Recommendation BUY CMP 889 Target Price 1324 Sector Stock Details Construction-Roads BSE Code 540047 NSE Code Bloomberg Code DBL DBL IN Market Cap (Rs cr) 12162 Free Float (%) 24.4 52- wk HI/Lo (Rs) 1009/217 Avg. volume (BSE+NSE) (Quarterly) 47854 Face Value (Rs) 10 Dividend (FY 17) Rs.1 Shares o/s (Crs) 13.7 Relative Performance 1Mth 3Mth 1Yr Dilip Buildcon 2.1% 46.7 298.5 Sensex 0.9% 3.1 25.0 Shareholding Pattern Sept 17 Promoters Holding 75.6% Institutional (Incl. FII) 16.6% Corporate Bodies 2.8% Public & others 5.0% Sunil Jain (+91 22 3926-8195) Head-Research sunil.jain@nirmalbang.com Nandish Shah-(+9122 3926-8021) Research Analyst-nandish.shah@nirmalbang.com On a High growth road (DBL) is one of the largest road construction company in India. Started as sole proprietorship firm in 1988, DBL has an outstanding track record of early completion of road projects. Its clientele in the road segment includes NHAI, state governments and private companies. DBL also diversified into segment like irrigation, urban development and mining. Investment Rationale Sales of BOT/HAM projects will free capital for growth: DBL entered into agreement with Chhatwal Group Trust (Shrem Group) to sell 24 projects comprising of 14 operational projects, 4 under construction projects & 6 recently won HAM projects. EPC work of under construction projects will be done by DBL while the ownership of the BOT asset will shift. DBL has already received Rs. 195Cr till date and expect to receive Rs. 550Cr in FY18 and the balance in FY19. The debts relating to BOT and HAM projects will also get transferred. Consistent track record of early completion of Projects: DBL focus has always remained execution and for this it has won early completion bonus from various authorities from time to time. DBL has till date won Rs.345Cr as early completion bonus since inception. Industry leading margin and ROE: DBL continuous focus on execution and planning led to earning higher operating margins and in turn higher ROE compared to its industry peers. Improvement in Working capital Cycle: DBL plans to bring down its working capital cycle by focusing more on EPC projects. From the working capital cycle of 5.85 months in FY15, DBL has brought it down to 4.47 months in FY17 and plans to further reduce by 15-20 days. Capitalizing on market opportunities in Road sector: The road construction push by NHAI and the Bharatmala Pariyojana will entail total investment of Rs. 6.92 Trillion. Players like DBL will be able to garner a larger pie of these orders on the back of their execution skills, owned equipment and higher borrowing power on the back of healthy balance sheet. Valuation & Recommendation DBL reported Revenues, EBIDTA and PAT of Rs. 5075Cr, 992Cr and Rs. 361Cr in FY17, growth of 25%, 45% and 21% respectively over FY16. With healthy order books, owned equipments, in-house execution capabilities, strong bid pipeline we expect revenues, EBIDTA and PAT to grow at CAGR of 30%, 27.5% and 41% respectively during FY17 FY20E. We expect EBIDTA margin to remain stable in the range of 18-19%. With the recent sale of BOT assets and reduction in working capital requirement, debt is likely to come down further which in turn will help ROE and ROCE to improve. We expect ROE and ROCE to improve from 19.5% in FY17 to 25% in FY20 and 17.6% in FY17 to 24.6% in FY20 respectively. At CMP, DBL is trading at 12.1x FY20 EPS. We recommend a BUY on DBL with a target price of Rs. 1324, based on 18x FY20E EPS. (Upside of 49%). Year Net Sales Growth % EBITDA Margin % PAT Margin EPS PE EV/EBITDA ROE % FY17 5075.4 25.0% 992.2 19.5% 360.9 7.1% 26.4 33.7 14.7 19.5% FY18E 6760.3 33.2% 1259.9 18.6% 505.1 7.5% 36.9 24.1 11.4 21.6% FY19E 8772.7 29.8% 1643.2 18.7% 768.8 8.8% 56.2 15.8 8.6 25.1% FY20E 10897.3 24.2% 2058.6 18.9% 1006.4 9.2% 73.6 12.1 6.8 25.0% 1 P a g e
Chart 1: Order Book Background (DBL) is one of the leading private sector road focused EPC contractors in India. Their core business is undertaking construction projects across India in the road and irrigation sectors. They specialize in constructing state and national highways, city roads, culverts and bridges. Initially started with presence in Madhya Pradesh, DBL ventured out into other states in India and currently has presence in almost 16 states. DBL strength lies in its ability to execute projects on time, within costs, and of the highest quality. Its clientele in the road segment includes NHAI, state governments and private companies. Witnessing opportunities in other space, DBL also diversified into segment like irrigation, urban development and mining in 2014 and 2015. As on 30 th September 2017, 53% of their order book is from NHAI, 27% from Ministry of Road transport and Highways, 10% from Northern Coalfields, 6% from Singareni collieries Co ltd, 3% from state governments and rest from others. In last 5 years DBL has completed 73 projects with 17000 lane km in road portfolio with 8604.6 lane km being operational. As on 30 th September2017, DBL has an order book of Rs. 14204 Cr, as compared Rs. 15629Cr as on 30 st Jun-17. Chart 2: Order book-by Sector Source: Company data, NBRR Chart 3: Order book-by state Source: Company data, NBRR Chart 4: Order book-by Clients Source: Company data, NBRR Source: Company data, NBRR 2 P a g e
Under the leadership of Mr. Dilip Suryavanshi (Chairman and Managing Director) and Devendra Jain (Executive Director and Chief Executive officer), DBL s revenue, EBIDTA and PAT grew by 28%, 25% and 10% CAGR from FY13 to FY17 respectively. In August 2016, DBL came out with a public issue of Rs.654 Cr at Rs. 219 per share offering 2.98 Cr shares. Out of 2.98 Cr shares, 1.96 Cr shares were fresh issue while the rest was offer for sale. Investment Rationale Sales of BOT/HAM projects will free capital for growth Recently Company entered into agreement with Chhatwal Group Trust (Shrem Group) to sell 24 projects comprising of 14 operational projects, 4 under construction projects & 6 recently won HAM projects. Company has invested Rs. 682cr in all these projects. Whereas company was supposed to invest Rs.842cr in under construction and HAM projects in next 1-2 years. DBL will get around Rs.1600cr as consideration on sale of these projects and will be making nominal profit (Rs.75cr) but will free up the capital to bid for more and more project under emerging opportunity in road sector. DBL has already received Rs. 195 Cr towards part payment for the above sale. Management expects Rs. 550Cr to be received in FY18 and the remaining by FY19. HAM are at initial stage of construction and will be transferred post completion and receipt of COP. Apart from this Loan related to operational 14 BOT project of Rs.1251cr, current and future loan of Rs.965cr related to 4 under construction BOT projects and current and future loan of Rs.2571cr related to recently won HAM project will also be transferred to the acquirer. Company has increased its guidance of Order intake during FY18 from Rs.6000cr to Rs.8000-10000cr post this deal. Though the order booking by company in H1 was very low as Q1 is generally inactive quarter and Q2 got impacted by GST implementation. But presently the Bid pipe line is very strong (over Rs.50000cr) and considering relatively low competitive scenario company is hopeful of achieving its order intake target in FY18 Consistent track record of early completion of Projects DBL has earned Rs.345cr till 30 th September2017 as early completion bonus and completed 47 road projects, on or ahead of schedule. Source: Company report, Nirmal Bang Retail Research This company is able to achieve this on account of careful selection of projects, efficient project planning and management, project tracking to minimize the delay, owning sand and stone mines, apart from largest owner of construction equipment and one of the largest employer of construction manpower. DBL owns one of the largest fleet of Construction equipment (around 9000) and is one of the largest employers in construction industry (27,000 employees). 3 P a g e
Industry leading margin and ROE Early completion bonus along with own construction and own asset base leading to one of the highest operating margin for DBL and effective utilization of assets leading to even one of the highest ROE in the industry. Source: Company report, Nirmal Bang Retail Research DBL has implemented live tracking system to keep control of its large feel of construction equipment and has implemented effective HRD policy to reduce attrition. DBL is now implementing SAP and Data analytics tool from IBM which will help it to more effectively utilize its large resources. This is likely to have positive impact on margin and capital deployment. Improvement in Working capital Cycle Construction business is working capital intensive where in around 50% of capital employed is in working capital. DBL has shown impressive improvement in working capital cycle from 5.85 months of sales in FY15 to 4.47 months of sales in FY17. This was mainly driven by Inventory holding which reduced from 4.3 months to 3.7 months and Receivable from 5.2 months to 2.4 months in the same period. Creditor also declined from 3.8 months to 2.1 months in similar period. Working capital cycle in number of months. Source: Company report, Nirmal Bang Retail Research Company is further pursuing to improve working capital cycles mainly inventory with the implementation of SAP and Data analytical tools of IBM. 4 P a g e
Diversifying to other but related infrastructure sectors Till FY13 DBL order booking was solely from Road sector. In FY14 DBL diversified into Irrigation and Urban Infra projects. In FY16 DBL further diversified to Mining and Cable suspension Bridge area. At the end of FY17 though Road continue to dominant DBL order book with 80% share but DBL is establishing its foot in other Sector like Mining, Cable Bridges, Irrigation etc. DBL has diversified in the area where it can utilize its skill and Assets more effectively without sacrificing on margin and same principle will be followed to diversify in any other area. Capitalizing on market opportunities in Road sector Recently Government of India announced investment of Rs. 6.92 Trillion for building an 83677 km road network over the next 5 years. The road construction push includes the Bharatmala Pariyojana with a Rs5.35 trillion investment to construct 34,800km of roads. In addition, Rs1.57 trillion will be spent on the construction of 48,877km of roads by the state-run National Highway Authority of India (NHAI) and the ministry of road transport and highways. To expedite the Bharatmala projects, apart from ministry of road transport and highways and state-run firms NHAI and National Highways and Infrastructure Development Corporation Ltd (NHIDCL) even respective state public works departments (PWDs) will be roped in for timely execution. With lot of work in the road segment, DBL will be able to garner large pie of the same given it higher execution capabilities, owned equipment and higher borrowing power after the recent sell-off of the BOT assets. Industry Roads: Investments in roads is expected to increase to Rs. 5.8 trillion in the (2018-23) 13th Five-Year Plan, as against Rs.5.3 trillion (2012-17) (actual) in the 12th Five-Year Plan (marking a 11% increase). NHAI awards projects under different modes - EPC, build-operate-transfer, or BOT, and the recently introduced HAM. In the last two years, BOT projects have lost out to EPC projects because the latter requires limited upfront capital and involves lower risk.since 2013-14, cash contracts have dominated NHAI awarding as a result of low appetite of road players for BOT projects.to boost private participation further, the government introduced HAM in 2015-16, wherein 40% of the total project cost is to be funded by the government and the remaining by the private developer. The equity requirement in these projects is only about 12-15% of the project cost, which is much lower than a BOT project, and the developer is immune to traffic, inflation and interest rate risk. In 2015-16, this model took off at a rather slower than-expected pace and only about 350 km were awarded mostly due to the apprehensions of various stakeholders towards a new, untested model. However, the participation of players in these projects improved significantly towards the end of 2015-16. In 2016-17, almost half of the projects were awarded on HAM. Between 2016-17 and 2020-21, Crisil research expect investment of Rs. 3.8 trillion, up by 3.2 times in the next 5 years compared to the past 5 years. Notably, the government will account for more than half of the investment as against 44% in the previous five years. Key Risks and concerns Any hurdle in the completion of the deal for sale of assets can have a negative impact on the financial of the company. Any delays in execution of the projects due to lack of land acquisition or other issues can risk the revenues recognition. With lot of investment in plant and equipment, lack of order with DBL can put pressure on margins of the Co. 5 P a g e
Valuation and Recommendation DBL reported Revenues, EBIDTA and PAT of Rs. 5075Cr, 992Cr and Rs. 361Cr in FY17, growth of 25%, 45% and 21% respectively from FY16. With healthy order books, owned equipments, in-house execution capabilities, strong bid pipeline we expect revenues, EBIDTA and PAT to grow at CAGR of 30%, 27.5% and 41% respectively during FY17 to FY20E. We expect EBIDTA margin to remain stable in the range of 18-19%. With the recent sale of BOT assets and reduction in working capital requirement, debt is likely to come down further which in turn will help ROE and ROCE to improve. We expect ROE and ROCE to improve from 19.5% in FY17 to 25% in FY20 and 17.6% in FY17 to 24.6% in FY20 respectively. We have compared DBL with 4 others players in the industry. DBL enjoy one of the best EBIDTA margins and ROE as compared to others. On the valuation it is still available at a discount to all the other players. Peer Comparison Revenues EBIDTA EBIDTA Net EPS P/E ROE % FY20(Rs in cr) margins Profit Dilip Buildcon 10897.3 2058.6 18.9 1006.4 73.6 12.1 25.0 Ashoka Buildcon 3597.3 549.7 15.3 238.7 12.8 18.2 10.1 Sadbhav Engineering 5067.4 572.4 11.3 280.3 16.3 22.0 12.9 PNC Infra 3760.0 509.3 13.5 290 11.1 16.5 13.6 KNR Constructions 2515.9 384.0 15.3 219.6 15.9 16.9 15.6 Source: Bloomberg estimate, Nirmal Bang Retail Research, Standalone numbers At CMP, DBL is trading at 12.1x FY20E EPS. We recommend a BUY on DBL with a target price of Rs. 1324, based on 18x FY20E EPS. (Upside of 49%). 6 P a g e
Quarterly Financials Particulars Q2FY18 Q1FY18 QoQ% Q2FY17 YoY% Net Sales 1581.8 1664.1-4.9% 916.3 72.6% Other Operating Income 0.0 0.0-0.0 - Total Income 1581.8 1664.1-4.9% 916.3 72.6% Cost of raw material consumed 1224.4 1277.2-4.1% 675.6 81.2% Gross Profit 357.4 386.9-7.6% 240.7 48.5% Gross Margin (% of net sales) 22.6% 23.3% -65.59 26.3% -367.36 Employee Expenses 34.1 35.2-3.1% 25.5 33.4% Other Expenses 38.0 51.5-26.2% 59.7-36.3% Total Expenditure 1296.5 1363.9-4.9% 760.8 70.4% EBITDA 285.3 300.2-5.0% 155.5 83.5% % of net sales 18.0% 18.0% -0.36 17.0% 106.7 Depreciation 67.6 65.1 3.9% 53.9 25.4% EBIT 217.7 235.2-7.4% 101.6 114.3% Interest 111.0 110.6 0.4% 95.9 15.8% PBT & OI 106.7 124.5-14.3% 5.7 1776.2% Other Income 3.1 2.7 18.2% 3.6-12.0% PBT 109.8 127.2-13.6% 9.2 1087.7% Tax -5.8 4.5-227.7% 2.3-353.8% Tax / PBT -5.3% 3.6% 24.7% Net Profit 115.6 122.6-5.7% 7.0 1559.5% % of net sales 7.3% 7.4% 0.8% Equity 136.8 136.8 136.8 EPS (Unit Curr.) 8.5 9.0 0.5 Source: Company data, Nirmal Bang Securities Revenues grew by 73% YoY on the back of strong execution of roads and mining EPC orders. EBIDTA increased by 83% YoY on the back of higher revenues. EBIDTA margins increased by 100 bps YoY on the back of lower other expenses. Interest cost remained flat QoQ on the back of improving working capital cycle. Other income grew by 18% QoQ while YoY decreased by 12%. PBT grew by 1088% YoY while QoQ decreased by 14%. PAT grew by 1560% YoY and decreased 6% QoQ. 7 P a g e
Financials 8 P a g e
Disclaimer: Nirmal Bang Securities Private Limited (hereinafter referred to as NBSPL ) is a registered Member of National Stock Exchange of India Limited, Bombay Stock Exchange Limited and MCX stock Exchange Limited. We have been granted certificate of Registration as a Research Analyst with SEBI. Registration no. is INH000001766 for the period 23.09.2015 to 22.09.2020.NBSPL or its associates including its relatives/analyst do not hold any financial interest/beneficial ownership of more than 1% in the company covered by Analyst (in case any financial interest is held kindly disclose) NBSPL or its associates/analyst has not received any compensation from the company covered by Analyst during the past twelve months. NBSPL /analyst has not served as an officer, director or employee of company covered by Analyst and has not been engaged in market making activity of the company covered by Analyst. The views expressed are based solely on information available publicly and believed to be true. Investors are advised to independently evaluate the market conditions/risks involved before making any investment decision. Nirmal Bang Research (Division of Nirmal Bang Securities Pvt. Ltd.) B-2, 301/302, Marathon Innova, Opp. Peninsula Corporate Park Off. Ganpatrao Kadam Marg Lower Parel (W), Mumbai-400013 Board No. : 91 22 3926 8000/8001 Fax. : 022 3926 8010 9 P a g e