Friday, 29 July 2016
 

Dilip Buildcon

Building roads

While company's sales and operating profits have been on a fast lane, bulging interest and depreciation have been big hurdles to its bottomline growth

CM RATING 40/100
Dilip Buildcon (DBL) is one of the leading road-focused Engineering Procurement Construction (EPC) contractors in India with nearly 83% of total revenue of FY'16 coming from execution of road focused EPC contracts in India. During the last five years ended March 31, 2016, the company completed construction of 47 road projects in the states of Madhya Pradesh (MP), Gujarat, Himachal Pradesh, Rajasthan and Maharashtra, with an aggregate length of around 5,611.94 lane kms.

The businesses of the company are spread across 2 major segments; the construction segment and infrastructure development. The construction business undertakes projects across India in the roads and irrigation sectors. Here, DBL specializes in constructing state and national highways, city roads, culverts and bridges. Under infrastructure development business, DBL undertakes building, operation and development of road projects on a Built Operate Transfer (BOT) basis with a focus on annuity projects.

As of March 31, 2016, the company has an order book of Rs 10800 crore, consisting of 50 third party road EPC projects (70% of total order book), 6 of its own road BOT projects (15%), 3 irrigation projects (7%), 1 mining project (1%), 1 cable-stayed bridge project (5%) and 3 urban development projects (3%). Over FY12-16, DBLs order book multiplied 4 times owing to strong business development activities. The higher order book has been followed by strong execution with consolidated revenue and operating profit recording a CAGR of around 38% and 39% respectively during FY12-16 period. The Government contracts account for 76.27% of the total order book as on March 31. 2016. DBL is considered as the largest client of HPCL, BPCL & IOC for sourcing bitumen.

The company has current portfolio of completed 12 projects of which only one is on toll basis, 3 on annuity basis, 3 are currently being undertaken on hybrid annuity basis model and balance projects are on annuity plus toll basis. DBL has invested over Rs 370 crore as equity in operational projects and earns an annual annuity income to the tune of Rs 207 crore and collects toll over Rs 20 crore annually. BOT projects accounted for only 14.65% of total order book as of March 31, 2016.

The company has completed of over 36 EPC and 11 BOT projects in last five years and is currently pre-qualified to bid for BOT projects and EPC projects with a contract value of up to Rs 2140 crore & Rs 1250 crore respectively. The significant increase in pre-qualifications has helped DBL to increase its target market size and maintain the growth momentum of its order book.

DBL maintains a modern equipment fleet of 7,345 vehicles and other construction equipment from some of the world's leading suppliers such as Schwing Stettar, Metso, Wirtgen and Vogele.

The Offer and the Objects

The issue comprises of fresh offer of Rs 430 crore which at lower price band of Rs 214 per share works out to issue size of 2.01 lakh shares and at higher price band of Rs 219 per share, works out to an issue size of 1.96 lakh shares. In addition to the above, there is an offer for sale of 1.02 crore shares comprising of Promoters and group of private investors. The offer size of offer for sale at lower price band of Rs 214 per share works out to Rs 218.86 crore and at upper price band of Rs 219 per share, works out to Rs 223.97 crore.

The minimum Bid lot is 65 Equity Shares and in multiples of 65 Equity Shares thereafter. The issue is made through a book building process and will open on 1st Aug and will close on 3rd Aug with Anchor Investor Bidding date of 29th July 2016.

For the fresh offer of Rs 430 crore, the object of the issue consists of repayment of term loans of around Rs 203.60 crore, Rs 200 crore towards working capital and rest for general corporate purpose.

Strengths

Awarding of road construction projects under EPC basis by the Government is likely to pick up significant pace going forward. Over the next five years, National Highway Authority of India (NHAI) is expected to award more than 22,500 km of projects through EPC route, as BOT projects are losing favour. Overall investments in road projects is expected to grow by 2 times to Rs 86000 crore during FY 2016-FY 2020 as compared to FY 2010-FY 2015. State governments are also increasingly focusing on improving state roads and thus whole pie of awards of orders will increase going forward.

Further, NHAI's focus on ensuring 80% availability of land for EPC contracts at time of award will facilitate faster execution.

DBL generates one of the highest operating margins and has the highest Return on Equity (ROEs) of around 20% among the comparable peers. This is primarily attributable to high usage of technology, geographic clustering of projects, bulk procurement at competitive prices and usage of modern equipment. On average, the EBITDA margins stand at close to 22% levels which are higher than many other players in the listed space.

The company has a healty track record of early completion of projects and has received an early completion bonus to the tune of over Rs 220 crore in the last four years.

Weaknesses

MP (DBL's home state) earlier used to account 80% of total order execution 5 years back. DBL has already expanded in 12 states across the country and currently is executing over 64 projects in different states. But MP still accounts for 40% of its total order.

DBL is required to pay over Rs 650 as equity commitment over the 3 years for 6 under construction projects, which has to be met through internal accruals. Any inability to improve its cash flow generation hereon may put pressure on balance-sheet and funding of equity will be difficult through accruals.

The company had negative cash flows from operations in FY'16, mainly owing to consistent rise in working capital requirement and interest cost (due to ballooning of loans). Higher-than-industry receivable and inventory days (126 days) result in industry-leading cash conversion cycle.

There are outstanding legal proceedings against DBL which are incidental to its business and operations, including certain criminal/taxation proceedings against the company, some directors, promoters and subsidiaries, JVs and group companies. There are some corporate governance issues within the company.

The advantage derived from the higher operating margin of more than 22% is lost due to higher interest costs, which accounts for more than 10% of top line as compared to around 1-3% of its competitors.

The company's consolidated debt stands at Rs 3221 crore as of 31 March 2016. Consolidated debt equity ratio stands at around 3.2 times as on that date.

The company has large fleet of owned equipment resulting in high and fast growing depreciation provision.

Valuation

For FY 2016, the consolidated net sales stood at Rs 4315.40 crore, up by 56% YoY. OPM stood at 23.1% resulting in OP growth of 45% to Rs 995.40 crore. Interest cost was higher by 45% to Rs 514.20 crore and depreciation was higher by 38% to Rs 284.10 crore. PBT was up by 73% to Rs 230.70 crore. After providing total tax of Rs 34.10 crore, down by 25% due to some Minimum Alternative Tax (MAT) benefits, consolidated PAT for the year ended FY'16 stood at Rs 196.60 crore, up by 124%. On a diluted equity share capital of the company of Rs 136.70 crore of face value of Rs 10 each, the EPS for FY 2016 works out to Rs 14.4.

At higher price band of Rs 219, DBL is being offered at a P/E of around 15.2 times its FY'16 earnings. Comparable companies like KNR Constructions, PNC Infra, J Kumar Infra and MBL Infra are trading at P/E range of 6.4 to 17 times their FY 2016 consolidated adjusted EPS.

Dilip Buildcon: Issue highlights
For Fresh Issue Offer size (in no of shares )
- On lower price band 2.01 crore
- On upper price band 1.96 crore
Offer size (in Rs crore ) 430 crore
For Offer for Sale Offer size (in Rs crore)
- On lower price band 218.86
- On upper price band 223.97
Offer size (in no. of shares ) 1.02 crore
Price band (Rs)* 214-219
Post issue capital (Rs crore) at upper price band 136.70
Post-issue promoter & Group shareholding (%) 75.6
Issue open date 1/8/2016
Issue closed date 3/8/2016
Listing BSE,NSE
Rating  40/100

Dilip Buildcon: Consolidated Financials
1203(12) 1303(12) 1403(12) 1503(12) 1603(12)
Net Sales 1190.00 1919.50 2383.80 2762.00 4315.40
OPM (%) 22.2% 24.7% 22.0% 24.9% 23.1%
OP 264.00 473.40 524.80 686.60 995.40
Other in. 2.80 7.40 17.80 6.60 33.60
PBDIT 266.80 480.80 542.60 693.20 1029.00
Interest 58.90 115.40 200.70 353.90 514.20
PBDT 207.90 365.40 341.90 339.30 514.80
Dep. 43.60 75.60 100.20 206.10 284.10
PBT 164.30 289.80 241.70 133.20 230.70
Tax (including Deferred Tax) 56.20 48.50 56.00 45.50 34.10
PAT 108.10 241.30 185.70 87.70 196.60
Minority interest (MI) 0.00 0.00 0.00 0.00 0.00
PAT after MI 108.10 241.30 185.70 87.70 196.60
EPS (Rs)* 7.9 17.7 13.6 6.4 14.4
*EPS is on post issue equity capital of Rs 136.7 crore of face value of Rs 10 each on higher price band of Rs 219.
Figures in crore
Source: Capitaline Database