Ashoka Buildcon IPO - Apply or Not ?

Investors may subscribe to the initial public offer of infrastructure player Ashoka Buildcon. At the upper end of its price band of Rs 297-324, the offer discounts FY-10 consolidated earnings by 22 times and estimated FY-11 earnings by 14 times. Larger players in this space such as Jaypee Infratech and IRB Infrastructure trade at valuations of 21-22 times the trailing earnings. However, Ashoka may have scope for higher growth.



Ashoka doubles up as a construction contractor for third parties in roads and electrical works, whilst developing its own road projects, allowing it to get the most out of the sizeable potential of both segments. It already has a clutch of operational road projects on which it is collecting the toll, with a good number in the pipeline. It has an RMC and bitumen division through which it meets its entire requirement besides sales to other entities.

Double presence

Ashoka has an order book of Rs 1,615 crore (2.9 times FY-10 contract revenues), of which, contracts from third parties account for 87 per cent, in the roads and power segments. With an execution period of about 30 months, the order book provides medium-term earnings visibility. The order book also has reasonable geographic diversification, spread across the States of Chattisgarh, Maharashtra, Madhya Pradesh and Rajasthan among others. The remaining order book pertains to the construction of its own Build-Operate-Transfer (BOT) contracts.

It has ten operational road projects on which tolls are being collected; toll revenues make up about 20 per cent of total revenues. Six projects are in the pipeline, of which, three will turn operational in the last quarter of this financial year and will thus fully contribute to revenues from FY12 onwards. Ashoka also has joint ventures with players such as IVRCL Infrastructures to secure projects.

BOT projects are typically executed through subsidiaries, especially since some of them are secured in consortium. Equity infusion for projects such as its Durg Bypass and Bhandara road project has come from institutions such as IDFC and India Infrastructure Fund.

Hitherto, contracts were primarily secured from the State governments of Maharashtra and Madhya Pradesh. Orders in the pipeline now include those from the NHAI, besides geographically diversifying into Karnataka and Orissa, boding well for the company to secure large-sized orders across the country while also holding a favourable position with the State governments.

A presence in both contracting and developing allows Ashoka to better capture opportunities thrown up in the road infrastructure space than as a developer or a contractor alone. Executing own projects will also help maintain healthy operating margins. The company has a track record of completing projects well ahead of schedule, which, in the case of BOT contracts, is especially beneficial since it indicates earlier inflow of toll revenues.

Backward integration

Besides revenues from tolls and construction, Ashoka derives about 10 per cent of revenues from sale of RMC and bitumen, which offers two benefits.

One, it provides a degree of risk mitigation in the revenue mix. Two, the division addresses the entire requirement of the company for its contracts, helping reduce operating costs and boosting margins, while ensuring that critical raw material is available on time. The company also owns a fleet of construction equipment, which again serves to better operating margins. Rs 25 crore of issue proceeds will fund the acquisition of new equipment.

Financials

Consolidated revenues grew at annual compounded rate of 25 per cent for the past three years, while net profits have grown 49 per cent on the back of lower material costs. Operating margins are healthy, at 27 per cent for FY10, though they are lower than the 32 per cent of FY-09, due to higher contract costs.

OPM for the BOT segment is healthy at about 49 per cent, on par with other large developers such as IRB Infrastructure. Rs 45 crore of issue proceeds will part-finance working capital requirements. Turnover of working capital improved from 1.5 times in FY-07 to 2.4 times in FY-10.

However, debt taken on to fund project development led to high interest outgo, with interest costs eating over 10 per cent of sales from FY-07 to FY09, before falling to 6 per cent in FY-10. Operational BOT projects are converted into intangible assets and amortised over the concession period. Depreciation and amortisation costs are thus on the higher side.

Net margins, therefore, dropped to 8 per cent in FY-10, though this is an improvement over the 4 per cent margins the year earlier. Depreciation costs are likely to remain high, given the planned investments in capital equipment and the three BOT projects that will convert into assets when they are commissioned in 2011.

The consolidated debt-equity pre-issue stands at 2.4 times. Rs 55 crore of issue proceeds will be used to repay Ashoka's debt, while Rs 60 crore will be provided to subsidiaries to repay debt on their books.

Post-issue, consolidated debt will drop to 1.5 times. Interest cover is healthy at 4.7 times in FY-10. This will help it raise debt and achieve financial closure for its other BOT projects.

(Hema Deepak Katariya has filed a civil application before Civil Judge Junior Division, Nasik, on July 31, 2010, to obtain interim injunction against the Issue. Hema Deepak Katariya has filed another application on September 20, before the court as a continuation of the application dated July 23 for an interim stay on the issue. The matter has been scheduled to be heard by the court on September 28, 2010).

via BL