Initiate ‘buy’ on Ashoka Buildcon with a target price of Rs 210 per share.
Our March-2017 based SoTP values the core construction business at 6.5x EV/Ebitda, given its strong execution track record but weak starting backlog.
We estimate the recent build-operate-transfer additions (part of Ashoka Concessions) to yield returns below the 12% IRR committed on investments made by SBI Macquarie, leading to a shortfall of ~R12 per share.
This levers the SoTP to recovery in traffic (lifting of mining ban, economic recovery). Investible funds form 20% share of our SoTP, which once invested could yield higher value.
The stock may be volatile in near term, but will eventually reflect strong sectoral growth prospects. We build in 14% revenue CAGR and flat Ebitda margin over FY2015-18e for the construction business.
For the BOT business, we estimate 1) a steady-state traffic growth of 5.5%, 2) WPI inflation of 4.5% and (3) ebitda margin gradually improving to average ~80% over the period of concession. We build in extension of concession period for Sambalpur (six years), PNG (four years), Dhankuni (three years) and Belgaum projects (three years).
Ashoka Buildcon is an integrated roads BOT player with a strong EPC business (nil debt, material third-party exposure). On the strength of its EPC cash flows, the company has been able to fund most of its R800 crore of BOT investments over FY11-15.
While these recent BOT additions have not lived up to their potential, contribution of mature BOT projects has made the overall portfolio well-funded. Its BOT portfolio has limited downside risks as 1) all toll projects have been commissioned and 2) exposure to long distance, south-north traffic (DFC) is limited.
The company can be the biggest beneficiary of an uptick in ordering in roads, given its dual business exposure and access to ~R1,400 crore of cash inflows over FY2016-18e. This can help multiply its ordering and order backlog over this period.
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