Recommendation From Construction & Contracting - Civil
This section gives a recommendation of a stock having stock price below Rs 100 with sound fundamentals and expected to give handsome returns over a one-year time horizon.
ASHOKA BUILDCON : LAYING PROFITABLE FOUNDATIONS
HERE IS WHY
☛Healthy Order Book of 2.5 times of FY20 sales
☛Posted a healthy set of numbers in Q2FY20
☛Available at PE of five times
The infrastructure sector in India is at an inflection point. The fundamentals of the sector are fast returning to normal after the shock of the pandemic and the imposition of nationwide lockdown in the country. Execution activity is picking up and order award momentum remains strong on the back of the National Highways Authority of India (NHAI) awarding its highest-ever order awards in the first half of FY21 – 60 per cent higher on a yearly basis. What is also favouring the sector is its attractive valuation. Given this scenario, one company that may appeal to investors is Ashoka Buildcon Limited (ABL).
The infrastructure execution of the company has recently picked up led by rise in labour availability across project sites. Currently, labour availability and operational efficiencies of the company have reached the pre-pandemic levels. Besides, ABL is also receiving robust orders. In the first half of FY21 the company received orders worth Rs 2,400 crore, taking its order book to Rs 9,300 crore, which is 2.5 times its book-to-sales ratio, reflecting the revenue visibility of the company. Of the total order book, roads comprise 81 per cent (EPC constitutes 35 per cent and HAM 46 per cent), power transmission and distribution comprise 10 per cent while railways comprise 8 per cent.
Going ahead, the momentum of new getting new orders is likely to remain healthy as NHAI will continue with its pace of award in the third and fourth quarters of FY21. ABL is also actively exploring opportunities in the water segment, where it had bid for recent projects in Uttar Pradesh but wasn’t successful in winning any. It is also looking at the opportunity provided by the power and railways segments. Improving sector fundamentals is helping the company to post better than expected numbers.
ABL reported a decent quarterly performance with execution ramping up and top-line growing by 6 per cent on a yearly basis across its project sites led by increase in labour availability. Its EBITDA increased 6.6 per cent on a yearly basis with EBITDAM surprising positively at 14.9 per cent and beating street estimates of 12.6 per cent, thus showing strong operational performance. On the bottom-line front, adjusted PAT saw a rise of 44 per cent YoY to Rs 104.7 crore .
In addition to the improvement in its profit and loss account the company is also strengthening its balance-sheet. It managed to reduce its gross standalone debt to Rs 220 crore from Rs 240 crore in 1QFY21, of which equipment loans stand at Rs 191 crore and working capital loans at Rs 33 crore. Every share of the company is available at price to earnings of around five times. This looks attractive considering the double-digit return on equity and huge growth potential. Overall, ABL’s strong balance-sheet and execution track record should translate into robust earnings’ growth over the next three years. Hence, we recommend buying this stock with a one year perspective while expecting your investment in this stock to double.
