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Ashoka Buildcon’s (ABL) 1QFY24 PAT at INR 164mn was sharply below estimate of INR 656mn (consensus: INR 954mn) due to one-time provision of INR 560mn for NTPC solar contract. Revenue grew by 3.6% YoY to INR 15.3bn. EBITDA fell by 51% YoY to INR 702mn. EBITDA margin declined sharply by 520bps YoY to 4.6%. Adjusted for one-time provision, it stood at 8.2% (estimate: 7.7%). ABL has lowered its FY24 guidance for revenue growth to 15% (earlier: c.20%), EBITDA margins to 8-8.5% (earlier: 8.75-9.25%) and order inflows to INR 70-90bn (earlier: INR 80-100bn) due to weaker 1Q. ABL expects to complete sale of Jaora-Nayagaon, Chennai ORR and CGD business by Dec-23 leading to inflows of INR 10.2bn, which will be used to partly reduce the guaranteed return of INR 12bn to SBI-M. ABL is also in talks with multiple investors to monetise its HAM portfolio and is also targeting sale of 5 BOT assets by Mar-24. Maintain BUY with price target of INR 155

* 1QFY24 reported earnings impacted by one-off provision: EBITDA margins declined sharply by 520bps YoY to 4.6% as ABL booked one-off provision of INR 560mn in NTPC solar project due to procurement of higher cost solar modules. Adjusted for one-time provision, EBITDA margin stood at 8.2% (estimate: 7.7%). Interest costs grew sharply by 160% YoY/11% QoQ to INR 514mn (estimate: INR 475mn) due to rise in debt levels (INR 9.9bn in June-23 vs. INR 8.6bn in June-22) and higher interest rate.

* Lowers FY24 guidance due to weaker 1Q; execution in international contracts to pick-up: ABL has lowered its FY24 guidance for revenue growth to 15% (earlier: c.20%), EBITDA margins to 8-8.5% (earlier: 8.75-9.25%) and order inflows to INR 70-90bn (earlier: INR 80-100bn) due to weaker 1Q. Order inflows in YTD stands at INR 22.9bn. Order backlog stands at INR 169bn (2.6x TTM revenue). Bid pipeline stands at INR 350bn (Highways: INR 250bn, others: INR 100bn). ABL expects to start execution in Maldives projects (backlog: INR 13.4bn) by Sept-end depending on approvals from Finance Ministry. Execution in other international projects in Benin, Guyana and Bangladesh has started.

* Asset monetization plans underway: ABL expects to complete sale of Jaora-Nayagaon, Chennai ORR and CGD business by Dec-23 leading to inflows of INR 10.2bn. Proceeds will be used to partly reduce the guaranteed return of INR 12bn to SBI-M. ABL is at an advanced stage of signing SPAs for 11 HAMs (closure of 7 to happen by Dec-23, 2 by Mar-24 and 2 by Dec-24). The equity investment at fully invested stage is likely to be INR 11bn and the ABL is confident of comfortably securing close to 1.5x P/B for these assets.

* Maintain BUY with SoTP based price target of INR 155: We have cut FY24 EPS estimate by 18% to factor the one-off provision in Solar NTPC project while we maintain FY25 EPS. We expect core EPS to grow by 15% CAGR over FY23-25E led by revenue growth and margin expansion. ABL trades at 9.1x FY25E core EPS (ex of other income) and valuations have historically been at a discount to peers. We believe there is significant room for re-rating if the planned monetisation of its asset portfolio is completed. We value ABL’s EPC business at 8x FY25E core EPS, HAM portfolio at 1x P/B and other ABL assets at 0.5x P/B and arrive at an SOTP-based price target of INR 155.

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