CMP* (Rs) 346 Upside/ (Downside) (%) 17. Market Cap. (Rs bn) 23 Free Float (%) 42.0 Shares O/S (mn) 67

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1 Consturction India 3QFY18 Result Update February 20, 2018 Market Cap. (Rs bn) 23 Free Float (%) 42.0 Shares O/S (mn) 67 Healthy Show on Higher Margin: Maintain (ACIL) has reported a better-than-expected operating performance in 3QFY18, with its reported EBITDA growing sharply by 32% YoY and 25% QoQ to Rs625mn mainly on account of continued belt-tightening exercise and a good progress on high-margin projects. While reported revenue rose by just 1% YoY to Rs3.6bn, revenue on comparable basis grew by ~10% YoY. EBITDA margin rose by 411bps YoY and 240bps QoQ to 17.3%, which is the key positive, in our view. Despite a one-time provisioning of Rs87mn in finance cost, reported net profit surged by 19% YoY and 13% QoQ to Rs292mn owing to higher operating profit. Further, an order inflow of Rs12.6bn in 9MFY18 as against initial guidance of Rs13bn in FY18E augurs well for ACIL and the Company may beat its inflow guidance for the year. While ACIL seems to be conservative in terms of order inflow outlook owing to increased competitive intensity, we continue to maintain our positive stance on ACIL on the back of healthy balance sheet, asset light business model, and superior return ratios. Marginally tweaking our earnings estimates for forward years and introducing our FY20 estimates, we reiterate our recommendation on the stock with a revised Target Price of Rs405 (from Rs385 earlier). Share price (%) 1 mth 3 mth 12 mth Absolute performance (5.7) Relative to Nifty (1.1) 2.1 (1.5) Shareholding Pattern (%) Sept 17 Dec'17 Promoter Public Year Stock Price Performance Strong Margin Drives Performance While revenue grew by ~10% YoY on comparable basis, EBITDA improved by a sharp 32% YoY to Rs625mn. Notably, ACIL s consistent endeavour to optimise cost at projects level and good progress on high-margin projects resulted in solid operating performance, as EBITDA margin at 17.3% seems to be the strongest for last couple of years. Given that ACIL does not compromise with margins while bidding for projects as vindicated by the conservative inflow guidance, we foresee its margin to remain healthy in coming years. ACIL has guided for an EBITDA margin of ~13-14% Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Aug-17 Sep-17 Note: * CMP as on February 19, 2018 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Pick-up in Inflow leads to Healthy Order Book Unlike no order inflow in 1QFY18, ACIL secured orders worth Rs12.6bn in last two quarters. Further, with the likely addition of Rs2bn orders in 4QFY18 (as guided), order inflow guidance of Rs13bn for FY18 is expected to be exceeded. ACIL furthers guides an order inflow of Rs16bn for FY19, which is conservative, in our view. Current order book at Rs35.8bn (2.1x TTM revenue) continues to oer decent business visibility, going forward. Outlook & Valuation We maintain our positive stance on ACIL mainly on the back of: (1) asset light business model; (2) strong balance-sheet (D/E at 0.2x); (3) best-in-class return ratios; and (4) no equity commitment unlike several other construction companies. Further, with strong pedigree in projects execution and superior expertise, we expect ACIL to add more quality projects to its kitty, going forward. Marginally tweaking our earnings estimates for forward years and introducing our FY20 estimates, we reiterate our rating on the stock with a revised Target Price of Rs405. Key Financials (Rs mn) FY17 FY18E FY19E FY20E Sales 14,265 16,776 17,647 4,778 EBITDA 1,730 2,190 2, Net Profit 860 1,179 1,388 0 EPS (Rs) DPS (Rs) P/E (x) P/B (x) EV/EBITDA (x) RoE (%) Divi. Yield (%) Source: Company, RSec Research Research Analyst: Binod Modi Contact: binod.modi@relianceada.com 1

2 Risks to the View Lower-than-expected order inflow due to delay in capex recovery. Any delay in project execution. Conference Call Key Takeaways Order Inflow & Guidance: ACIL secured orders worth Rs7.1bn in 3QFY18 taking its 9MFY18 order book to Rs12.6bn. The Management expects to add fresh orders worth Rs2.0bn in 4QFY18 and thus it is expected to surpass its initial guidance of Rs13bn. While there is no L1 position as of now, ACIL is currently bidding for projects worth >Rs25bn including 2 projects of NBCC worth ~Rs18.5bn. Further, it guides an order inflow of Rs16bn for FY19, which is conservative, in our view. Reason for Conservative Inflow Guidance: ACIL states that competitive intensity has doubled in last few quarters especially in NBCC and residential projects, as several regional contractors have started pursuing for large projects. ACIL reveals that high competitive intensity led to 10-12% decline in bid prices and it would be diicult for the small and inexperienced players to prove their pedigree in projects execution. However, in the long run, it expects it to reverse to normal level. As ACIL does not want to compromise with its margins, it has given conservative guidance for order inflow. Current Bidding Pipeline: Out of current bidding pipeline of Rs25bn, 80% belongs to government projects like NBCC, CPWD and HSCC etc., while private segment accounts for the rest. As ACIL continues to see decent opportunities in private commercial and institutional space, it expects its order book share from private segment to increase from 50% to 60% in FY19E. Diversification in to Airport Projects: Though ACIL does not own any technical qualification to bid for airport projects as its own, it is pursuing to tap this opportunity though JV route. It expects to participate in airport projects worth over ~Rs10bn through JV partner in coming months. Kota Project: Though revenue and PAT for 9MFY18 stood at Rs8.5mn and Rs11.8mn, respectively, actual cash loss for the project stood at Rs14.4mn during 9MFY18. Average Cost of Debt & Interest Cost: Gross debt stood at Rs610mn with an average cost of 9.5%. The Management expects debt to come down to Rs mn in FY19E. It attributed higher interest cost for 3QFY18 to one-time provisioning of Rs87mn. f f Revenue, Capex & Margin Guidance: Revenue growth for FY18E is guided in the range of 15-20% with EBITDA margin of 13-14%. Further, capex for FY18E is guided at Rs200mn. 2

3 Exhibit 1: Quarterly Performance (Rs mn) 3QFY18 3QFY17 % YoY 2QFY18 % QoQ 9MFY18 9MFY17 % YoY Net Sales 3,611 3, , ,998 9, (Inc)/Dec in stock in Trade (463) Consumption of RM 1,324 1,789 (26.0) 1,638 (19.2) 5,248 4, % sales Operating Expenses (6.4) 173 (8.9) % sales Employees Cost (8.7) 345 (0.1) 1,008 1,203 (16.2) % sales Subcontracts Exps ,106 (13.4) 3,228 1, % sales Other Expenditures % sales Total Expenditures 2,986 3,108 (3.9) 2, ,339 8, EBIDTA ,659 1, Margins Depreciation Interest Other Income (4.9) (42.3) PBT ,296 1, Tax Expens % PBT PAT Net Margins Source: Company, RSec Research Exhibit 2: Revised vs. Old Estimates FY18E FY19E (Rs mn) Old Revised % change Old Revised % change Sales (Rs mn) 16,366 16, ,281 17,647 (3.5) EBIDTA (Rs mn) 2,052 2, ,354 2, EBIDTA margins (%) PAT (Rs mn) 1,160 1, ,401 1,388 (0.9) PAT margins (%) EPS (Rs) (0.8) Source: RSec Research 3

4 Profit & Loss Y/E Mar (Rs mn) FY17 FY18E FY19E FY20E Net Sales 14,265 16,776 17,647 18,111 Total Expenditure 12,535 14,586 15,288 15,656 EBITDA 1,730 2,190 2,359 2,456 EBITDA Margin (%) Financial Charges Depreciation Other Income Profit before tax Total Tax % of PBT Profit after tax 860 1,179 1,388 1,492 PAT Margin (%) Net Profit 860 1,179 1,388 1,492 Adjusted EPS Balance Sheet Y/E Mar (Rs mn) FY17 FY18E FY19E FY20E Shareholders Funds Share Capital Reserves and Surplus 4,946 6,124 7,481 8,940 Total 5,080 6,258 7,614 9,074 Loan Funds Secured Loans Unsecured Loans Total TOTAL 5,984 6,842 7,978 9,188 Application of Funds Fixed Assets Gross Block 4,530 4,680 4,830 5,030 Less: Depreciation 2,605 2,858 3,120 3,391 Net Block 1,925 1,822 1,711 1,639 Capital Work-in Progress Investments Current Assets, Loans and Advances Inventories 2,008 2,390 2,514 2,630 Sundry debtors 6,018 6,894 7,107 7,294 Cash and bank balances 1,416 1,896 2,912 4,049 Loans and advances ,005 Total 10,233 12,111 13,513 14,978 Less: Current Liabilities and Provisions Current Liabilities 6,302 7,193 7,330 7,506 Provisions Total 6,375 7,291 7,445 7,630 Net Current Assets 3,858 4,820 6,068 7,348 Deferred Tax Asset (Net) TOTAL 5,984 6,842 7,978 9,188 4

5 Cash Flow Statement Y/E Mar (Rs mn) FY17 FY18E FY19E FY20E A. Cash Flow from Operating Activities Profit after tax 1,306 1,767 2,081 2,237 Depreciation Working Capital changes 869 (482) (231) (145) Net Cash from Operating Activites 2,416 1,538 2,112 2,364 B. Cash flow from Investing Activities: Capital Expenditure (204) (150) (150) (200) Net Cash from Investing Activites (204) (150) (150) (200) C. Cash flow from Financing Activities Net borrowing (515) (320) (220) (250) Net dividend and others 0 0 (32) (32) Net Cash from Financing Activites (515) (320) (252) (282) Net Inc./(Dec.) in Cash & Cash Equivalents 1, ,016 1,137 Opening Balance 150 1,416 1,896 2,912 Closing Balance 1,416 1,896 2,912 4,049 Key Ratio Y/E Mar FY17 FY18E FY19E FY20E Valuation Matrix Price / Adj Earnings (x) Price / CEPS (x) Price / BV (x) EV / EBIDTA (x) EV / Sales (x) EPS (Rs)-Adjusted CEPS (Rs) Book Value Adj ROE (%) ROCE (%) Solvency Ratio (x) Total Debt / Equity (x) Debt / EBIDTA Debt / Capital Emp Capital Emp / Net Worth Turnover Ratio (x) Asset Turnover Ratio Fixed Asset Turnover Ratio Working Capital Ratio (x) Current Ratio Working Capital to Sales Inventory (days) Debtors (days) Creditors (days) Working Capital Cycle (Days)

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