Ashoka Buildcon IPO Analysis

Building roads

Develops roads and bridges on BOT basis

Ashoka Buildcon, promoted by Ashok Katariya and Satish Parakh, undertakes EPC contracts for roads, bridges and commercial building projects and also operates them on BOT basis. It recently ventured into the power T&D domain and bagged EPC orders from MAHADISCOM.



The company's development asset portfolio (excluding the three handed back projects) comprises 17 operational road projects (1,100 lane kilometers) and six road projects of 2,400 lane kilometers under construction & development. Of the 17 BOT road projects under operation, four are operated by the company, 11 are operated by the subsidiaries of the company/joint ventures (JV) controlled by the company, one is operated by an associate company in which the company has a 50% interest, and one is operated by a JV in which the company has a 5% interest.

On the EPC business side, the company has so far constructed about 44 roads & bridges individually or through part of JV/associates. Moreover, the company has also constructed about 5.4 million sq ft of commercial, industrial and institutional projects. The EPC division is the major contributor to the top line, with a share of 68% in FY 2010, with another 20% coming from BOT road projects or toll revenue. The company also has 14 ready-mix concrete (RMC) plants to support its EPC business.

Recently, it won two projects worth Rs 1638 crore from NHAI. The company is also developing a hydroelectric power plant (i.e., 1,500 Kwh Waghur hydroelectric power plant) on a BOOT basis.

To capitalize on its EPC prowess, the company signed two agreements in September 2008 with Kalyan Dombivali Municipal Corporation (KDMC) to develop shopping malls on the campus of Rukminibai Hospital in Kalyan City, Maharashtra, on BOT basis. The construction of these projects has not yet begun. These two malls will have an estimated total leasable area of 12,453 square metres and will be leased out to third parties.

The company intends to use the net proceeds of the issue for (i) investment in capital equipment, (ii) to meet working capital requirements, (iii) prepayment/ repayment of project loans of the company, (iv) funding certain subsidiaries for prepayment/ repayment of their loans, and (iv) general corporate purposes.

IDFC private equity has a post-issue stake of 13.4% to 13.6% (on upper and lower band) in the company. Being a venture fund, they are not subject to any lock-in period.

Strengths

EPC order book as end of May 31, 2010, stood healthy at Rs 1615.36 crore, which translates into 2 times of its FY 2010 consolidated revenue, thereby giving decent revenue visibility. The order book is excluding the Rs 1638.0 crore for Belgaum-Dharwad and Sambalpur-Baragarh projects for which the company got work order in June 2010 only from the special purpose vehicles (SPVs) that signed the concession agreement in June 2010. Moreover, the order book is majorly made up of third party orders, aggregating to Rs 1408.92 crore, with just Rs 206.44 crore from the captive BOT projects.

The company is an integrated player with in-house design, engineering and construction capability as well as traffic estimation and operation and maintenance. In addition, it also manufactures RMC and has control on quality and execution of the project. Moreover, it is one of the few BOT players to see the entire lifecycle of BOT road project: developed a BOT road project, operated it for the entire concession period and handed it back to nodal agency after completion of concession period. So far the company has handed back three road projects after completion of concession period.

Successful forayed into power T&D EPC projects. The company has bagged contracts from Maharashtra State Electricity Distribution Company (MAHADISCOM) worth Rs 1018.85 crore(order backlog was Rs 600.25 crore as end of May 31, 2010).

Of the six BOT road projects under development, three are expected to commence toll collection going forward in the current fiscal. These three BOT projects are Bhandara Road (NH6), Jaora Nayagoan Road, and Durg Bypass (NH6)-Chhattisgarh Maharashtra Border Road. As of May 31, 2010, about 93% of the first two projects have been completed and about 68% of the latter have been completed. These projects are expected to commence contribution to the top line within FY 2011 either fully or partially.

Weaknesses

Compared to its peers, the operating margin at 26.9% in FY 2010 is relatively lower. This is largely on account of just around 20% share of the topline from high margin toll business. With core EPC business margin being lower, especially for third party contracts, the strategy of the company is to increase the share of third part contracts especially in power EPC. This is bound to moderate the overall operating margin.

Despite the early-mover advantage, the company has very few large/niche projects in its portfolio. Moreover, with the preference of PPP model to cash contracts in road sector development, the survival of a construction service provider largely depends on its ability to win BOT projects. This is likely to increase the competition for niche projects and drive down returns going forward.

Construction of commercial mall in Kalyan has been delayed as the company has not received vacant possession of the land due to a legal dispute with the current tenants on the land where the shopping mall is to be constructed. The company has paid 50% of the project premium of Rs 12.90 crore under the concession agreement with KDMC.

The company's projects are of long gestation period and are mainly on fixed price basis. Any escalation in raw material prices during the course of the project could impact the profitability of the company.

The company's business is relatively concentrated in Maharashtra, Madhya Pradesh and Chhattisgarh.

There is litigation outstanding against the company objecting to the initial public offering from Hema Kataria and complaints from Deepak M Kataria. Though the order to maintain the status has been quashed by higher courts, civil suits praying for restraining the company from IPO is alive. Any adverse outcome in such outstanding litigation may restrain the company from undertaking the Issue.

The company as on March 31, 2010, had a total of Rs 159.96 crore and 154.34 crore of unsecured loans on standalone and consolidated basis that were repayable on demand. Moreover, as on March 31, 2010, the company had an aggregate amount of Rs 1841.52 crore as contingent liabilities outstanding on a consolidated basis. Of this, Rs 353.73 crore was bank guarantees and letters of credit issued by banks in favour of third parties.

Valuation

Consolidated sales for the year ended March 2010 were higher by 53% to Rs 795.57 crore and net profit by 131% to Rs 80.37 crore. On post-IPO equity, EPS at the lower price band works out to Rs 15.1 and that at the upper price band was Rs 15.3. The PE works out to 19.7-21.2 times its FY 2010 consolidated EPS. On the other hand, larger player IRB Infrastructure given its superior profitability quotes at a PE of 24.4 times its FY 2010 consolidated EPS. Another larger player IL&FS Infrastructure, which gets construction of its BOT projects done through third parties, trades at P/E of 19.2 times its FY 2010 EPS.