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) 3.1 16.3 Relative to Nifty (1.1) 2.1 (1.5) Shareholding Pattern (%) Sept 17 Dec'17 Promoter 58.0 58.0 Public 42.0 42.0 1 Year Stock Price Performance 400 380 360 340 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%. 320 300 280 260 240 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 2,359 531 Net Profit 860 1,179 1,388 0 EPS (Rs) 12.8 17.6 20.7 0.3 DPS (Rs) 0 0 0.4 0.4 P/E (x) 26.9 19.7 16.7 15.5 P/B (x) 4.6 3.7 3.0 2.6 EV/EBITDA (x) 13.1 10.0 8.7 7.8 RoE (%) 18.5 20.8 20.0 17.9 Divi. Yield (%) 0.0 0.0 0.1 0.1 Source: Company, RSec Research Research Analyst: Binod Modi Contact: 022 3320 1097 Email: binod.modi@relianceada.com 1
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 Rs250-300mn 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
Exhibit 1: Quarterly Performance (Rs mn) 3QFY18 3QFY17 % YoY 2QFY18 % QoQ 9MFY18 9MFY17 % YoY Net Sales 3,611 3,581 0.8 3,345 7.9 11,998 9,547 25.7 (Inc)/Dec in stock in Trade 137 99 (463) 136 223 Consumption of RM 1,324 1,789 (26.0) 1,638 (19.2) 5,248 4,537 15.7 % sales 40.5 52.7 35.1 44.9 49.9 Operating Expenses 158 169 (6.4) 173 (8.9) 503 450 12.0 % sales 4.4 4.7 5.2 4.2 4.7 Employees Cost 344 377 (8.7) 345 (0.1) 1,008 1,203 (16.2) % sales 9.5 10.5 10.3 8.4 12.6 Subcontracts Exps. 958 622 53.9 1,106 (13.4) 3,228 1,647 96.0 % sales 26.5 17.4 33.1 26.9 17.2 Other Expenditures 66 52 25.1 48 35.9 215 178 20.9 % sales 1.8 1.5 1.4 1.8 1.9 Total Expenditures 2,986 3,108 (3.9) 2,847 4.9 10,339 8,238 25.5 EBIDTA 625 472 32.2 498 25.3 1,659 1,309 26.7 Margins 17.3 13.2 410.7 14.9 240.3 13.8 13.7 11.7 Depreciation 64 61 4.4 64 0.6 191 175 9.3 Interest 124 60 108.3 46 168.3 208 195 7.1 Other Income 11 12 (4.9) 10 16.1 36 63 (42.3) PBT 448 364 23.2 398 12.5 1,296 1,003 29.3 Tax Expens 156 119 31.4 141 11.2 451 340 32.7 % PBT 34.9 32.7 35.3 34.8 33.9 PAT 292 244 19.3 258 13.2 844 662 27.5 Net Margins 8.1 6.8 7.7 7.0 6.9 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 16,776 2.5 18,281 17,647 (3.5) EBIDTA (Rs mn) 2,052 2,190 6.7 2,354 2,359 0.2 EBIDTA margins (%) 12.5 13.1 12.9 13.4 PAT (Rs mn) 1,160 1,179 1.6 1,401 1,388 (0.9) PAT margins (%) 7.1 7.0 7.7 7.9 EPS (Rs) 17.3 17.6 1.7 20.9 20.7 (0.8) Source: RSec Research 3
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 (%) 12.1 13.1 13.4 13.6 Financial Charges 267 258 109 55 Depreciation 241 253 262 271 Other Income 84 89 93 107 Profit before tax 1306 1767 2081 2237 Total Tax 446 588 693 745 % of PBT 34.1 33.3 33.3 33.3 Profit after tax 860 1,179 1,388 1,492 PAT Margin (%) 6.0 7.0 7.9 8.2 Net Profit 860 1,179 1,388 1,492 Adjusted EPS 12.84 17.60 20.72 22.27 Balance Sheet Y/E Mar (Rs mn) FY17 FY18E FY19E FY20E Shareholders Funds Share Capital 134 134 134 134 Reserves and Surplus 4,946 6,124 7,481 8,940 Total 5,080 6,258 7,614 9,074 Loan Funds Secured Loans 834 534 334 84 Unsecured Loans 70 50 30 30 Total 904 584 364 114 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 3 3 3 3 Investments 63 63 63 63 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 792 931 979 1,005 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 72 98 115 123 Total 6,375 7,291 7,445 7,630 Net Current Assets 3,858 4,820 6,068 7,348 Deferred Tax Asset (Net) 134 134 134 134 TOTAL 5,984 6,842 7,978 9,188 4
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 241 253 262 271 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 1,266 480 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) 26.9 19.7 16.7 15.5 Price / CEPS (x) 21.0 16.2 14.0 13.1 Price / BV (x) 4.6 3.7 3.0 2.6 EV / EBIDTA (x) 13.1 10.0 8.7 7.8 EV / Sales (x) 1.6 1.3 1.2 1.1 EPS (Rs)-Adjusted 12.8 17.6 20.7 22.3 CEPS (Rs) 16.4 21.4 24.6 26.3 Book Value 75.8 93.4 113.7 135.5 Adj ROE (%) 18.5 20.8 20.0 17.9 ROCE (%) 25.6 30.2 28.3 25.5 Solvency Ratio (x) Total Debt / Equity (x) 0.2 0.09 0.05 0.01 Debt / EBIDTA 0.5 0.3 0.2 0.0 Debt / Capital Emp. 0.2 0.1 0.0 0.0 Capital Emp / Net Worth 1.2 1.1 1.0 1.0 Turnover Ratio (x) Asset Turnover Ratio 2.4 2.5 2.2 2.0 Fixed Asset Turnover Ratio 3.1 3.6 3.7 3.6 Working Capital Ratio (x) Current Ratio 1.6 1.7 1.8 2.0 Working Capital to Sales 0.3 0.3 0.3 0.4 Inventory (days) 51 52 52 53 Debtors (days) 154 150 147 147 Creditors (days) 161 157 152 151 Working Capital Cycle (Days) 44 45 47 49 5
Rating Guides Rating Expected absolute returns (%) over 12 months >10% HOLD -5% to 10% REDUCE >-5% Reliance Securities Limited (RSL), the broking arm of Reliance Capital is one of the India s leading retail broking houses. Reliance Capital is amongst India s leading and most valuable financial services companies in the private sector. Reliance Capital has interests in asset management and mutual funds, life and general insurance, commercial finance, equities and commodities broking, wealth management services, distribution of financial products, private equity, asset reconstruction, proprietary investments and other activities in financial services. The list of associates of RSL is available on the website www.reliancecapital.co.in. RSL is registered as a Research Analyst under SEBI (Research Analyst) Regulations, 2014 General Disclaimers: This Research Report (hereinafter called Report ) is prepared and distributed by RSL for information purposes only. The recommendations, if any, made herein are expression of views and/or opinions and should not be deemed or construed to be neither advice for the purpose of purchase or sale of any security, derivatives or any other security through RSL nor any solicitation or oering of any investment /trading opportunity on behalf of the issuer(s) of the respective security(ies) referred to herein. These information / opinions / views are not meant to serve as a professional investment guide for the readers. No action is solicited based upon the information provided herein. Recipients of this Report should rely on information/data arising out of their own investigations. Readers are advised to seek independent professional advice and arrive at an informed trading/investment decision before executing any trades or making any investments. This Report has been prepared on the basis of publicly available information, internally developed data and other sources believed by RSL to be reliable. RSL or its directors, employees, ailiates or representatives do not assume any responsibility for, or warrant the accuracy, completeness, adequacy and reliability of such information / opinions / views. While due care has been taken to ensure that the disclosures and opinions given are fair and reasonable, none of the directors, employees, ailiates or representatives of RSL shall be liable for any direct, indirect, special, incidental, consequential, punitive or exemplary damages, including lost profits arising in any way whatsoever from the information / opinions / views contained in this Report. Risks: Trading and investment in securities are subject to market risks. There are no assurances or guarantees that the objectives of any of trading / investment in securities will be achieved. The trades/ investments referred to herein may not be suitable to all categories of traders/investors. The names of securities mentioned herein do not in any manner indicate their prospects or returns. The value of securities referred to herein may be adversely aected by the performance or otherwise of the respective issuer companies, changes in the market conditions, micro and macro factors and forces aecting capital markets like interest rate risk, credit risk, liquidity risk and reinvestment risk. Derivative products may also be aected by various risks including but not limited to counter party risk, market risk, valuation risk, liquidity risk and other risks. Besides the price of the underlying asset, volatility, tenor and interest rates may aect the pricing of derivatives. Disclaimers in respect of jurisdiction: The possession, circulation and/or distribution of this Report may be restricted or regulated in certain jurisdictions by appropriate laws. No action has been or will be taken by RSL in any jurisdiction (other than India), where any action for such purpose(s) is required. Accordingly, this Report shall not be possessed, circulated and/ or distributed in any such country or jurisdiction unless such action is in compliance with all applicable laws and regulations of such country or jurisdiction. RSL requires such recipient to inform himself about and to observe any restrictions at his own expense, without any liability to RSL. Any dispute arising out of this Report shall be subject to the exclusive jurisdiction of the Courts in India. Disclosure of Interest: The research analysts who have prepared this Report hereby certify that the views /opinions expressed in this Report are their personal independent views/opinions in respect of the securities and their respective issuers. None of RSL, research analysts, or their relatives had any known direct /indirect material conflict of interest including any long/short position(s) in any specific security on which views/opinions have been made in this Report, during its preparation. RSL s Associates may 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. RSL, its Associates, the research analysts, or their relatives might have financial interest in the issuer company(ies) of the said securities. RSL or its Associates may have received a compensation from the said issuer company(ies) in last 12 months for the brokerage or non brokerage services.rsl, its Associates, the research analysts or their relatives have not received any compensation or other benefits directly or indirectly from the said issuer company(ies) or any third party in last 12 months in any respect whatsoever for preparation of this report. The research analysts has served as an oicer, director or employee of the said issuer company(ies)?: No RSL, its Associates, the research analysts or their relatives holds ownership of 1% or more, in respect of the said issuer company(ies).?: No Copyright: The copyright in this Report belongs exclusively to RSL. This Report shall only be read by those persons to whom it has been delivered. No reprinting, reproduction, copying, distribution of this Report in any manner whatsoever, in whole or in part, is permitted without the prior express written consent of RSL. RSL s activities were neither suspended nor have defaulted with any stock exchange with whom RSL is registered. Further, there does not exist any material adverse order/judgments/ strictures assessed by any regulatory, government or public authority or agency or any law enforcing agency in last three years. Further, there does not exist any material enquiry of whatsoever nature instituted or pending against RSL as on the date of this Report. Important These disclaimers, risks and other disclosures must be read in conjunction with the information / opinions / views of which they form part of. RSL CIN: U65990MH2005PLC154052. SEBI registration no. ( Stock Brokers: NSE - INB / INF / INE 231234833; BSE - INB / INF / INE 011234839, Depository Participants: CDSL IN-DP-257-2016 IN-DP-NSDL-363-2013, Research Analyst: INH000002384); AMFI ARN No.29889. 6