Ashoka Buildcon: Suddenly, everyone is gung-ho on this stock

NEW DELHI: This stock rallied 7 per cent in Thursday’s depressed market, has doubled price from its 52-week low hit on April 3 during the Covid-19 lockdown, but is still down 35 per cent on a year-to-date basis.

On Thursday, it had 16 ‘buy’ calls, six ‘outperform’ and just one ‘hold’ ratings on the publicly available Reuters Eikon database.

Analysts say the stock seems to have taken off after posting better-than-expected June quarter earnings, and could be a multibagger in the making. Or at least that is what brokerages’ new price targets suggest. “The inexpensive valuations are factoring in more negatives than they ideally should,” they say. The stock has no ‘underperform’ or ‘sell’ ratings on analysts books currently.

The stock is roads and highways developer Ashoka Buildcon. After jumping 7 per cent to Rs 64.60 on Thursday, the stock added another 4 per cent in early trade on Friday.

Current brokerage price targets suggest up to 118 per cent upside potential from current market price. HDFC Institutional Equities has a price target of Rs 141 on the stock, Kotak Securities sees it at Rs 130 while Anand Rathi pegs it at Rs 127. JM Financial has a price target of Rs 100. Other price targets for the stock are in the Rs 80-85 range.

What analysts like is the company's strong balance sheet and an order book of Rs 8,616 crore, at 2.4 times trailing 12-month sales. They are also positive on the company's focus on reducing debt and faster-than-expected resumption of operations. Possible monetisation of asset portfolio and a pending PE exit are key drags for the stock, but the risk-reward still looks favourable, they say.

June quarter results
The highways builder reported a 6.7 per cent increase in June quarter’s standalone profit at Rs 69 crore compared with Rs 65 crore reported for the same quarter last year. Other income was higher, as it included Rs 5 crore insurance claims and Rs 5 crore related to equipment loan restructuring. Revenues fell 31.9 per cent year on year to Rs 620.7 crore from Rs 911 crore.

In case of its engineering, procurement and construction (EPC) business, labour resumption was faster than expected. In July, the company operated at 90-95 per cent of the required workforce. Operation-wise, the business saw nearly 85 per cent execution run-rate. In case of toll collections, activity resumed across toll plazas from April 20. In July, the company reached 90 per cent of the pre-Covid toll collections and is expecting further improvement as economic activities pick up.

Order book outlook
For the current year, NHAI has set a target of 4,500 km road awards. Out of this, 3,200 km has already been awarded. To ease liquidity for infrastructure companies, NHAI has shifted to a monthly billing policy.

The company management expects new orders of Rs 4,000-5,000 crore in FY21, out of which it anticipates Rs 3,000-4,000 crore in road orders and another Rs 1,000-1,200 crore in railways orders. The company has bid for 300 km road projects.

“An improvement in order inflow from RVNL and CORE is expected to help the railways segment,” Kotak Securities said.

The road segment represents 80 per cent of the company's order book, power T&D segment 9 per cent and railways 10 per cent.

“With many of the company’s build-operate-transfer (BoT) model projects situated on NH-6 passing through mineral-rich states, elasticity of traffic growth following economic recovery will be substantial. Commercial vehicles constitute majority traffic on ABL’s roads (~80%), placing it in a sweet spot to gain from industrial revival,” Edelweiss Securities said.

The company expects to receive an appointed date for three HAM projects by October, which should boost execution, Edelweiss said.

The company anticipates a flat 10 per cent growth in FY21 revenues and projects Ebitda margin in the 12.5-13.5 per cent range. Capex for the year is seen at Rs 70 crore.

JM Financial said the company has completed financial closure for a HAM (hybrid annuity model) project and is poised to deliver growth in FY22. FY21 inflows will add visibility for FY23 and beyond, it said.

Reduction in debt
Motilal Oswal says a key surprise for the company has been the reduction in gross debt to Rs 240 crore in June quarter from Rs 400 crore at the end of March, which the brokerage says indicates focus on cash flow management.

While the company has not availed the loan moratorium at standalone level, at SPV level, interest moratorium has been availed, but principal repayments remained as per schedule.

Kotak says a sequential decline in standalone debt was on account of efficient control over cash flows and faster release of payment from NHAI on a monthly basis. It believes the company would have sufficient liquidity to meet incremental equity requirements of Rs 375 crore for HAM projects.

“Improving toll collections across BOT projects raise hope of faster monetisation of the company's road assets,” it said.

Overhangs
In 2012, SBI-Macquarie invested Rs 700 crore in Ashoka Concessions (ACL), a holding company formed for seven projects at the time of the investment. The Macquarie Infrastructure Fund is now looking to sell a 39 per cent stake in ACL.

Despite a few overhangs, JM Financial finds valuations for the stock inexpensive at 4.8 times FY22 P/E for its core EPC business. Anand Rathi said the SBI-Macquarie exit is likely to be delayed, but the consequent overhang seems more than priced in.

“With discussions on hold with the existing suitor owing to the Covid-triggered uncertainty, there are efforts to approach suitors that had evinced interest in the portfolio in the past. The management believes the recovery in toll collection to 90 per cent of pre-Covid levels would help," Anand Rathi said.

Nirmal Bang expects the company’s standalone EPC business to do well. “But investments in the asset business need to be pared for the true value of EPC business to be realised. Even the stake sale by the private equity player is getting dragged for quite some time. We have maintained our FY21 and FY22 estimates. We maintain our buy rating on the stock and target price of Rs 87 based on a SOTP basis,” it said.

Analyst takes
Anand Rathi said proven execution capabilities and a well-set balance sheet made it retain ‘buy’ rating on the stock, with a price target of Rs 127.

“With Covid restrictions constantly easing and blended execution efficiency gradually returning to normal, we see Ashoka’s soothing start to the year gaining strength in coming quarters. A well-set balance sheet, too, is likely to support efforts to return to normal at the earliest. Though good for the immediate future, more is needed in the order book for growth in the medium term. The SBI-Macquarie exit is likely to be delayed; but the consequent overhang seems more than priced in," it said.

Kotak said the company’s reasonable standalone leverage and cash-generating road portfolio should help in meeting near-term liquidity requirements. “Improving traffic raises hopes of faster monetisation of road assets,” it said.

“Incremental order-wins and monetisation in Ashoka Concessions (ACL) will be the key stock catalysts, in our view,” Edelweiss said.