Nicely put!
Apart from the missing EPC piece, one other angle imho is cash profits.
(Disc: not a valuation or accounting expert, could be wrong, feel free to correct) –
Cranes have useful life of 35-40+ years. Depreciation in P&L is pretty aggressive. Therefore, if we don’t use cash to value this company, we will be undervaluing it.
Earnings power value
What is the static value of this business assuming no change (no growth, no cyclicality, persistent demand)?
Cash profit / WACC = 370/13% = ~2800cr
Enterprise value is around 5000cr…
The difference can be explained by growth expectations of market. However, we need to check if growth is value accretive or diminutive.
Value of growth
Someone in one of the above posts calculated Return on incremental CAPEX. Using similar method:
Yield on new cranes (more expensive): 1.7-1.8% (20% annually, payback period of 5 years w/out accounting for OPEX)
Revs to cash conversion: ~55% (based on latest PPT)
Post-tax return on incremental capex = 20% annual yield for new crane * 55% = ~11%
Cost of borrowing = ~9%
Assuming new capex will be funded by debt, growth looks marginally value accretive (11%>9%)
However, mgmt. indicated that they will be conservative wrt. Debt to Equity ratio (0.3) unlike past cycles that could set a ceiling for growth
Return on Invested Capital (proxy for ROE for such companies)
~370cr cash profit capability on current gross block; based on Q3 PPT
~2500cr gross block (Q2 transcript 2485 + some addition in Q3; 90% useful)
ROIC = cash profit / useful gross block = 370/2500 = ~15%
WACC could be close to 12-13%, marginally value accretive (15%>13%)
Yields
Mgmt. has indicated that 2.5-2.6 may not be achievable now, but they are confident of ~2. This may be a drag on valuation in long term
Tying it all
Since the value of growth is only marginally accretive, it cannot itself explain the huge gap between EV (~5000cr) and EPV (~2800cr). Looks like the rest of the growth baked in is EPC based (as per market).
On the surface, looks tightly valued or may be overvalued, especially if cyclicality of core biz is taken into consideration. However, the expectations around EPC biz could be providing some stability into valuations, not sure. Need some estimates around EPC valuation to put the final brick in the puzzle. Need help with that, thanks.
Disc: Tracking position, Evaluating
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