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Execution to pick up pace...

Dilip Buildcon Ltd (DBL) is one of the largest road construction company in India. The company is also an established player in irrigation, urban development and mining segments.

* Q3FY21 revenue grew by 3.6% YoY led by normalcy in operation and strong order book.

* EBITDA margin declined by 115bps YoY to 16.5% due to higher material cost while other expenses declined by 44% YoY.

* Order book remain healthy at Rs26,141cr (3x TTM revenue) supported by strong inflow of Rs15,831cr in 9MFY21, provides strong revenue visibility for the next three years.  PAT de-grew by 13% YoY due to higher tax rate of 33.9% compared to base quarter and lower other income (-26% YoY).

* DBL is in the advance stage of monetising 12 HAM projects and expects cash flow of Rs 2,000cr over FY22 & FY23.

* We maintain Buy rating due to strong order book and positive economic activity. Our TP of Rs753 based on a P/E of 13x FY23E EPS & HAM business at 0.3x P/B of invested equity.

Operation back to normalcy...

Q3FY21 revenue grew by 3.6% YoY to Rs2,467cr aided by strong order book and normalcy in execution. The revenue from roads & bridges de-grew by 6% YoY to Rs1,918cr, while irrigation business grew by 513% YoY to Rs200cr and Urban development grew by 292% YoY to Rs132cr. The company indicates that the labour availability is back to 100% and execution to pick up from Q4FY21 and expects FY22 revenue to grew by 15-20%. Due to strong order book, executional capability and pick up in economic activity, we increase FY22 revenue estimate by 12%. The company is in the advance stage of monetising 12 HAM projects and expects Rs2,000cr over FY22- FY23. This will help to reduce company’s debt and provide capital support to future projects.

Strong order book provides visibility...

DBL’s order book remains healthy at Rs26,141cr (3x TTM revenue) which provides strong revenue visibility for the next three years. The company has received order inflow of Rs15,831cr in 9MFY21 largely from road, irrigation and tunnel projects. Further, DBL is diversifying its order book and has entered into railway segment in Q4FY21 with orders of Rs655cr in the state of Chhattisgarh. DBL has made remarkable diversification, in 2016 road projects constitute 87% of the order book while in Q3FY21 the road segment was at 43%. This will aid long term growth.

Higher tax impacted earnings...

In Q3FY21, EBITDA margin declined by 115bps YoY to 16.5% due to higher material costs while and other expenses declined by 44% YoY. Moreover, a higher tax rate of 33.9% (vs 25.8% in Q3FY20) impacted Q3FY21 earnings which de-grew by 10% YoY to Rs111cr. The management indicates that effective tax rate for FY21 will be in the range of 33-35%. The company is not opting for concessional tax under section 115BAA as it will result in into higher cash outflow due to non-availability of MAT credit.

Valuations

We expect timely payment from Govt. and recovery in execution from H2FY21 will help to manage working capitals. Therefore, we increase FY21EFY22E earnings estimate by 17%/27% respectively and maintain Buy rating with a TP Rs753 based on a P/E of 13x on FY23E EPS & HAM business at 0.3x P/B of invested equity.

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