ITD Cementation (India) Ltd.

Transcription

1 INDUSTRY INFRASTRUCTURE CMP (as on 5 Nov 2015) Rs 107 Target Price Rs 137 Nifty 7,955 Sensex 26,304 KEY STOCK DATA Bloomberg ITCE IN No. of Shares (mn) 155 MCap (Rs bn) / ($ mn) 17/254 6m avg traded value (Rs mn) 25 STOCK PERFORMANCE (%) 52 Week high / low Rs 116/39 3M 6M 12M Absolute (%) Relative (%) SHAREHOLDING PATTERN (%) Promoters DIIs & Local MFs FIIs 3.54 Public & Others Source : BSE Parikshit D Kandpal parikshitd.kandpal@hdfcsec.com Prabhat Anantharaman prabhat.anantharaman@hdfcsec.com Margins expansion next trigger ITD Cementation (ITDC) delivered a strong 3QCY15 execution beat with revenue/ebitda growth of 69%/182% YoY. While revenue was 4.3% above our estimates, EBITDA came 8.4% below expectations. EBIDTA margins expanded 250bps on YoY basis (86bps below our estimate), largely driven by lower employee costs (123bps contraction YoY) and lower other expenses (382bps contraction YoY). However, EBIDTA margins contracted 71bps QoQ due to 158bps increase in employee costs (bonus/hikes). Gross debt and D/E stood at Rs 6.8bn /1.4x. As India enters a cyclical recovery in government-led EPC spend over CY14-17E, we expect ITDC s order book to grow ~1.7x even as PAT (almost) quadruples. With the management continuing to focus on improving bid success rate in high-margin lowcompetitive intensity and specialist segments, ITDC is well positioned to ride a cyclical recovery. Maintain BUY. Upgrade TP to Rs 137/share (valuing construction business at 15x Sep-17E EPS). RESULTS REVIEW 3QCY15 5 NOV 2015 ITD Cementation (India) Ltd. Highlights of the quarter BUY Order-book update: ITDC currently has an order book of Rs 57.9bn (2.1x CY14 revenue), excluding L1 orders of Rs 23bn. The management s CY15 order intake guidance of Rs 50bn (including one Mumbai Metro order) poses upside risk to our assumption of Rs 47bn. WC cycle/earnings quality improves: Higher creditor days (176) has compensated for the increase in the inventory days (from 128 to 143 days), resulting in a cash conversion cycle of 63 vs. 89 days (end 2QCY15). The working capital cycle will see further improvement as ITDC expects to settle claims worth Rs 1.4bn. We have upgraded ITDC multiple from 12x to 15x on account of (1) Expectations of bottoming out of EBIDTA margins, (2) New higher margins orders now constituting ~50% of the order book, and (3) Robust execution, which may result in operating leverage playing out. Financial Summary (Standalone) (Rs mn) 3QCY15 3QCY14 YoY (%) 2QCY15 QoQ (%) CY15E CY16E CY17E Net Sales 6,877 4, ,323 (6.1) 26,816 33,788 39,574 EBITDA (15.7) 1,903 3,039 3,944 APAT 42 (219) ,576 Diluted EPS (Rs) 2.7 (17.3) P/E (x) EV / EBITDA (x) RoE (%) HDFC securities Institutional Research is also available on Bloomberg HSLB <GO>& Thomson Reuters

2 ITDC s 3QCY15 net sales and EBIDTA grew 69% & 182% YoY While revenue was 4.3% above our estimates, EBIDTA was 8.4% below expectations ITDC improved net profit on account of lower interest costs (down 6.6% YoY) and lower depreciation (down 37.8% YoY) EBIDTA margins expanded 250bps YoY, owing to 123bps and 382bps reduction in employee costs and other expenses, respectively. QoQ margins contracted 71bps due to 178bps increase in employee costs (bonus/hikes) 3QCY15-end order book stood at Rs 57.9bn (excluding L1 orders of Rs 23bn) Consolidated Quarterly Financial Particulars (Rs mn) 3QCY15 3QCY14 YoY (%) 2QCY15 QoQ (%) 9MCY15 9MCY14 Net Sales 6,877 4, ,323 (6.1) 20,077 12,048 Material Expenses (4,495) (2,562) 75.5 (4,839) (7.1) (13,325) (6,964) Employee Expenses (628) (423) 48.6 (553) 13.6 (1,708) (1,423) Other Operating Expenses (1,324) (941) 40.7 (1,422) (6.9) (3,785) (2,958) EBITDA (15.7) 1, Interest Cost (333) (356) (6.6) (363) (8.4) (1,061) (1,024) Depreciation (79) (127) (37.8) (113) (30.4) (292) (324) Other Income (13.9) PBT 49 (293) (116.8) 55 (11.0) 61 (452) Tax (8) 74 - (24) (67.8) APAT 42 (219) (118.9) (345) Margin Analysis 3QCY15 3QCY14 YoY (bps) 2QCY15 QoQ (bps) 9MCY15 9MCY14 Material Expenses % Net Sales (71) Employee Expenses % Net Sales (123) Other Operating Expenses % Net Sales (382) 19.4 (16) EBITDA Margin (%) (71) Tax Rate (%) (967) 42.9 (2,736) (464.2) 23.6 APAT Margin (%) 0.6 (5.4) (2.9) Order Book Assumptions Rs mn CY14 CY15E CY16E CY17E Opening Order Book 39,721 47,630 67,814 74,027 Add: New Order Wins 25,098 47,000 40,000 46,000 Less: Orders Executed 17,189 26,816 33,788 39,574 Closing Order Book 47,630 67,814 74,027 80,453 Page 2

3 WC cycle improves further During 3QCY15, the inventory cycle has increased from 128 days to 143 days on account of mobilization for new orders Debtor cycle remained stable at 61 days Cash conversion cycle has improved from 89 days end- 2QCY15 to 63 days end- 3QCY15. This is largely driven by increase in payable days from 151 to 176 WC cycle may improve further as ITDC settles pending claims of Rs 1.35bn with various clients Order book stood at Rs 57.9bn, excluding L1 status of Rs 23bn (ITDC share of Udangudi Port and Mumbai Metro orders) Plagued by a prolonged slowdown in economic activity, subdued infra spending, tight financing environment and weak operating metrics, ITDC saw its working capital cycle deteriorate to ~196 days in CY14 vs. average 100 days for the industry. With the uptick in the execution cycle, 3QCY15 inventory cycle has increased to 143 days from 128 days in 2QCY15. Debtor cycle has reduced from 63 days to 61 days. Higher creditor cycle of 176 days has compensated for the increase in the inventory cycle, resulting in Working Capital Cycle a cash conversion cycle of 63 days vs. 89 days by the end of 2QCY15. The working capital cycle will see further improvement as ITDC expects to settle claims with AP Irrigation (~Rs 250mn), Telangana Irrigation (~Rs 750mn) and other clients (~Rs 350mn). During our interaction with the Telangana Irrigation secretary we found that the state government is keenly working on settling contractors dues. We expect a resolution by 1QCY16E. Particulars CY10 CY11 CY12 CY13 CY14 2QCY15 3QCY15 CY15E CY16E CY17E Inventory days Debtor days Loans advances/others Payables days Cash Conversion Cycle Order Book Position Robust; Lends Visibility To Future Growth Consolidated (Rs mn) Rs mn % Hydro / Dams / Tunnels / Irrigation 9, Marine 30, Specialist Works 1, Transportation 5, Industrial Structures Water & Sewage 1, Urban Infrastructure / MRTS 5, Buildings 3, Airport TOTAL 57, Page 3

4 We expect 19.1% CY14-17E order book CAGR CY14-17E revenue CAGR 32%, EBIDTA CAGR 63% CY15-17E net profit to multiple 4x Net cash position doesn t change debt materially Key Assumptions And Estimates Key Assumptions CY14 CY15E CY16E CY17E Comments Closing order book 47,630 67,814 74,027 We expect 19.1% CY14-17E order book CAGR on back of strong marine and 80,453 MRTS segment order pipeline Order book growth (%) Strong growth during CY15E (FY16E) as Rs 26bn order have been announced 8.7 during 1HCY15E excluding L1 of Rs 12bn New order booking 25,098 47,000 40,000 Rs 26bn order announced, L1 Rs 12bn, Mumbai Metro bids yet to open. For 46,000 rest of 2HCY15E, we expect new order booking of Rs 21bn Book to bill ratio Book to bill ratio to remain healthy Total Revenue 17,189 26,816 33,788 Expect execution to materially pickup during CY15-17E. We have modeled for 39,574 32% revenue CAGR over CY14-17E Growth (%) EBIDTA 911 1,903 3,039 Strong execution and completion of low-margin legacy order of Rs 6bn to 3,944 result in EBIDTA margins expansion. Operating leverage to drive CY14-17E EBIDTA CAGR of 63% EBIDTA margin (%) CY16E EBIDTA margins expansion on account of 80bps gains from employee 10.0 cost and completion of low margins legacy order Depreciation To grow in line with capex Financial Charges 1,355 1,462 1,297 Debts and borrowing cost to remain stable. We have taken into account 100bps 1,198 reduction in interest cost over the CY15-17E period. Also, higher share of interest-free client advances will benefit interest costs PBT (686) 108 1,365 2,317 PBT growth in line with EBIDTA expansion PBT margin (%) (4.0) Tax 74.8 (281.6) Tax rate (%) (10.9) (261.7) PAT (761) ,576 PAT expansion in line with overall EBIDTA improvement Net margin (%) (4.4) Extraordinary (1,240.0) - - CY15E extraordinary on account of NHAI write off Reported PAT 194 (851) 928 1,576 Debtor days To improve as economic recovery picks up pace, 1HCY15E debtors at 63 days CFO (a) 436 2,894 2,757 Higher revenue growth, robust client advance to result in higher positive cash 2,562 flow from operations CFI (b) (384) (902) (852) (953) Investment largely driven by capex on machinery FCF (a + b) 53 1,992 1,905 1,610 CFF (c) (43) (1,912) (2,047) (1,348) Reduction in debt and outflow on interest Total change in cash (a + b + c) (142) 262 Net cash position doesn t change debt materially Source: HDFC sec Inst Research Page 4

5 We value ITDC core EPC business at Rs137/share (15x one-year forward Sep-17E EPS) Our target P/E multiple is in line with KNR Construction and J Kumar infra. In the past ITDC has traded at 15-20% 1-yr forward P/E multiple premium to these companies We had earlier valued ITDC at 20% discount to peers owing to margin volatility With higher margins, new orders now constituting ~50% of order book and likely operating leverage playing out with revenue growth, EBIDTA margins may have bottomed out We model for 9% and 10% EBIDTA margins for CY16E and CY17E respectively Outlook and Valuation Target price of Rs 137 implies ~28% upside Valuation Methodology: We have valued ITDC on P/E basis in line with peers, namely KNR/J Kumar, at 15x one-year forward. With the recent L1 status in Mumbai Metro Line 3 project (~Rs 12bn share) and likely bottoming out of EBIDTA margin, we believe that ITDC valuation multiple should revert higher. Hence, we remove the 20% P/E multiple discount earlier. MNC parentage and strong corporate governance are some of the other factors influencing our decision. Other fundamental basis include (1) Improving order book with ~1.7x increase over CY14-17E period to Rs 80bn, (2) Improving balance sheet (D/E will improve to 0.8x from 1.4x end CY15E), (3) Likely recovery of pending claims of Rs 1.4bn, and (4) No exposure to capex-intensive BOT segment. We have earlier ascribed ITDC a 20% multiple discount to the peer group to account for volatility in margins. We now believe that ITDC EBIDTA margins may have bottomed out. Higher margins new orders now constitute about 50% of the order book (end-cy15e). Besides, there will be 100bps improvement on account of employee cost reduction as % sales. We have built in meaningful margin recovery only from 1QCY16E. ITDC has Rs 5bn of legacy low-margin orders, which will be completed by 1QCY16E. Government-led spends in the infrastructure sector will continue to drive stock performance and ITDC, with its strong credentials, will likely benefit from the pickup in ordering activity. The company, over the past many years, has built strong pre-qualification in low competitive intensity segments such as marine, MRTS, etc. This will aid margin recovery. The balance sheet is in repair mode and working capital intensity is improving. We have a positive stance on ITDC and maintain BUY rating. We value the core EPC business at Rs 137/share (15x oneyear forward Sep-17 EPS vs. Rs 109/share and 12x one-year forward Sep-17 EPS, earlier). Valuation Particulars Segments Value (Rsmn) Value per share(rs) Rationale ITD Cementation Core construction business 21, At 15x Sep-17E EPS Total 21, Source: HDFC sec Inst Research Page 5

6 Income Statement (Consolidated) Year ending December (Rs mn) CY13 CY14 CY15E CY16E CY17E Net sales 15,841 17,189 26,816 33,788 39,574 Growth (%) (5.2) Material expenses 8,346 10,465 17,646 22,166 25,697 Employee expenses 1,923 1,936 2,172 2,500 2,810 Other operating expenses 3,948 3,877 5,095 6,082 7,123 EBIDTA 1, ,903 3,039 3,944 EBIDTA (%) EBIDTA Growth (%) (23.1) (44.0) Other income Depreciation EBIT 1, ,570 2,662 3,515 Interest 1,283 1,355 1,462 1,297 1,198 PBT 239 (686) 108 1,365 2,317 Tax (282) PAT 93 (761) ,576 EO items (net of tax) (1,240) - - Reported PAT (851) 928 1,576 APAT Growth (%) (58) EPS 0.8 (4.9) EPS Growth (%) (57.6) Balance Sheet (Consolidated) Year ending December (Rs mn) CY13 CY14 CY15E CY16E CY17E SOURCES OF FUNDS Share capital Reserves 3,969 5,523 4,672 5,600 7,176 Total shareholders funds 4,084 5,678 4,827 5,755 7,331 Total debt 7,695 7,653 7,203 6,453 6,303 Deferred taxes (212) (149) (149) (149) (149) TOTAL SOURCES OF FUNDS 11,567 13,183 11,882 12,060 13,486 APPLICATION OF FUNDS Net block 2,236 3,353 3,816 4,174 4,569 CWIP Investments, LT loans & advs Inventories 9,568 11,313 10,285 11,108 12,468 Debtors 4,016 4,415 5,510 6,943 8,132 Cash & equivalents ST loans & advances, others 2,180 2,411 3,086 3,703 4,337 Total Current Assets 16,083 18,410 19,233 21,963 25,408 Current liabilities 6,661 8,448 11,020 13,885 16,263 Provisions Total current liabilities 6,820 8,615 11,204 14,117 16,534 Net current assets 9,264 9,795 8,029 7,846 8,874 TOTAL APPLICATION OF FUNDS 11,567 13,183 11,882 12,060 13,486 Page 6

7 Cash Flow (Consolidated) Year ending December (Rs mn) CY13 CY14 CY15E CY16E CY17E PBT ,365 2,317 Non-operating & EO items 0 (955) (1,240) 0 0 Others (218) 28 Interest expenses 1,283 1,355 1,462 1,297 1,198 Depreciation Working capital change 238 (750) 1, (766) Tax paid (116) (437) (742) OPERATING CASH FLOW ( a ) 1, ,894 2,757 2,562 Capex (583) (491) (900) (850) (950) Others (2) (2) (3) Free cash flow (FCF) 1,306 (21) 1,992 1,905 1,610 Investments INVESTING CASH FLOW ( b ) (488) (384) (902) (852) (953) Share capital Issuance 0 1, Debt Issuance (139) (42) (450) (750) (150) Interest expenses (1,302) (1,387) (1,462) (1,297) (1,198) FCFE (136) (1,450) 80 (142) 262 Dividend (27) (13) FINANCING CASH FLOW ( c ) (1,468) (43) (1,912) (2,047) (1,348) NET CASH FLOW (a+b+c) (88) (142) 262 Non-operating and EO items 0 0 Closing Cash & Equivalents Key Ratios (Consolidated) CY13 CY14 CY15E CY16E CY17E PROFITABILITY (%) GPM EBITDA margin APAT margin (3.2) RoE 2.3 (15.6) Core RoCE RoCE EFFICIENCY Tax Rate (%) 61.1 (10.9) (261.7) Asset Turnover (x) Inventory & OCA (days) Debtors (days) Payables (days) Cash conversion cycle (days) Debt/EBITDA (x) Net D/E Interest Coverage PER SHARE DATA EPS (Rs/sh) 0.8 (4.9) CEPS (Rs/sh) 4.6 (2.2) DPS (Rs/sh) BV (Rs/sh) VALUATION P/E (22.0) P/BV EV/EBITDA OCF/EV (%) FCF/EV (%) 6.6 (0.1) FCFE/Market Cap (%) (1.1) (8.7) 0.5 (0.8) 1.6 Dividend Yield (%) Page 7

8 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 RECOMMENDATION HISTORY ITD Cementation TP Date CMP Reco Target 8-Sep BUY Nov BUY Rating Definitions BUY : Where the stock is expected to deliver more than 10% returns over the next 12 month period NEUTRAL : Where the stock is expected to deliver (-)10% to 10% returns over the next 12 month period SELL : Where the stock is expected to deliver less than (-)10% returns over the next 12 month period Page 8

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