Dilip Buildcon Ltd. has jumped the most among peers so far this year as India’s infrastructure push drives investor interest in developers of roads to airports.
Shares of the company are trading close to 52-week high after having gained more than 50% in February alone. It’s the top performer in the infrastructure category, with gains of up nearly 74%.
12 of 14 analysts tracking the stock have a ‘buy’, according to Bloomberg data. Two suggest ‘hold’. The stock has surpassed analyst expectations, with the average of 12-month price targets implying a downside of more than 4.9%.
The latest surge for infrastructure firms is partly driven by the highest-ever outlay of Rs 1.18 lakh crore for transport and highways in the budget for 2021-22 Finance Minister Nirmala Sitharaman presented on Feb. 1. More than 90% of that has been earmarked for capex spending, increasing changes of higher orders for the sector.
For Dilip Buildcon, the budget push is not the only positive. The company’s diversification from a road developer to an infrastructure firm with presence in 19 states—only behind Larsen & Toubro Ltd.—has aided investor interest.
The company’s order book has grown more than 2.4 times to Rs 26,141 crore since it went public five years ago.
It now vies for contracts in irrigation and mining to airports, railways and metro. The share of roads in the order book has fallen by half in the last five years, according to its filings.
The government intends to build 21,800-kilometer highways, has also increased outlays for railways, water supply, metro rails and irrigation.
Rohan Suryavanshi, head-strategy and planning at Dilip Buildcon, told BloombergQuint in an interview that diversification has prepared it for contracts across infrastructure segments.
The order book is diversified geographically as well. While Gujarat, Jharkhand and Uttarakhand are the biggest contributors, Dilip Buildcon gets orders from other states as well.
Revenue Outlook
Dilip Buildcon’s revenue grew at an annualised rate of 27% in five years through March 2020. Potential infrastructure orders has boosted the revenue outlook for the firm.
Another revenue stream for Dilip Buildcon is coal. The company became a mine developer and operator in 2016. This involves land acquisition, resettlement and rehabilitation, mine development and planning, and coal extraction and transportation. The company won contracts for Pachwara and Siarmal and estimates that it will add Rs 2,000 crore annual revenue in the next 22-55 years.
Suryavanshi expects 15-20% annual growth in revenue since FY22.
For the ongoing fiscal, however, revenue growth would have been 15-16% had the company not sought moratorium over debt, said Suryavanshi. The company sought a moratorium for its debt during Covid which led to lower sales as working capital was impacted to an extent due to this.
But the company also benefited from easier payment and bank guarantee requirements as part of the government’s attempt to provide liquidity to the road sector during the pandemic. The government provided an extension of three to six months in all projects, relaxing the payment terms, improving cash flows.
Improving Working Capital
Increased infrastructure activity has decreased working capital days—or time taken to convert working capital to revenue—from the peak of 127 in 2016-17. The metric, however, worsened ahead of and during the pandemic.
The endeavor would be to bring down working capital days to less than 70 over the next three years or so, said Suryavanshi.
One key factor that may impact Dilip Buildcon is its debt. The company is looking to pare debt by monetising at least a dozen road projects it won under the hybrid annuity model—where the government and private contract share the cost of the project.
The talks for at least 12 HAM assets are at an advanced stage, according to company’s presentation. It expects Rs 900 crore in the ongoing financial year and around Rs 11,00 crore in 2022-23 from sales.
According to Suryavanshi, the sale of assets will bring down net debt to equity to less than 0.5 times by financial year 2024 from 0.9 times at the end of December. Besides, he said, it will provide capital support for growth, and increase return on equity.
According to a report by IIFL Securities, leverage should sharply improve from 0.8x in FY21 to 0.2x in FY23 as capex is contained and proceeds from asset monetisation continue to flow in. 12 HAM projects are more than 50% complete and can be transferred within six months of commercial operations data, the report said, adding that the company has sold five assets to Cube Highways and Transport Assets Advisers Pct. and is in advanced talks to sell the remaining HAM projects.
The relaxation in the change of ownership clause in HAM projects—six month after commercial operations begin against the earlier requirement of two years after COD—is positive since this allows for a quicker deleveraging process, said Suryavanshi.
According to Anupam Gupta, research analyst at IIFL Securities, “Policy easing on payments, bank guarantee requirements and sale of completed HAM assets will drive faster deleveraging to 0.2x ND/E by FY23 and allow the company to achieve 15-20% revenue CAGR over the medium term.”
Risks
According to Nomura, the company faces four key risks:
Slowdown in infrastructure ordering.
Working capital deterioration from the current levels.
Increasing leverage from below par cash generation.
Weaker-than-expected execution levels that may impact Dilip Buildcon more than its peers due to its higher fixed costs. The company owns its machinery, while its peers lease much of their requirement.
Financial services firm InCred said in a report that a delay in completion of asset sale to Cube Highways could be a potential downside risk.
Watch the full interview here...
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