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Execution continues, margins soft; maintaining a Buy

Ashoka's Q2 was marked by consistent execution and healthy additions, but it was not without flaws. The margin contracted for the fifth straight quarter, and the q/q lower scale did not lead to any lower leverage. The H2 expected better payment cycle and monetisation proceeds could mean Ashoka’s balance sheet strengthens sooner than later, but margins are unlikely to return to past highs (on keener competition and softer-margin orders in newer segments). Nevertheless, the guided-to margin range is respectable, and the balance sheet is in good shape to sustain growth. Valuations are similarly undemanding. As a result, we maintain our Buy rating with a higher TP of Rs147 (rolling forward to FY25e).

No road orders in Q2, ample assurance. Benefiting from the recent openness to scale up in newer segments (railways, buildings, international), Ashoka added over Rs13bn in Q2, none from Roads. YTD additions too are dominated by segments other than Roads (only one Guyanese order). With Q2 healthy additions, the OB rose ~Rs1.2bn q/q to ~Rs149bn, and assurance was a sturdy ~2.9x. Orders of Rs50bn are targeted in H2, and it has its eyes set on ~Rs100bn bids placed, and identified prospects of ~Rs550bn (from ~Rs750bn).

Internal accruals mostly sufficed. Notwithstanding q/q lower revenue, net debt inched up ~Rs98m (to ~Rs6.5bn on 30th Sep’22). A generally slow payment cycle in H1, ~Rs0.4bn of equity infused in hybrids, and ~Rs0.25bn capex are the key reasons. Citing a general trend of brisk payments in H2 and envisaged proceeds from monetisation, it sees leverage to contract ahead.

FY23 guidance. Sturdy H1 execution impelled management to raise FY23 revenue growth guidance to 25-30% (from 20-25% earlier). Margin guidance was narrowed to 9-9.5% (from 9-10%), citing competition and the rising contribution from newer segments (except international, bid with slightly lower margins).

Valuation. We raise our revenue estimates on the stronger-than-expected H1 execution, but prune our margins on softer profitability for the newer segments. Resultantly, FY23e earnings are ~10% higher, and FY24e is mostly flat. At the CMP, the stock (excl. investments) is available at 3.2x our newly introduced FY25e core construction EPS. Risk. Any WC cycle deterioration.

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