Key investment argument

Transcription

1 PRIVATE CLIENT RESEARCH DECEMBER 22, 217 Pankaj Kumar Stock details BSE code : NSE code : VASCONEQ Market cap (Rs bn) : 7.7 Free float (%) : wk Hi/Lo (Rs) : 58.8/26.2 Avg daily volume (nos) : Shares (o/s) (mn) : Summary table (Consolidated) (Rs mn) FY17 FY18E FY19E FY2E Revenue Growth (%) EBITDA EBITDA margin (%) PBT APAT EPS EPS Growth(%) (76.4) CEPS (Rs) Book value (Rs/share) Dividend per share (Rs) ROE (%) Adj ROCE (%) Net cash (debt) (28) (1873) (1149) (125) NW Capital (Days) P/E (x) P/BV (x) EV/EBITDA (x) EV/Sales (x) , Kotak Securities Private Client Research Share holding pattern Others 63% Source: Capitaline FII 1% One-year performance (Rel to Nifty) Promoter 36% VASCON ENGINEERS LTD PRICE: RS. 46 RECOMMENDATION: BUY TARGET PRICE: RS. 6 FY2E PE: 1.2X Vascon Engineers Ltd (VEL) has presence in construction and development of residential and commercial real estate projects with a history of over 25 years. After having a rough patch between FY13 to FY15, the company has embarked on a decisive restructuring exercise. We feel the company could be a good turnaround story in FY19E with focus on affordable housing in both its EPC and real estate business. The four pronged strategy of turnaround are: 1) Focus on increasing the order book of EPC business. The company has capability to execute 8 mn sq ft of projects/rs.1 bn in value p.a. as compared to potential revenue of ~ Rs.3 bn in FY18E. It has already increased its EPC order book from Rs. 5.2bn in Mar 17 to Rs.7.2 bn at the end of H1FY18; 2) Reviving the real estate business under the new CEO of Real estate division, by focusing on affordable housing in a big way; 3) Liquidation of non-core investments to the tune of ~ Rs.2 bn in its subsidiaries & other businesses to fund future growth plans; and 4) Exiting loss making services business in its 85% held subsidiary called GMP Technical Solutions. This has the potential to swing PBT by Rs.1-15 mn between FY17 to FY19E. On an overall basis, we expect company s revenue and earnings to grow a CAGR of 26% and 231%, respectively between FY17-2E. We expect 1257 bps improvement in EBITDA margins in FY17-2E. Based on detailed working of individual businesses, we arrive at a SOTP price target of Rs.6. We initiate coverage on the stock with a BUY recommendation. Key investment argument Expect traction in EPC order book with Focus on quality projects. VEL came out of woods after exiting distress or slow moving real estate construction projects in FY15. These projects were bagged from private developers in FY1 when it went very aggressive on building its order book. Now the company is focusing on quality EPC projects in the building segment under Dr. Santosh Sundararajan (CEO). VEL has increased its EPC order book from Rs. 5.2 bn in Mar 17 to Rs 7.2 bn at the end of H1FY18. These are still far lower than the company s execution capacity to execute 8 mn sqft or Rs 1 bn of projects per annum. We expect order inflows to gain traction in FY19 based on 1) company would be qualified to bid for government & PSUs orders from FY19E, 2) Bank guarantee limit is expected to increase from Q4FY18 and 3) Increased opportunity in affordable building space, especially from various state governments. Asset light model in real estate development with focus on affordable housing. In real estate, VEL will focus on affordable housing segment and is looking to follow an asset light model by developing projects through JVs and JDA model. Its land bank includes 16.2 mn sqft of saleable area (in terms of VEL s share) with 9% of its projects under Joint Development (JDA) or JV model. It has a pipeline of residential projects in Pune (Kharadi & Bane), Madurai & Talegaon (affordable housing project, near the old Mumbai Pune). We expect these projects to be launched starting Q4FY18 onwards. To revive its real estate business, the company has brought new CEO for the division, Mr. Rajesh Mhatre who has vast experience in the industry with renowned players. The company is expected to double its real estate team size to 1 by FY18 end which should boost its real estate business in FY19E. Source: Capitaline Kotak Securities Limited has two independent equity research groups: Institutional Equities and Private Client Group. This report has been prepared by the Private Client Group. The views and opinions expressed in this document may or may not match or may be contrary with the views, estimates, rating, target price of the Institutional Equities Research Group of Kotak Securities Limited.

2 Liquidation of non-core assets to strengthen balance sheet for future growth. The company intends to liquidate non-core investment of ~Rs.2 bn in its subsidiaries and other businesses which will be utilized for growing its business. The company intends to exit land parcel which does not fit in its long term strategy and has set up a dedicated team focused on liquidating noncore assets. The company has already raised Rs. 7 mn in 1H-FY18 by selling non-core assets and liquidating old inventories. Restructuring in GMP to positively impact bottomline. It 85% held subsidiary, GMP Technical Solutions incurred a loss of Rs.54 mn in FY17 which negatively impacted VEL s consolidated net profit. GMP has manufacturing and service division of which the service division is responsible for the overall losses of the company. In order to turnaround, GMP management has discontinued the loss making services division (in MEP projects) and would continue with the profitable manufacturing division. This would positively impact the consolidated PAT in FY18. Positive outlook for players focused on affordable housing. There is a housing demand-supply mismatch of 18 mn units in urban areas, with most of this shortfall coming from the economically weaker section and the low income group. In order to address the housing need, the government of India has launched Pradhan Mantri Awas Yojna which aims at construction of 5 mn houses to be built in urban and rural areas by 222. As per KPMG, affordable housing segment is expected to grow at 3% rate in the next 5 years. Further, government giving infrastructure status to affordable housing sector will boost funding for the sector and in turn would reduce the cost of funding for the buyers as well as developers. Expect turnaround in earnings growth. We expect turnaround in VEL s earnings profile led by 26.3% CAGR in revenue and 1257 bps improvement in EBITDA margins in FY17-2E. Strong growth in revenue would be contributed by traction in EPC business where the outlook has improved on the back of strong order book, robust pipeline of future orders and increased balance sheet strength. We expect the consolidated EBITDA margins of the company to be at 11.4% in FY2E led by operating leverage benefit in EPC, corrective measure by the company in subsidiary GMP and improved performance in real estate business. As a result, we expect consolidated PAT of the company to grow at a CAGR of 231% during FY17-2E (on the low base of FY17). We expect consolidated net profit to be Rs.729 mn in FY2E (Vs. Rs. 2 mn in FY17). Valuation Based on FY19E and FY2E consolidated EPS of Rs.2.9 and 4.5, the stock is trading at PE of 15.9x and 1.2x respectively. We have done detailed working on the EPC and real estate business separately. We have valued the EPC business at 8x FY2E EBITDA (~2% discount to road construction companies like KNR & PNC), GMP is valued at 9x FY2E EBITDA and for the real estate business, we have worked out the Net Asset Value (NAV). Based on the individual valuations, we have arrived at an SOTP based target price of Rs 6. We initiate coverage on the stock with a BUY rating and potential upside of 3%. Key risk & concerns Our assumptions are based on the management s turnaround strategy and aggressive foray in the real estate business. Any delay in execution and ability to turnaround the loss making subsidiary (GMP) can distort our assumptions. Pick-up in demand for affordable housing is key for company s projects to materialize. Interest rates should remain on the lower side for home buyers to afford housing loans. Kotak Securities Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 2

3 COMPANY BACKGROUND Vascon Engineers Ltd (VEL) has presence in construction and development of residential and commercial real estate projects with a history of over 25 years. VEL through its EPC and real estate verticals is active in multiple sectors including residential, industrial, IT parks, malls, multiplexes, hospitality and community. The company has presence in more than 1 states and has completed over 2 contracts of approx 5 mn sqft. In EPC, VEL has expertise across various types of buildings and has capability to execute 8 mn sqft of projects (or Rs 1 bn in value) per annum. In real estate, its land current portfolio includes 3.9 mn sqft of saleable area with VEL s share of 16.2 mn sqft. Out of this, it has 2.4 mn sqft of area under current development. Its 85% subsidiary, GMP Technicals Solutions is one of the leading players in clean room partitioning systems and turnkey solution provider in India having manufacturing facilities in Baddi, Himachal Pradesh and in Bhiwandi, Thane that is engaged in making fibre doors, aluminum doors & windows, clean room partition & windows, aluminum sections, etc. 4% of its FY17 consolidated revenue is contributed by EPC, 9% by Real estate and 51% is contributed by GMP. The company s EPC order book is widely spread across sectors in building segment with projects located across India. Consolidated Revenue Mix (%) Consolidated Gross profits Mix (%) EPC Revenue Development Revenue Hotel Revenue GMP 1% 8% 6% 4% 2% % FY11 FY12 FY13 FY14 FY15 FY16 FY17 EPC Revenue Development Revenue Hotel Revenue GMP 1% 8% 6% 4% 2% % -2% -4% FY11 FY12 FY13 FY14 FY15 FY16 FY17 Sectoral breakup of EPC Order book in H1FY18 Education 5% Others 5% Geographical breakup of EPC Order book in H1FY18 Tamil Nadu 11% Others 1% Maharashtra 2% Affordable Housing 3% Residential 6% AP 31% UP 37% Kotak Securities Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 3

4 Management Details Name Designation Board of Directors V. Mohan Chairman & Independent Director R. Vasudevan Managing Director K. G. Krishnamurthy Non-Executive Director Mr. Mukesh Malhotra Independent Director Ms. Sowmya Vasudevan Moorthy Non-Executive Director Other Key management Dr. Santosh Sundararajan Rajesh Mhatre Siddharth Vasudevan M Krishnamurthy D Santhanam Chief Executive Officer Chief Executive Officer (Real Estate) Chief Operating Officer Chief Corporate Affairs Chief Financial Officer Kotak Securities Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 4

5 INVESTMENT RATIONALE Focus on quality projects in EPC segment In EPC, VEL has expertise across various types of buildings residential, industrial, IT parks, malls, multiplexes, hospitality, etc. But in past few years the company remained conservative in adding new orders after undergoing through turbulent phase. VEL has come out of woods after exiting distress or slow moving real estate construction projects from private developers such as HDIL, BPTP, etc. These projects were bagged by the company in FY1 when it went aggressive on building its order book. But these projects got stuck due to slowdown in the sector or aggressive approach adopted by the developers. Now the company is focusing on quality EPC projects in building segment based on below mentioned criteria. Quality Clients/project profile: Government bodies, Private trusts (college, Hospitals, schools, etc.) Industries, AAA rated private developers Favorable terms of contracts: in terms of guarantee, advances, executional timeline, price escalation, etc. It is not going for Bank Guarantee (BG) based orders from private builders Profitability: aim for minimum 15% gross margins Expect traction in EPC order book VEL has current EPC order book of Rs 7.2 bn which is lower than its execution capacity as it has capability to execute 8 mn sqft or Rs 1 bn worth of projects per annum. We believe that the order inflows of the company is expected to see traction in FY19 based on 1) company would directly qualify for government & PSUs orders from FY19, as they would be able to meet the criteria of profitable track record (i.e. positive net profit in last three consecutive years), 2) bank guarantee limit is expected to increase from Q4FY18 and 3) increased opportunity in building space from government s focus on low cost housing. Presently, it requires 3% margin on BG which affects in bidding for projects. But with expected improvement in rating, the BG limits for the company is expected to ease (with 1-12% margins). Hence from FY19 onwards, the company can bid for government tenders. In H1FY18, the company has bagged a large size order of Rs 2.5 bn in AP from Shapoorji Pallonji. This year, AP government awarded Rs 75 bn of orders for building low cost housing in first phase to players like L&T, NCC, and Shapoorji Pallonji. But due to resource constraints some of these developers have subcontracted the work to players like VEL in order to meet execution timeline. Further, VEL has strong pipeline of orders from Godrej Properties, various Hospital projects, government building projects from players like NBCC, etc. As per management, there is further opportunity from AP government in future as they would launch next phase of tenders. By that time, VEL is expected to be eligible to bid for contracts on its own. Based on all these factors, the company is targeting to achieve EPC order book of Rs 1 bn early FY19. We expect VEL s order book to reach Rs 14.6 bn by FY2E. Order Inflows and Order Backlog (Rs mn) Order Intake Order Backlog FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY2E, Kotak Private Client Research Kotak Securities Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 5

6 Order Book breakup Location Client Current Order book (Rs mn) Lucknow Kailash Enclave 183 Ayyalur,Andhra Pradesh Ayyalur 1 Adoni, Andhra Pradesh Adoni 1 Mumbai Sheth Creators Malad (I&II) 74 Chennai Sriram Educational Turst 7 Lucknow Everest Enclave 58 Chennai Godrej Chennai 34 Pune Tech Point 18 Chennai TNMC Chennai 17 Others 66 Total 72 Asset light model in real estate development with focus on affordable housing In real estate, VEL is focusing on affordable housing segment and is looking to follow asset light model by developing projects through JVs and JDA model. It has right mix of real estate development project in terms of land bank, JV and JDA. About 9% of its projects are on Joint Development (JDA) model, which keeps the company assets light and reduces initial investment in land. In real estate development, the company has till date focused on mid to premium segment projects. In future, the company is focusing on affordable and low cost housing. It has a pipeline of affordable housing project (total 1.62 mn sq ft,.46 msf at Katvi and ~1.16 at Talegaon) at Talegaon, near old Mumbai Pune Highway which would be launched in phases. The ticket size of the project is <Rs 2 lac for 1 BHK, <Rs 25 lac for 2 bhk, < Rs 15 lac for 1RK. In house EPC would give edge to VEL over its competitors at Talegaon as it would be able to offer a competitive project in terms of quality at lower cost. The company would be marketing the project aggressively using electronic and print media. In the longer run, the company is expected to increase focus on low cost/affordable housing. In order to achieve this objective, the company may create a separate SPV for executing these projects. Land Bank Details Location Area Saleable Vascon Vascon Area Share Share/stake % JDA Pune % Chennai % Madurai % Coimbatore % Total JDA JV Thane % Pune % Total JV Own Pune % Aurangabad % Total Own Grand Total Kotak Securities Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 6

7 Breakup of land bank (VEL s share) Own 9% JDA 29% JV 62% Strong team of professionals and robust pipeline to boost real estate sales VEL has transformed its real estate team with new professionals on board who have vast experience in the industry with renowned players like Lodha Developers. It has built a team of 5 sales and marketing professionals and targets to increase the same to 1 by FY18 end. The strong sales force in the division would help company in marketing and selling existing as well as upcoming projects. The company has strong launch pipeline. It would be launching Forest County phase 3 of 8 sqft in December 217 end. Apart from this, the company intends to complete phase 1 of Windermere by January 218 end and would re-launch the project to clear unsold inventory. Based on this, the company expects traction in real estate sales. The company has witnessed improvement in real estate sales in H1FY18 with Rs 1.1 bn of projects sold in the period as against Rs 6 mn in FY17. The company targets to sell Rs 2.5 bn of real estate projects in FY18. Improvement in real estate sales trend (Rs mn) FY 14 FY 15 FY 16 FY 17 H1FY18 Liquidation of non-core assets to strengthen balance sheet for future growth The company intends to liquidate non-core investment in its subsidiaries and other businesses which will be utilized for growing its business. The company intends to exit land parcel which does not fit in its long term strategy and has set up a dedicated team focused on liquidating non-core assets. It would be monetizing land parcel where the sales visibility is high. Further, it has investment in hotel property in Goa from which it can generate Rs 45-5 mn through monetization. The company also has 85% investment in GMP which is managed by professionals and is focused on unrelated business of clean room partitions. The company has an option to exit GMP (Book value of Rs 8 mn in FY17) in a longer run. We have valued investment in GMP at Rs 2.1 bn. The company can raise over Rs 2 bn by liquidating its non-core assets in longer run. The company generated Rs 75 mn from liquidation of old unsold inventory and sale of land in H1FY18. Further it intends to raise Rs 1 bn from the liquidation process in the rest of the year (FY18). Kotak Securities Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 7

8 Restructuring in GMP to positively impact bottomline GMP is market leader in clean room partitions for hospitals, space centers, etc and has incurred loss in FY17 (of Rs 53.9 mn in FY17) which negatively impacted VEL s consolidated bottomline. In order to turnaround its business, GMP has discontinued its loss making services business in MEP projects (~Rs 1 bn revenue in FY17) and would continue with profitable manufacturing business (Rs 1.8 bn revenue in FY17). This will positively impact its consolidated PAT in FY18. Further, GMP s new plant at Bhiwandi is operating at a low utilization of 3-4%. Based on current capacity, GMP s manufacturing division can add another Rs 1 bn to its revenue and can achieve potential revenue of Rs 2.5 bn with 1-12% EBITDA margins. GMP s Revenue (Rs mn) GMP s PBT (Rs mn) FY14 FY15 FY16 FY17-8 FY14 FY15 FY16 FY17 Positive outlook for players focused on affordable housing The market size of real estate in India is expected to increase at a CAGR of 15.2% during FY8 28E and is estimated to be worth US$ 853 billion by 228 (Source: IBEF). This growth is driven by increasing urbanization, rising income and increasing industrial activity. The number of Indians living in urban areas is expected to increase from 434 million in 215 to about 6 million by 231. With current growth rate of mn per annum, the Indian urban population is expected to take over rural population by 25. (Source: KPMG). At this rate, India s urban housing requirement is increasing at mn homes per annum. According to Ministry of Housing and Urban Poverty Alleviation (MHUPA), there is a housing demand-supply mismatch of 18 mn units in urban areas, with most of this shortfall comeing from the economically weaker section (~56%) and the low income group (~4%). In order to address the housing need, the government of India has launched Pradhan Mantri Awas Yojna which aims at construction of 5 mn houses to be built in urban and rural areas by 222. As per KPMG s estimate, total (urban+rural & Government +private) 11 mn houses are required to be constructed by 222 to meet the affordable housing demand with USD 2 trn investment. Hence affordable housing segment is expected to grow at 3% CAGR. In order to achieve Housing to All, the Union Budget brought amendment with regards to Affordable Housing Sector by according the status of infrastructure status. This would boost fund raising for the sector and in turn reduce the cost of funding for the buyers as well as developers. Kotak Securities Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 8

9 Market size of real estate in India (USD bn) Indians living in urban areas (mn) FY8 FY9 FY1 FY11 FY13 FY15 FY2E FY28E E Source: IBEF PMAY Status analysis Particular Nos Houses to be built under PMAY (Urban) untill Houses built until 31 July Remaining houses to be built by Months remaining 65 Houses to be built per month for PMAY (Urban) Houses to be built under PMAY (Gramin) untill Houses built until 31 July Estimates houses pending for PMAY (Gramin) Houses to be built per month for PMAY (Gramin) Total houses to be built per month to meet target of 5 mn units by Source: KPMG report RERA is expected to be the game changer for the Indian real estate sector RERA (Real Estate Regulation Act) is big reform in the real estate sector in India and is expected to be a game changer for the sector by bringing in transparency in the sector. This is expected to bring customer confidence back. As per the provisions of the act, only those projects which have all approvals in place can be advertised and sold to the buyers. In addition, information related to approvals, time taken for completion and master plan of project will have to be disclosed before the launch. Any failure to comply with the regulation would result in heavy monetary penalty and imprisonment for the developers. The act would lead to timely delivery of projects, elimination of non serious/short term players and bring cleaner financial management of customer advances. As a result, many smaller and weaker developers would find it difficult to operate and is positive for organized and large players focused on delivery. This will also will reduce the inventory overhang in the sector and will attract investment in the sector. Expect turnaround in earnings growth We expect turnaround in VEL s earnings profile led by 26.3% CAGR in revenue and 1257 bps improvement in EBITDA margins in FY17-2E. Strong growth in revenue is contributed by traction in EPC business where the outlook has improved on strong order book, robust pipeline of future orders and increased balance sheet strength. We expect the consolidated EBITDA margins of the company to be at 11.4% led by operating leverage benefit in EPC, corrective measure by the company in subsidiary GMP and improved performance in real estate business. As a result, we expect consolidated PAT of the company to grow at a CAGR of 231% on a low base of FY17. Kotak Securities Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 9

10 Net Sales Growth (Rs mn) 12, 1, 8, 6, 4, Gross profit growth (Rs mn) 3, 2,5 2, 1,5 1, 2, 5 - (2,) FY17 EPC Real Estate GMP FY2E - FY17 EPC Real Estate GMP FY2E, Kotak Securities - Private Client Research Kotak Securities Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 1

11 KEY RISK & CONCERNS Slowdown in spending in building segment: Any slowdown in building and low cost housing would negatively impact order inflows for the EPC players like VEL. Aggressive foray in real estate: An aggressive foray by the company in real estate business may negatively impact company s balance sheet considering real estate demand is cyclical in nature. Rise in interest rate: rise in interest rate may negatively impact cost of funding and real estate demand Kotak Securities Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 11

12 FINANCIAL PROJECTIONS Expect 26% Sales CAGR in FY17-2E We expect revenue of VEL to grow at a CAGR of 26.3% in FY17-19E led by 49% CAGR in EPC revenue, 35% CAGR in real estate revenue and 5% decline in GMP revenue mainly due to discontinuation of service business. We expect EPC revenue growth to be driven by execution of robust order book with strong pipeline of projects. We expect EPC order backlog to grow from Rs 5.15 bn in FY17 to Rs 14.6 bn in FY2 based on positive outlook for building projects, strong inflows of new projects on company meeting criteria for government orders and ease in bank guarantee limit from Q4FY18 onwards. Revenue growth in GMP is expected to improve from FY19 after a decline in FY18 as company took corrective measures to exit loss making services business. We believe that improvement in real estate sale and strong pipeline of projects will result in improvement in real estate revenue. Expect turnaround in EBITDA in FY17-2E with improvement in returns ratios We expect EBITDA of the company to turnaround from losses in FY17 due to 1) improvement in EBITDA margins in GMP business as the company discontinued loss making services business and 2) improved profitability in EPC segment on pickup in revenue growth 3) improved performance in real estate business, based on strong cash flows to improve on improved collections and company liquidating unsold inventory in real estate business. As a result, the net debt to equity is expected to reduce from.3x in FY17 to.2x by FY2E. We expect ROE of the company to improve to 9.8% by FY2E from.3% in FY17 on increased profits. Revenue and Revenue growth Net Profit and Net Profit Margin 12, 1, 8, Revenues (LHS, Rs mn) Revenue Growtth (RHS, %) Net Profit (LHS, Rs mn) NPM (RHS, %) 8 6 6, , 2, FY16 FY17 FY18E FY19E FY2E -2 FY16 FY17 FY18E FY19E FY2E, Kotak Securities - Private Client Research EBITDA and EBITDA margin RoCE & RoE (%) 12 1,2 EBITDA (LHS, Rs mn) 14 1, EBITDA Margin (RHS, %) 12 1 ROCEs (2) ROEs (2) FY16 FY17 FY18E FY19E FY2E -2 (4) FY16 FY17 FY18E FY19E FY2E, Kotak Securities - Private Client Research Kotak Securities Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 12

13 Standalone Quarterly & Half yearly highlights Year to March (INR Mn.) Q2FY18 Q2FY17 % Chg Q1FY18 % Chg H1FY18 H1FY17 % Chg Net Revenues (15.) 814 (32.9) 1, , Raw Materials Cost (34.4) 628 (48.) Gross Profit Employee Expenses Other Expenses (7.3) Operating Expenses (19.9) 767 (36.4) 1,255 1, EBITDA EBITDA margin 1.7% 5.2% 5.8% 7.7% 8.4% Depreciation 18 2 (6.2) (7.7) Other income 3 8 (61.8) 42 (27.6) (31.6) Net finance expense (9.5) 58 (4.) (9.9) Profit before tax (53.3) (36.8) Provision for taxes - 26 (1.) - #DIV/! (1.) Reported net profit As % of net revenues COGS Employee cost Other Expenses Operating expenses EBITDA Reported net profit Tax rate (% of PBT) Kotak Securities Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 13

14 VALUATIONS Based on FY19E and FY2E consolidated EPS of Rs.2.9 and 4.5, the stock is trading at PE of 15.9x and 1.2x respectively. We have valued the company on sum of the parts based valuation. We have valued EPC business on 8x FY2E EBITDA (~2% discount to road players like KNR, PNC & etc), GMP at 9x FY2E EBITDA and real estate business based on net asset value. We have assumed Rs7-12 per sqft as project level EBITDA margins and 13% as discount rate for valuing its real estate projects including land bank (except thane where we have valued at 2x BV). We have assumed that the company would monetize its land bank by FY31 while valuing real estate assets. Based on these assumptions, we have arrived at SOTP based target price of Rs 6. We initiate coverage on the stock with buy rating. SOTP valuation Segment Parameter FY2E EBITDA/NAV Stake Multiple Value Per Share EPC Business EV/EBITDA 659 1% Real Estate NAV % GMP EV/EBITDA 24 5% Net Debt Total Value Source: Kotak Securities - Private Client Research Peer Comparison Comparative CMP FY17-19E FY17-19E FY19E FY19E FY19E FY19E FY19E FY19 EPC (Rs) Sales CAGR PAT CAGR EBITDA P/E EV/EBITDA RoE RoCE Net D/E OB/Bil (%) (%) Margins (x) (x) (%) (%) (x) (x) (%) VEL 46 25% 382% KNR 33 2% 12% NCC 132 1% 25% PNC Infratech % 23% Source: Kotak Securities - Private Client Research Kotak Securities Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 14

15 FINANCIALS (CONSOLIDATED) Profit and Loss Statement (Rs mn) FY17 FY18E FY19E FY2E Revenues % change yoy EBITDA % change yoy Depreciation EBIT Other Income Interest Profit Before Tax % change yoy (66.) Tax as % of EBT PAT % change yoy (86.9) Shares outstanding (mn) EPS (Rs) DPS (Rs) CEPS(Rs) BVPS(Rs) , Kotak Securities - Private Client Research Cash Flow Statement (Rs mn) (Rs mn) FY17 FY18E FY19E FY2E Pre-Tax Profit Depreciation Change in WC (871) (9) 183 (91) Other operating activities 452 (44) (162) (259) Operating Cash Flow Capex (23) (1) (1) (1) Free Cash Flow (465) (11) Change in Investments 173 Investment cash flow (56) (1) (1) (1) Equity Raised 64 Debt Raised 5-1 Dividend & others 14 CF from Financing 254 (1) Change in Cash Opening Cash Closing Cash , Kotak Securities - Private Client Research Balance Sheet (Rs mn) FY17 FY18E FY19E FY2E Paid - Up Equity Capital Reserves Net worth Borrowings Net Deferred tax (84) (84) (84) (84) Total Liabilities Net block Total fixed assets Investments Inventories Sundry debtors Cash and equivalents Loans and advances & Others Total current assets Sundry creditors and others Provisions Total CL & provisions Net current assets Total Assets , Kotak Securities - Private Client Research Ratio Analysis (Rs mn) FY17 FY18E FY19E FY2E Profitability Ratios EBITDA margin (%) EBIT margin (%) Net profit margin (%) Adjusted EPS growth (%) (76.4) Balance Sheet Ratios: Receivables (days) Inventory (days) Loans & Advances Payable (days) Cash Conversion Cycle Asset Turnover Net Debt/ Equity Return Ratios: RoCE (%) RoE (%) Valuation Ratios: P/E (x) P/BV (x) EV/EBITDA (x) EV/Sales (x) , Kotak Securities - Private Client Research Kotak Securities Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 15

16 RATING SCALE Definitions of ratings BUY We expect the stock to deliver more than 12% returns over the next 9 months ACCUMULATE We expect the stock to deliver 5% - 12% returns over the next 9 months REDUCE We expect the stock to deliver % - 5% returns over the next 9 months SELL We expect the stock to deliver negative returns over the next 9 months NR Not Rated. Kotak Securities is not assigning any rating or price target to the stock. The report has been prepared for information purposes only. RS Rating Suspended. Kotak Securities has suspended the investment rating and price target for this stock, either because there is not a Sufficient fundamental basis for determining, or there are legal, regulatory or policy constraints around publishing, an investment rating or target. The previous investment rating and price target, if any, are no longer in effect for this stock and should not be relied upon. NA Not Available or Not Applicable. The information is not available for display or is not applicable NM Not Meaningful. The information is not meaningful and is therefore excluded. NOTE Our target prices are with a 9-month perspective. Returns stated in the rating scale are our internal benchmark. FUNDAMENTAL RESEARCH TEAM Sanjeev Zarbade Ruchir Khare Amit Agarwal Nipun Gupta K. Kathirvelu Capital Goods, Engineering Capital Goods, Engineering Logistics, Paints, Transportation Information Technology Production sanjeev.zarbade@kotak.com ruchir.khare@kotak.com agarwal.amit@kotak.com nipun.gupta@kotak.com k.kathirvelu@kotak.com Teena Virmani Ritwik Rai Jatin Damania Jayesh Kumar Construction, Cement, Building Mat FMCG, Media Metals & Mining Economy teena.virmani@kotak.com ritwik.rai@kotak.com jatin.damania@kotak.com kumar.jayesh@kotak.com Arun Agarwal Sumit Pokharna Pankaj Kumar Ashini Shah Auto & Auto Ancillary Oil and Gas Midcap Midcap arun.agarwal@kotak.com sumit.pokharna@kotak.com pankajr.kumar@kotak.com ashini.shah@kotak.com TECHNICAL RESEARCH TEAM Shrikant Chouhan Amol Athawale shrikant.chouhan@kotak.com amol.athawale@kotak.com DERIVATIVES RESEARCH TEAM Sahaj Agrawal Malay Gandhi Prashanth Lalu Prasenjit Biswas, CMT sahaj.agrawal@kotak.com malay.gandhi@kotak.com prashanth.lalu@kotak.com prasenjit.biswas@kotak.com Kotak Securities Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 16

17 Disclosure/Disclaimer Kotak Securities Limited established in 1994, is a subsidiary of Kotak Mahindra Bank Limited. Kotak Securities is one of India's largest brokerage and distribution house. Kotak Securities Limited is a corporate trading and clearing member of Bombay Stock Exchange Limited (BSE), National Stock Exchange of India Limited (NSE), Metropolitan Stock Exchange of India Limited (MSE). Our businesses include stock broking, services rendered in connection with distribution of primary market issues and financial products like mutual funds and fixed deposits, depository services and Portfolio Management. Kotak Securities Limited is also a depository participant with National Securities Depository Limited (NSDL) and Central Depository Services (India) Limited (CDSL). Kotak Securities Limited is also registered with Insurance Regulatory and Development Authority as Corporate Agent for Kotak Mahindra Old Mutual Life Insurance Limited and is also a Mutual Fund Advisor registered with Association of Mutual Funds in India (AMFI). We are registered as a Research Analyst under SEBI (Research Analyst) Regulations, 214. We hereby declare that our activities were neither suspended nor we have defaulted with any stock exchange authority with whom we are registered in last five years. However SEBI, Exchanges and Depositories have conducted the routine inspection and based on their observations have issued advise/warning/deficiency letters/ or levied minor penalty on KSL for certain operational deviations. We have not been debarred from doing business by any Stock Exchange / SEBI or any other authorities; nor has our certificate of registration been cancelled by SEBI at any point of time. We offer our research services to clients as well as our prospects. This document is not for public distribution and has been furnished to you solely for your information and must not be reproduced or redistributed to any other person. Persons into whose possession this document may come are required to observe these restrictions. This material is for the personal information of the authorized recipient, and we are not soliciting any action based upon it. This report is not to be construed as an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. It is for the general information of clients of Kotak Securities Ltd. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. We have reviewed the report, and in so far as it includes current or historical information, it is believed to be reliable though its accuracy or completeness cannot be guaranteed. Neither Kotak Securities Limited, nor any person connected with it, accepts any liability arising from the use of this document. The recipients of this material should rely on their own investigations and take their own professional advice. Price and value of the investments referred to in this material may go up or down. Past performance is not a guide for future performance. Certain transactions -including those involving futures, options and other derivatives as well as non-investment grade securities - involve substantial risk and are not suitable for all investors. Reports based on technical analysis centers on studying charts of a stock's price movement and trading volume, as opposed to focusing on a company's fundamentals and as such, may not match with a report on a company's fundamentals. Opinions expressed are our current opinions as of the date appearing on this material only. While we endeavor to update on a reasonable basis the information discussed in this material, there may be regulatory, compliance or other reasons that prevent us from doing so. Prospective investors and others are cautioned that any forward-looking statements are not predictions and may be subject to change without notice. Our proprietary trading and investment businesses may make investment decisions that are inconsistent with the recommendations expressed herein. Kotak Securities Limited has two independent equity research groups: Institutional Equities and Private Client Group. This report has been prepared by the Private Client Group. The views and opinions expressed in this document may or may not match or may be contrary with the views, estimates, rating, target price of the Institutional Equities Research Group of Kotak Securities Limited. We and our affiliates/associates, officers, directors, and employees, Research Analyst(including relatives) worldwide may: (a) from time to time, have long or short positions in, and buy or sell the securities thereof, of company (ies) mentioned herein or (b) be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as a market maker in the financial instruments of the subject company/company (ies) discussed herein or act as advisor or lender / borrower to such company (ies) or have other potential/material conflict of interest with respect to any recommendation and related information and opinions at the time of publication of Research Report or at the time of public appearance. Kotak Securities Limited (KSL) may have proprietary long/short position in the above mentioned scrip(s) and therefore may be considered as interested. The views provided herein are general in nature and does not consider risk appetite or investment objective of particular investor; readers are requested to take independent professional advice before investing. This should not be construed as invitation or solicitation to do business with KSL. Kotak Securities Limited is also a Portfolio Manager. Portfolio Management Team (PMS) takes its investment decisions independent of the PCG research and accordingly PMS may have positions contrary to the PCG research recommendation. Kotak Securities Limited does not provide any promise or assurance of favourable view for a particular industry or sector or business group in any manner. The investor is requested to take into consideration all the risk factors including their financial condition, suitability to risk return profile and take professional advice before investing. The analyst for this report certifies that all of the views expressed in this report accurately reflect his or her personal views about the subject company or companies and its or their securities, and no part of his or her compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this report. No part of this material may be duplicated in any form and/or redistributed without Kotak Securities' prior written consent. Details of Associates are available on our website ie Research Analyst has served as an officer, director or employee of subject company(ies): No We or our associates may have received compensation from the subject company(ies) in the past 12 months. We or our associates have managed or co-managed public offering of securities for the subject company(ies) in the past 12 months: No We or our associates may have received compensation for investment banking or merchant banking or brokerage services from the subject company(ies) in the past 12 months. We or our associates may have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company(ies) in the past 12 months. We or our associates may have received compensation or other benefits from the subject company(ies) or third party in connection with the research report. Our associates may have financial interest in the subject company(ies). Research Analyst or his/her relative's financial interest in the subject company(ies): No Kotak Securities Limited has financial interest in the subject company(ies) at the end of the month immediately preceding the date of publication of Research Report - No Our associates may have actual/beneficial ownership of 1% or more securities of the subject company(ies) at the end of the month immediately preceding the date of publication of Research Report. Research Analyst or his/her relatives has actual/beneficial ownership of 1% or more securities of the subject company(ies) at the end of the month immediately preceding the date of publication of Research Report: No. Kotak Securities Limited has actual/beneficial ownership of 1% or more securities of the subject company(ies) at the end of the month immediately preceding the date of publication of Research Report: No Subject company(ies) may have been client during twelve months preceding the date of distribution of the research report. "A graph of daily closing prices of securities is available at and (Choose a company from the list on the browser and select the "three years" icon in the price chart)." Kotak Securities Limited. Registered Office: 27 BKC, C 27, G Block, Bandra Kurla Complex, Bandra (E), Mumbai 451. CIN: U99999MH1994PLC13451, Telephone No.: , Fax No.: Website: Correspondence Address: Infinity IT Park, Bldg. No 21, Opp. Film City Road, A K Vaidya Marg, Malad (East), Mumbai 497. Telephone No: SEBI Registration No: NSE INB/INF/INE , BSE INB /INF , MSE INE /INB /INF , AMFI ARN 164, PMS INP258 and Research Analyst INH586. NSDL/CDSL: IN-DP-NSDL Our research should not be considered as an advertisement or advice, professional or otherwise. The investor is requested to take into consideration all the risk factors including their financial condition, suitability to risk return profile and the like and take professional advice before investing. Investments in securities market are subject to market risks, read all the related documents carefully before investing. Derivatives are a sophisticated investment device. The investor is requested to take into consideration all the risk factors before actually trading in derivative contracts. Compliance Officer Details: Mr. Manoj Agarwal. Call: , or ks.compliance@kotak.com. Level 1: For Trading related queries, contact our customer service at 'service.securities@kotak.com' and for demat account related queries contact us at ks.demat@kotak.com or call us on: Online Customers (by using your city STD code as a prefix) or Toll free numbers / , Offline Customers Level 2: If you do not receive a satisfactory response at Level 1 within 3 working days, you may write to us at ks.escalation@kotak.com or call us on and if you feel you are still unheard, write to our customer service HOD at ks.servicehead@kotak.com or call us on Level 3: If you still have not received a satisfactory response at Level 2 within 3 working days, you may contact our Compliance Officer (Mr. Manoj Agarwal ) at ks.compliance@kotak.com or call on 91- (22) Level 4: If you have not received a satisfactory response at Level 3 within 7 working days, you may also approach CEO (Mr. Kamlesh Rao) at ceo.ks@kotak.com or call on 91- Kotak Securities Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 17 (22)