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Leaving baggage behind; on the growth path

Ashoka Buildcon’s (ABL) Q3FY22 earnings missed estimates due to lower margins/ other income. Recurring PAT declined 11% YoY to Rs760m (estimate: Rs1bn). Reported loss stood at Rs6.9bn as it includes impairment of Rs7.7bn upon finalisation of sale of 5 SPVs to KKR (higher than Rs5.5-6bn previously indicated due to final adjustments). Wcap/debt rose QoQ due to timing mismatch in payments in HAM projects and delayed payments in Jharkhand. For Jaora and Chennai ORR, monetisation value and agreement to be firmed up by Mar-22. ABL is rapidly diversifying to become a pure EPC company (except HAM projects) and is also evaluating exiting its CGD business. Sale of remaining two assets should yield sizeable cash flows which can materially boost its liquidity profile and execution capacity. Maintain BUY with target price of Rs200.

Earnings missed estimates due to lower margins/other income

Revenue grew 12.5% YoY to Rs11bn (in-line). EBITDA grew 14% YoY to Rs1.2bn. EBITDA margin at 10.9% (flat YoY) missed estimate of 11.8% due to lower gross margins (16.6% in Q3 vs. estimate of 18.4%). Other income declined 39% YoY to Rs291m (estimate: Rs460m). Impairment of Rs7.7bn also includes the write-off of accrued interest due from ACL to ABL and going forward no interest will be charged on these loans.

Robust inflows strengthen backlog; guides for 25-30% revenue growth in FY23/24E

ABL has received robust order inflows of Rs85bn in YTDFY22. Consequently, ABL’s order backlog stands has strengthened to Rs145bn (3.3x TTM revenues). Given the strong bid pipeline, ABL is looking to win orders worth Rs100bn/Rs120bn in FY22/23E. With majority of the backlog to be executable by Q1FY23, ABL has guided for a robust 20-25% revenue growth in FY23/24E. It expects the margins to remain in 11-12% range.

Asset monetization of BOT/annuity assets on track, HAM and CGD to follow

ABL expects to complete transaction of 5 assets by Sept-22. For Jaora-Nayagaon and Chennai ORR, monetisation would be firmed up by Mar-22. While we saw an impairment of Rs7.7bn in Q3FY22, ABL’s leverage would still be healthy at ~0.2x. Also, ABL may look to exit CGD business in future. Total equity invested is ~Rs1.5bn which is invested 51:49 by ABL and Morgan Stanley India Infrastructure (MSII). MSII may want an exit in 1-2 years and ABL too may exit along with it (no guaranteed IRR obligation to MSII).

Low expectations from the stock make risk-reward favourable; BUY

With monetization of ACL assets firmed up, a major overhang on the stock has gone. Given its robust order backlog of Rs144bn, we expect revenue/core EPS to grow at 24%/29% CAGR over FY22-24E. While cut in reported EPS at 27%/18% in FY23/24E from previous estimates appears steep, it is due to sharp fall in other income as ABL would not be receiving any interest (which were largely accrued) on loans given to ACL. However, this does not have any impact on our fair value as we value the company on core EPC earnings (ex of other income). Valuations of 8.2x/6.2x FY23E/24E core EPC earnings (without other income) and unadjusted for value of assets of Rs54/share have ample room to re-rate. We maintain BUY, with TP of Rs200.

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