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Weak execution; muted order inflows

Ashoka Buildcon (ABL) reported a weaker-than-expected performance during Q3FY21 wherein standalone revenue were flattish YoY at | 981 crore largely impacted by delays in appointed dates (AD) in certain HAM, EPC projects. Also, its operating margin declined 188 bps YoY to 10.8%, owing to a muted topline performance, unfavourable change in project mix and deferral of profitability recognition in some projects. At the PAT level, weak operating show translated into muted bottomline at | 85.7 crore, flat YoY).

Order book at | 9,152 crore as of Q3FY21

ABL’s order book (OB) at the end of Q3FY21 was at | 9,152 crore (OB-to-bill ratio of 2.5x TTM revenues) spread across roads - HAM (| 3,923 crore), roads - EPC (| 2,988 crore), power T&D and others (| 1,466 crore), railways (| 692 crore), and CGD (| 83 crore) segments. During Q3FY21, the company has secured projects from a) NTPC Renewable Energy worth | 503 crore for EPC package of 150 MW solar PV project in Rajasthan and b) smaller contracts in power segment worth ~| 300 crore in Uttar Pradesh and Bihar. Going forward, the management has guided for order inflow of | 2,000-2,500 crore in the rest of FY21, with higher competitive intensity in roads and highways segment. On the execution front, the management expects a pick-up with desired level of labour availability and improvement in executable order book with expected AD in certain projects soon. Post a 2% YoY decline in EPC revenues, we bake in ~15% CAGR in EPC revenues in FY21-23E to | 5099.2 crore. Furthermore, operating margin is likely to be lower at 11.5%, as the management has tempered its guidance to 11-11.5% vs. 12-13%, guidance given earlier.

Equity infusion, asset monetisation update

ABL has infused ~| 600 crore up to Q3FY21 in the HAM project. It is further expected to infuse | 164 crore in Q4FY21, ~| 160 crore in FY22E based on current order book position. In addition, ABL expects closure of SBIMacquarie deal by March 2021 and receipts of fund by September 2021 (has received binding offer by potential investors; currently under evaluation stage. We will monitor the fructification and valuation thereof, for the deal, which will be the key for leverage ahead.

Valuation & Outlook

Key factors such as a) ABL’s weaker-than expected performance in Q3FY21, b) muted order inflows, c) moderated operating margin and d) persistent delay in SBI-Macquarie stake sell remain a cause of concern for us. We believe asset monetisation will be key for rerating of EPC business multiples. We conservatively bake in construction revenue growth at 9% CAGR in FY20-23E (~15% in FY21-23E) to | 5,099 crore and moderation in EBITDA margins as guided. We maintain HOLD rating on the stock with an SoTPbased target price of | 110/share (vs. | 95/share earlier).

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