. Godavari (Inchampalli) – Krishna (Pulichintala)

17. Godavari (Inchampalli) – Krishna

(Nagarjunasagar)

18. Godavari (Polavaram) – Krishna (Vijayawada)

19. Krishna (Almatti) – Pennar

20. Krishna (Srisailam) – Pennar

21. Krishna (Nagarjunsagar)-Pennar (Somasila)

22. Pennar (Somasila) – Cauvery (Grand Anicut)

23. Cauvery (Kattalai) – Vaigai-Gundar

24. Ken-Betwa

25. Parbati-Kalisindh-Chambal

26. Par-Tapi-Narmada

27. Damanganga-Pinjal

28. Bedti-Varada

29. Netravati-Hemavati

30. Pamba-Achankovil-Vaippar



Ports and Airports Compared to segments like roads, buildings and metros – the opportunity in ports and airports segments is expected to be significantly lower. We estimate the sectors to spend ~Rs 2trillion over the next five years.

Airports After the modernisation of four airports on a PPP basis (Delhi, Mumbai, Bengaluru, Hyderabad), AAI has upgraded multiple airports across the country (tier-1 and tier-2 cities), over the last ten years. As of now, AAI’s pipeline consists of:

Upgradation of multiple airports for capex of Rs 175bn

Development of 18 greenfield airports for capex of Rs 300bn

Overall, cumulatively, ports and airports segments offer a much smaller opportunity, over the next 3-5 years, than the sectors of roads, buildings, and metros.

Ports The ministry of shipping has prepared a comprehensive plan to expand ports capacity and connectivity till 2025 under the ‘Sagarmala’ scheme. The scheme envisages adding 222mtpa of cargo-handling capacity at major ports, improving rail and road connectivity to ports, developing port-activity-related clusters, and skill development. The total capex for the plan is envisaged to be Rs 4trillion – spread over the next ten years.

Capacity expansion planned under Sagarmala

Port (mtpa) Existing capacity

Ongoing

expansion

Additional capacity

from Master Plan Final Capacity

Kandla 121.4 24.5 55.0 200.9

Mumbai 44.5 29.5 4.0 78.0

JNPT 79.4 60.0 45.0 184.4

Mormugao 43.8 - 35.0 78.8

Kamarajar (Ennore) 37.0 42.0 3.0 82.0

Chennai 86.0 - 12.0 98.0

V.O. Chidambaranar 44.6 38.9 30.6 114.1

New Mangalore 77.8 6.7 5.5 90.0

Cochin 49.7 4.1 2.0 55.8

Visakhapatnam 96.8 38.8 8.0 143.6

Paradip 119.8 65.6 10.0 195.4

Kolkata Port Trust 70.9 10.8 12.0 93.7

Total Capacity (MTPA) 871.7 320.9 222.1 1,414.7

Source: Sagarmala documents

Break-up of capex plans of Sagarmala

Particular Head Capex

(Rs bn)

Total Capex

(Rs bn)

Port modernization New mega ports 300

Capex at existing ports 350 650

Connectivity Road 1,600

Rail 500

Inland waterways 50

Pipeline 50

ICDs 6 2,206

Port-led industrialization Manufacturing clusters 400

Materials clusters 350

Energy clusters 300 1,050

Coastal community development Skill development and Fishing harbours 50 50

Total

3,956 Source: Sagarmala documents

18 Greenfield airports approved



Stock Price, Price Target and Rating History (NCC Ltd)

Stock Price, Price Target and Rating History (Ahluwalia)

Stock Price, Price Target and Rating History (KNR Construction)

B (TP 100) B (TP 100) B (TP 125)

B (TP 115) B (TP 110) B (TP 115) B (TP 110) B (TP 125)

B (TP 160)

B (TP 165)

B (TP 165) B (TP 165) B (TP 145)

B (TP 150)

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B (TP 350)

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B (TP 415)

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B (TP 415) B (TP 500) B (TP 500)

B (TP 500) B (TP 410)

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O-16 N-16 D-16 F-17 M-17 M-17 J-17 A-17 S-17 N-17 D-17 J-18 M-18 A-18 J-18 J-18 S-18 O-18 D-18 J-19

B (TP 144) B (TP 158)

B (TP 180)

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Stock Price, Price Target and Rating History (PNC Infra)

Stock Price, Price Target and Rating History (ITD Cementation)

B (TP 132) B (TP 138) B (TP 140)

B (TP 140)

B (TP 160) B (TP 160)

B (TP 190) B (TP 200) B (TP 205) B (TP 200) B (TP 190)

B (TP 190)

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B (TP 120)

B (TP 140) N (TP 135) N (TP 145)

S (TP 125) S (TP 125)

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Stock Price, Price Target and Rating History (IRB Infra)

Stock Price, Price Target and Rating History (Ashoka Buildcon)

Stock Price, Price Target and Rating History (Sadbhav Engineering)

B (TP 320) B (TP 320)

B (TP 280) B (TP 280)

J-17

B (TP 290)

B (TP 290) B (TP 290) N (TP 255)

N (TP 225)

N (TP 250)

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N (TP 140) N (TP 155)

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B (TP 220)

B (TP 220) B (TP 205)

B (TP 205)

N (TP 205)

N (TP 205) B (TP 210)

B (TP 250) B (TP 292)

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N (TP 300)

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J-17 F-17 M-17 M-17 J-17 A-17 S-17 N-17 D-17 F-18 M-18 M-18 J-18 J-18 S-18 O-18 D-18 J-19



Rating Methodology We rate stock on absolute return basis. Our target price for the stocks has an investment horizon of one year.

Rating Criteria Definition

BUY >= +15% Target price is equal to or more than 15% of current market price

NEUTRAL -15% > to < +15% Target price is less than +15% but more than -15%

SELL <= -15% Target price is less than or equal to -15%.

Disclosures and Disclaimers PhillipCapital (India) Pvt. Ltd. has three independent equity research groups: Institutional Equities, Institutional Equity Derivatives, and Private Client Group. This report has been prepared by Institutional Equities Group. The views and opinions expressed in this document may, may not match, or may be contrary at times with the views, estimates, rating, and target price of the other equity research groups of PhillipCapital (India) Pvt. Ltd.

This report is issued by PhillipCapital (India) Pvt. Ltd., which is regulated by the SEBI. PhillipCapital (India) Pvt. Ltd. is a subsidiary of Phillip (Mauritius) Pvt. Ltd. References to "PCIPL" in this report shall mean PhillipCapital (India) Pvt. Ltd unless otherwise stated. This report is prepared and distributed by PCIPL for information purposes only, and neither the information contained herein, nor any opinion expressed should be construed or deemed to be construed as solicitation or as offering advice for the purposes of the purchase or sale of any security, investment, or derivatives. The information and opinions contained in the report were considered by PCIPL to be valid when published. The report also contains information provided to PCIPL by third parties. The source of such information will usually be disclosed in the report. Whilst PCIPL has taken all reasonable steps to ensure that this information is correct, PCIPL does not offer any warranty as to the accuracy or completeness of such information. Any person placing reliance on the report to undertake trading does so entirely at his or her own risk and PCIPL does not accept any liability as a result. Securities and Derivatives markets may be subject to rapid and unexpected price movements and past performance is not necessarily an indication of future performance.

This report does not regard the specific investment objectives, financial situation, and the particular needs of any specific person who may receive this report. Investors must undertake independent analysis with their own legal, tax, and financial advisors and reach their own conclusions regarding the appropriateness of investing in any securities or investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realised. Under no circumstances can it be used or considered as an offer to sell or as a solicitation of any offer to buy or sell the securities mentioned within it. The information contained in the research reports may have been taken from trade and statistical services and other sources, which PCIL believe is reliable. PhillipCapital (India) Pvt. Ltd. or any of its group/associate/affiliate companies do not guarantee that such information is accurate or complete and it should not be relied upon as such. Any opinions expressed reflect judgments at this date and are subject to change without notice.

Important: These disclosures and disclaimers must be read in conjunction with the research report of which it forms part. Receipt and use of the research report is subject to all aspects of these disclosures and disclaimers. Additional information about the issuers and securities discussed in this research report is available on request.

Certifications: The research analyst(s) who prepared this research report hereby certifies that the views expressed in this research report accurately reflect the research analyst’s personal views about all of the subject issuers and/or securities, that the analyst(s) have no known conflict of interest and no part of the research analyst’s compensation was, is, or will be, directly or indirectly, related to the specific views or recommendations contained in this research report.

Additional Disclosures of Interest: Unless specifically mentioned in Point No. 9 below: 1. The Research Analyst(s), PCIL, or its associates or relatives of the Research Analyst does not have any financial interest in the company(ies) covered in

this report. 2. The Research Analyst, PCIL or its associates or relatives of the Research Analyst affiliates collectively do not hold more than 1% of the securities of the

company (ies)covered in this report as of the end of the month immediately preceding the distribution of the research report. 3. The Research Analyst, his/her associate, his/her relative, and PCIL, do not have any other material conflict of interest at the time of publication of this

research report. 4. The Research Analyst, PCIL, and its associates have not received compensation for investment banking or merchant banking or brokerage services or for

any other products or services from the company(ies) covered in this report, in the past twelve months. 5. The Research Analyst, PCIL or its associates have not managed or co-managed in the previous twelve months, a private or public offering of securities for

the company (ies) covered in this report. 6. PCIL or its associates have not received compensation or other benefits from the company(ies) covered in this report or from any third party, in

connection with the research report. 7. The Research Analyst has not served as an Officer, Director, or employee of the company (ies) covered in the Research report. 8. The Research Analyst and PCIL has not been engaged in market making activity for the company(ies) covered in the Research report. 9. Details of PCIL, Research Analyst and its associates pertaining to the companies covered in the Research report:

Sr. no. Particulars Yes/No

1 Whether compensation has been received from the company(ies) covered in the Research report in the past 12 months for investment banking transaction by PCIL

No

2 Whether Research Analyst, PCIL or its associates or relatives of the Research Analyst affiliates collectively hold more than 1% of the company(ies) covered in the Research report

No

3 Whether compensation has been received by PCIL or its associates from the company(ies) covered in the Research report No

4 PCIL or its affiliates have managed or co-managed in the previous twelve months a private or public offering of securities for the company(ies) covered in the Research report

No

5 Research Analyst, his associate, PCIL or its associates have received compensation for investment banking or merchant banking or brokerage services or for any other products or services from the company(ies) covered in the Research report, in the last twelve months

No

Independence: PhillipCapital (India) Pvt. Ltd. has not had an investment banking relationship with, and has not received any compensation for investment banking services from, the subject issuers in the past twelve (12) months, and PhillipCapital (India) Pvt. Ltd does not anticipate receiving or intend to seek



compensation for investment banking services from the subject issuers in the next three (3) months. PhillipCapital (India) Pvt. Ltd is not a market maker in the securities mentioned in this research report, although it, or its affiliates/employees, may have positions in, purchase or sell, or be materially interested in any of the securities covered in the report.

Suitability and Risks: This research report is for informational purposes only and is not tailored to the specific investment objectives, financial situation or particular requirements of any individual recipient hereof. Certain securities may give rise to substantial risks and may not be suitable for certain investors. Each investor must make its own determination as to the appropriateness of any securities referred to in this research report based upon the legal, tax and accounting considerations applicable to such investor and its own investment objectives or strategy, its financial situation and its investing experience. The value of any security may be positively or adversely affected by changes in foreign exchange or interest rates, as well as by other financial, economic, or political factors. Past performance is not necessarily indicative of future performance or results.

Sources, Completeness and Accuracy: The material herein is based upon information obtained from sources that PCIPL and the research analyst believe to be reliable, but neither PCIPL nor the research analyst represents or guarantees that the information contained herein is accurate or complete and it should not be relied upon as such. Opinions expressed herein are current opinions as of the date appearing on this material, and are subject to change without notice. Furthermore, PCIPL is under no obligation to update or keep the information current. Without limiting any of the foregoing, in no event shall PCIL, any of its affiliates/employees or any third party involved in, or related to computing or compiling the information have any liability for any damages of any kind including but not limited to any direct or consequential loss or damage, however arising, from the use of this document.

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Kindly note that past performance is not necessarily a guide to future performance.

For Detailed Disclaimer: Please visit our website www.phillipcapital.in IMPORTANT DISCLOSURES FOR U.S. PERSONS This research report is a product of PhillipCapital (India) Pvt. Ltd. which is the employer of the research analyst(s) who has prepared the research report. PhillipCapital (India) Pvt Ltd. is authorized to engage in securities activities in India. PHILLIPCAP is not a registered broker-dealer in the United States and, therefore, is not subject to U.S. rules regarding the preparation of research reports and the independence of research analysts. This research report is provided for distribution to “major U.S. institutional investors” in reliance on the exemption from registration provided by Rule 15a-6 of the U.S. Securities Exchange Act of 1934, as amended (the “Exchange Act”). If the recipient of this report is not a Major Institutional Investor as specified above, then it should not act upon this report and return the same to the sender. Further, this report may not be copied, duplicated and/or transmitted onward to any U.S. person, which is not a Major Institutional Investor.

Any U.S. recipient of this research report wishing to effect any transaction to buy or sell securities or related financial instruments based on the information provided in this research report should do so only through Rosenblatt Securities Inc, 40 Wall Street 59th Floor, New York NY 10005, a registered broker dealer in the United States. Under no circumstances should any recipient of this research report effect any transaction to buy or sell securities or related financial instruments through PHILLIPCAP. Rosenblatt Securities Inc. accepts responsibility for the contents of this research report, subject to the terms set out below, to the extent that it is delivered to a U.S. person other than a major U.S. institutional investor.

The analyst whose name appears in this research report is not registered or qualified as a research analyst with the Financial Industry Regulatory Authority (“FINRA”) and may not be an associated person of Rosenblatt Securities Inc. and, therefore, may not be subject to applicable restrictions under FINRA Rules on communications with a subject company, public appearances and trading securities held by a research analyst account. Ownership and Material Conflicts of Interest Rosenblatt Securities Inc. or its affiliates does not ‘beneficially own,’ as determined in accordance with Section 13(d) of the Exchange Act, 1% or more of any of the equity securities mentioned in the report. Rosenblatt Securities Inc, its affiliates and/or their respective officers, directors or employees may have interests, or long or short positions, and may at any time make purchases or sales as a principal or agent of the securities referred to herein. Rosenblatt Securities Inc. is not aware of any material conflict of interest as of the date of this publication Compensation and Investment Banking Activities Rosenblatt Securities Inc. or any affiliate has not managed or co-managed a public offering of securities for the subject company in the past 12 months, nor received compensation for investment banking services from the subject company in the past 12 months, neither does it or any affiliate expect to receive, or intends to seek compensation for investment banking services from the subject company in the next 3 months. Additional Disclosures This research report is for distribution only under such circumstances as may be permitted by applicable law. This research report has no regard to the specific investment objectives, financial situation or particular needs of any specific recipient, even if sent only to a single recipient. This research report is not guaranteed to be a complete statement or summary of any securities, markets, reports or developments referred to in this research report. Neither PHILLIPCAP nor any of its directors, officers, employees or agents shall have any liability, however arising, for any error, inaccuracy or incompleteness of fact or opinion in this research report or lack of care in this research report’s preparation or publication, or any losses or damages which may arise from the use of this research report.

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Investing in any non-U.S. securities or related financial instruments (including ADRs) discussed in this research report may present certain risks. The securities of non-U.S. issuers may not be registered with, or be subject to the regulations of, the U.S. Securities and Exchange Commission. Information on such non-U.S. securities or related financial instruments may be limited. Foreign companies may not be subject to audit and reporting standards and regulatory requirements comparable to those in effect within the United States.

The value of any investment or income from any securities or related financial instruments discussed in this research report denominated in a currency other than U.S. dollars is subject to exchange rate fluctuations that may have a positive or adverse effect on the value of or income from such securities or related financial instruments.

Past performance is not necessarily a guide to future performance and no representation or warranty, express or implied, is made by PHILLIPCAP with respect to future performance. Income from investments may fluctuate. The price or value of the investments to which this research report relates, either directly or indirectly, may fall or rise against the interest of investors. Any recommendation or opinion contained in this research report may become outdated as a consequence of changes in the environment in which the issuer of the securities under analysis operates, in addition to changes in the estimates and forecasts, assumptions and valuation methodology used herein.

No part of the content of this research report may be copied, forwarded or duplicated in any form or by any means without the prior written consent of PHILLIPCAP and PHILLIPCAP accepts no liability whatsoever for the actions of third parties in this respect.

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