>ASHOKA BUILDCON LIMITED: Traditionally a state player, has transformed into a national player

Ashoka Buildcon (ABL), traditionally a state player, has transformed into a national player by winning four NHAI projects totaling to a TPC of ~`5,156cr. However, this transition has come at a cost, as it entails premium commitments to NHAI (~`220cr per year, albeit covered by toll collections during the construction period) and huge equity contributions from ABL’s side, which we believe would stretch its leverage (consolidated net D/E is expected to rise from 1.4x in FY2011 to 3.0x by FY2013E). We have valued ABL on an SOTP basis – by assigning 5.0x EV/EBITDA to its standalone business (`87/share) and valued its BOT projects on NPV basis (`158/share). We initiate coverage with a Buy rating on the stock and a SOTP target price of `245/share and key catalyst being raising equity from capital markets.


Integrated business model: ABL boasts of an integrated business model in place with strong in-house execution capabilities, which helps it to have control over time and cost – the two key essentials of road development business. In the past, many industry players have witnessed severe strain on the financials and profitability of their projects because of their inability to control these important factors. Even in current times, there are developers who do not have an integrated business model and are dependent on contractors for construction activities, making them vulnerable. Hence, we believe players (read ABL) having an integrated business model are better placed.


Road sector; opportunities galore: NHAI has set itself an aggressive target of awarding ~9,371km of road projects in FY2012 against ~5,000km in FY2011. NHAI has done a commendable job by handing out ~4,000km so far in FY2012. Going ahead, NHAI, state and rural projects are expected to garner investments of `6.1trillion over FY2012-16E, which augurs well for road developers. Prefer IRB over ABL in the Road BOT space: We initiate coverage on ABL with a Buy rating and a SOTP target price of `245. Our analysis indicates that ABL would need to infuse equity up to ~`990cr (FY2012-14E) in various SPVs; this would be substantially funded by the PE route, as per management. However, we have not factored the same in our estimates, given the gloomy market conditions; instead, we have penciled in the increase in debt levels. In recent times, markets have been harsh on companies with loose financial discipline and, hence, we are conservative in assigning trading multiples to ABL. Therefore, we prefer IRB over ABL, considering ABL’s comparatively smaller size, dependency on capital markets for equity and projects at nascent stage.


To read the full report: ABL
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