Dilip Buildcon – Tunneling through!

  • Date: 18th Sept, 2020
  • Price: ₹ 374
  • Small Cap: ₹ 5,200 cr. Mkt cap
  • Industry – Roads Construction
  • Advice: Buy with a target of 810 in 2 years

jainmatrix investments, dilip buildcon

Summary 

  • Overview: Dilip Buildcon is an EPC firm undertaking projects in India in the roads, bridges, tunnels, etc. DBL’s revenue in FY20 was ₹ 9,725 crore and profits ₹ 358 cr. DBL’s revenues, EBITDA and PAT have grown at 41.2%, 41.1 and 27.9% CAGR from FY11-FY20. It’s a small cap but a sector leader.
  • Why Invest Now? Good growth in order book in Q1FY21. The Booked to Bill ratio rose to 2.84. Also DBL has diversified from primarily roads into attractive adjacent sectors like tunnels, mining, metros, airports and irrigation. It is also executing 2 large infra asset sale deals which will free up capital, improve returns, reduce debt and allow reinvestment in growth. The share is also sharply off 2018 highs and is available at a P/E of 18 times TTM. The macro is good with GoI investing heavily in infrastructure. Interest rates are falling and loans are easier to get.
  • Key Risks: 1) high debt and large working capital requirement 2) pledged shares 3) high competition 4) covid and weather disruptions 5) Roads Sector perception
  • Outlook: Investors can BUY the share a 2 year target price of ₹ 810.

Our other Roads related reports:

  1. Indian Roads Sector – A Delightful Drive Ahead? – Apr 2018

  2. H.G. Infra IPO – An Exciting Road Ahead – Feb 2018
  3. Here’s A Great Construction Achievement – July 2018
  4. Dilip Buildcon IPO – This Is A Rough Road – Aug 2016  (we have changed our opinion)

Here is our research report on Dilip Buildcon Ltd. (DBL).

Dilip Buildcon – Description and Profile

  • Dilip Buildcon (DBL) is an Engineering, Procurement and Construction (EPC) firm undertaking projects in India in the roads, bridges, tunnels, mining, metros, airports and irrigation sectors.
  • DBL’s revenue in FY20 was ₹ 9,725 crore and profits ₹ 358 cr. DBL’s revenues, EBITDA and PAT have grown at 41.2%, 41.1% and 27.9% CAGR from FY11-FY20.
  • DBL owns 12,901 vehicles and construction equipments, and employs 33,700 people.
  • DBL segment revenues for FY21 Q1 are: (a) Construction of roads and bridges – 88% (b) Mining – 1% (c) Irrigation projects – 1%. (d) Urban development – 10%
  • DBL is MP based but in Fig 1b we can see that projects are from all over the country.
  • As of Q1FY21, DBL had an order book of ₹ 26,115 cr. The Orders Booked to Billings ratio was at 1.96 times in Mar 20 has risen to 2.84 in Q1 giving good revenue visibility. Out of this 68% are central government projects and 32% state government projects.
  • Dilip Suryavanshi is CMD. He has 34 years’ experience in construction, and is President of the MP Builders Association. Devendra Jain is the CEO-ED and has 19 years’ experience in construction.
  • Shareholding of DBL is: Promoters -75%, MF – 9.5%, FII – 8.7%, Public – 6.7%.

 

JAINMATRIX INVESTMENTS – PRICING AND PAYMENT OPTIONS

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Business Model, News and Updates for DBL

  • DBL’s strategy going forward is to (a) focus on road EPC for government clients (b) divest BOT assets freeing capital (c) geographical diversification (d) projects clustering (e) Target smaller project size to reduce overdependence on large projects (f) Deleverage balance sheet.

jainmatrix investments, dilip buildconFig 1(a) – DBL Segment Revenue in FY20 and Fig 1(b) – State wise Order Book (clickable)

  • It has a policy of no subcontracting and no equipment on rental. This has helped it build good human resource and execution capabilities. They do a faster execution of projects. DBL has completed 90% of their projects early, and has received bonuses of ₹ 565 cr. from 2012-20.
  • DBL carefully selects projects and strives for geographical clustering of these outside MP. This helps in utilization of construction assets and reduce environmental and forest clearance risks. It also paves the way for regional strengths. DBL leverages its manpower, equipment and materials and saves transportation costs, thus achieving economies of scale.
  • Drones and UAV are emerging technologies used to reduce project time, improve safety and control project costs. UAV is used to collect engineering data at a construction site.
  • GPS technology is used to track machine life, fuel usage, and consumables. It provides mapping and replays vehicle location history with real time alerts and notifications. Using this tech, DBL is able to guide drivers and operators, enabling fuel savings of ~25%.
  • DBL has received a LoA for construction and upgrading of NH 131A near Narenpur to four-lane and near Purnea to two-lane with paved shoulders in Bihar on HAM mode, of value ₹ 1,960 cr.
  • DBL in Aug 2018 won a contract of Pachhwara Central Coal Mine for 55 years valued at ₹ 32,156 cr., located in Jharkhand. The Pachhwara Block is reserved for Power Sector end use and was allotted to Punjab State Power Corp by GoI. DBL will develop this in consortium with VPR Mining where DBL will hold 74% equity. It expects to generate annuities of ₹600 cr. and margins in line with the current road business.
  • In June 2012 Income Tax dept. conducted raids on promoter Dilip Suryavanshi, teacher-turned local business tycoon Sudhir Sharma and associates at 10 locations, including Indore and Bhopal in MP. The officers found incriminating documents related to tax evasion. The ED later sought details from the IT dept. regarding an alleged ₹ 140 cr. FEMA violation from South Africa. (TOI news).
  • As a part of Business Continuity Measures (BCM), DBL imposed the (WFH) policy and this was identified as major relaxation for working in the COVID-19 pandemic environment.

Industry Outlook

  • India has the 2nd largest road network in the world, aggregating to 61 lakh kms. Roads are the most common mode of transportation and account for 86% of passenger and 65% of freight traffic. In India, National Highways with length of 1.04 L km are just 1.7% of the road network, but carry about 40% of the road traffic. On the other hand, state roads and major district roads at the next level carry another 60% of traffic and account for 98% of road length.
  • There are 2 central Govt. bodies which award road projects, NHAI which is in charge of the National Highway Development Program (NHDP) and Ministry of Road Transport and Highways (MoRTH), which covers highways not under NHDP.
  • From the Fig 2 below we can see the transition of projects awarded to new models recently.

jainmatrix investments, dilip buildcon Fig 2 – Road Project Models (click on images to enlarge)

  • NHAI has set an aggressive timeline for highways, expressways and economic corridors, to be ready by Mar 2025. The combined length of these is 7,800 km and would require investment of approximately ₹ 3.3 Lakh cr. in the next five years.
  • NHAI has constructed 3,979 km of NHs in FY19-20, the highest ever achieved in a financial year.
  • GoI has envisaged a highway program Bharatmala Pariyojana for development of 65,000 km of NHs. Under Phase-I of the program, GoI has approved implementation of 34,800 km of NH projects with a stiff target of 5 years with an outlay of ₹ 5.35 L cr.
  • Highway construction in India increased at 21.4% CAGR between FY16-19. In FY19, 10,855 km were constructed, and GoI has set a target for constructing 12,000 km of NH in FY20.
  • The development of road infra in India is witnessing great momentum and construction of roads per day hit a new high of 27 kms/day for FY18, which is much higher than what was achieved earlier.

jainmatrix investments, dilip buildconFig 3 – Construction, Outlay and Projects Awarded

  • Under Union Budget 2020-21, GoI allocated ₹91,823 cr. to MoRTH, and plans to invest ₹ 15 lakh cr. in the next five years. CRISIL expects investment in roads to double to ₹10,70,000 cr. over 5 years.
  • The GoI approved the Bharatmala program under which 53,000 kms of NHs have been identified to bridge critical infra gaps. It will give the country 50 national corridors as opposed to 6 at present. Phase I will be over FY18-22 with 24,800 kms of construction expected.
  • Construction of roads generates employment and contribution to growth in GDP.
  • In recent times, the InvIT structure has become popular for holding and listing of infra assets. This structure is tax efficient and allows infra firms to monetize their assets.

Stock evaluation, Performance and Returns

  • DBL’s revenues, EBITDA and PAT have grown at 41.1%, 41% and 27.9% CAGR from FY11-20.
  • DBL’s price history is detailed in Fig 4. The share price high was ₹ 1,247.5 in May 2018.

jainmatrix investments, dilip buildconFig 4 – Price History

jainmatrix investments, dilip buildconFig 5a – DBL Financials (click on images to enlarge)

  • DBL’s revenue was ₹ 1,892 cr. in Q1 FY21, a decrease of -17% YoY. PAT also fell by -70% YoY to ₹ 34 cr. in Q1 FY21 largely due to the impact of covid-19 and lockdown, see Fig 5a. We can also see that Sept quarter is typically weakest, mostly as the rains slow the construction for roads.
  • They paid a dividend of ₹ 1/share (Rate of 1%) in FY20, a yield of 0.11% which is very small.
  • DBL has not been able to generate Free Cash Flow in the last 6 years in-spite of good Cash from Operations due to the large CAPEX needs . This is common across the industry. See Fig 5b – Cash Flow. We can also see some of the key Financial metrics in Fig 5c.

jainmatrix investments, dilip buildconFig 5b – DBL Cash Flows and Fig 5c – Financial Metrics 

  • It had a Booked to Billed ratio of 1.96 (FY20) which rose to 2.84 in Q1FY21 on wins, see Fig 5d.
  • DBL has a ROE of 11.21% in FY20.
  • It secured record orders worth ₹ 10,703 cr. in Q1FY21 across 4 sectors and 5 states including 2 new states of Uttarakhand and Bihar, see Fig 5e.
  • It is getting more diversified, and now has over 50% of Order Book from non – Road sector.
  • The promotors hold 75% shares. However 21.5% of shares have been pledged by them.
  • In Fig 6a, we see the PE chart for DBL has a historic average of 16.25 times and a range of 7.5-25 times in 4 quadrants. Today at 23.5 times, it is trading near its historic averages.
  • In Fig 6b we can see that the EPS TTM had decreased in the last year due to nationwide lockdown.

jainmatrix investments, dilip buildconFig 5d – Order Book to Billed and Fig 5e – OB in Q1FY21

jainmatrix investments, dilip buildconFig 6a – Price – PE graph

jainmatrix investments, dilip buildconFig 6b – Price – EPS graph

Benchmarking and Financial Estimates

jainmatrix investments, dilip buildconFig 7a – Benchmarking

We benchmark DBL against peer road construction companies. See Fig 7a.

  • DBL appears to be at slightly expensive valuations in terms of P/E and P/B.
  • Sales and profits growth while impressive is not the highest.
  • Debt equity ratio is high at 2.62, a problem in the sector but DBL is highest in this peer group. However Net Debt to Equity is 0.92. EBITDA and Profit margins are low. However, their strategy helps DBL grow its revenues faster. RoE, RoCE are fair.
  • Financials of DBL are projected for 2 years in Fig 7b basis order book, corporate plans, management guidance and analyst judgement.

jainmatrix investments, dilip buildconFig 7b – Financial Projections

Strengths of DBL

  • DBL is a sector leader in Indian roads EPC. It has a large order book and rising revenues.
  • DBL has a good pan India presence. It operates in geographical clusters for projects which helps with efficiency and asset utilization. So DBL has an efficient business model. The execution through strong operations helped DBL receive early completion bonuses for many projects.
  • DBL has seen a strong growth in financials and order book. In Q1FY21, it has improved order book and also diversified into new infra verticals like tunnels and irrigation projects, amid the lockdown challenge.
  • Diversification by DBL from roads to a number of adjacent infra sectors is a sign of aggression and dynamism. There are business model synergies with these sectors and they are high potential sectors.
  • The sale of road assets to Shrem and Cube Highways is helping reduce capital tied up and so debt is being reduced. DBL should be able to sharply reduce its interest payments by continuing to sell road assets as well as take advantage of the lower interest regime and reduce cost of loans.
  • Key assets are large employee strength and construction assets. It also has a factory campus in Bhopal.
  • Road projects used to be riskier earlier as NHAI etc. used to bid out projects while having acquired only a small portion of the land required for construction. Projects used to get delayed and the Construction firm used to suffer. This has now changed and most of the land is acquired before bidding it out.
  • Promoters Dilip Suryavanshi, Devendra Jain and top management are highly experienced in infra space.
  • Largest Caterpillar equipment fleet owning company in Asia.

Weaknesses and Risks of DBL

  • All firms in the roads EPC sector face issues like high working capital requirement, long project gestation periods, govt. clearances, govt. customers and PIL/ litigation issues. DBL is no exception.
  • D/E is high at 2.62 times and interest payments have been rising. However Net Debt to Equity is 0.92.
  • The promoter Dilip Suryavanshi is alleged to have a close relationship with the CM of MP, Mr. Shivraj Singh Chauhan. However he became CM again only recently. Further their business has gone national.
  • The 2012 IT Department case of tax evasion and FEMA is an issue. While the firm is attempting to settle this issue, there is no clarity on additional tax liabilities, or even more such cases against the firm.
  • The 3 promoters are paid high salaries. This is not shareholder friendly. But it is in acceptable limits.
  • The promoter has pledged 21.5% of shareholding, however this is only till award of certain projects. The pledges will be released as soon as they receive financial closure on the same from banks. But pledging of shares by promoters reduces the stability of the share in the market.
  • Competition is intense in road projects, particularly in EPC projects rather than BOT.
  • Sector perception: the roads construction sector is seen as a tough business with challenges like litigation, high working capital, opaque GoI clients and a difficult business model.
  • The Land acquisition Act in India specifies the process and compensation. It has undergone several changes recently, and we expect more changes. The uncertainty affects the roads EPC industry.
  • BOT projects are evaluated based on traffic projections. In this sector, BOT companies are facing financial pressures due to aggressive projections during evaluation and high competition during bidding.
  • High interest payments compared to earnings.
  • The covid infection affected operations in Q1, but by August, labour availability is 90% of normal.

Overall Opinion

  • There is an urgent need to build infrastructure such as roads and highways. This is reflected in the Indian budget allocations. Project awarding and completion has never been so fast in roads sector.
  • In this sector Dilip Buildcon has built a good momentum of business, and has a national presence, a fast growing order book that is diversifying from roads to attractive adjacent sectors like bridges, tunnels, mining, metros, airports and irrigation. It has a good strategy and business model.
  • Road projects undertaken include work on BOT, HAM and EPC models. However two recent large deals of sale of infra assets is releasing tied up capital and helping focus on core EPC.
  • Key Risks: 1) high debt an large working capital requirement 2) pledged shares 3) high competition 4) covid and weather disruptions 5) Sector perception
  • Excellent financial management, galloping revenues and order book, sectoral tailwinds along with a low price entry point makes Dilip Buildcon an excellent BUY.
  • Investors can BUY the share with a 2 year price target of ₹ 810.

Disclosure, Disclaimer and Assumptions

The target price has been arrived at using financial projections in Fig 7b and a target PE of 15 times. This document has been prepared by JainMatrix Investments Bangalore (JM), and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of JM. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, JM has not independently verified the accuracy or completeness of the same. Punit Jain has an equity ownership (<1%) in DBL since Sept 2018. Other than this he has no financial interests in DBL or any group company. Neither JM nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient’s particular circumstances and, in case of doubt, advice should be sought from an Investment Advisor. Punit Jain is a registered Research Analyst under SEBI (Research Analysts) Regulations, 2014. JM has been publishing equity research reports since Nov 2012. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com.

Dilip Buildcon IPO – This is a Rough Road

  • Date: 1st Aug 2016 
  • IPO Period: 1st – 3rd Aug, IPO Price range: Rs. 214-219 
  • Mid Cap: Rs 2,995 crore Mkt cap 
  • Industry – Roads Construction EPC 
  • Advice: The DBL IPO is an AVOID

Summary

  • Overview: DBL is a construction firm undertaking projects in the roads and irrigation sectors like national and state highways, city roads, culverts and bridges.
  • DBL had revenues and profits of Rs 4,315 crores and Rs 197 cr. resp. in FY16. Its revenue, EBITDA and PAT have grown 58.1%, 61.0% and 38.1% CAGR over 6 years.
  • DBL has a policy of no subcontracting and no equipment on rental. It owns the equipment fleet of 7,345 vehicles and is a large employer with 19,746 employees. In this sector Dilip Buildcon has built a good momentum of business, and is growing from an MP centric firm to an all India operating entity. It has good policies and business model. It has a 3.9% market share in its industry.
  • Valuations, with a PE of 15.2 times, look expensive compared to quality peers such as IRB.
  • Sector specific challenges like cash flows, debt, litigation and regulatory issues worry us. The roads construction sector by its very nature currently offers very few attractive opportunities. Investors need to look at profitable / high certainty sectors other than real estate.
  • Outlook: As an investment, we recommend an AVOID on DBL IPO.

Here is a note on Dilip Buildcon Ltd (DBL).

IPO highlights

  • IPO opens: Monday 1-3rd August 2016 with Issue Price band: Rs. 214-219 per share.
  • Shares offered to public: 2.99 crores of Face Value: Rs. 10 / share, Market Lot is multiples of 65.
  • Shares offered are 21.8% of post IPO equity. The offer is of Rs 654 cr. (upper band) which is a sale by current shareholders (Rs 224 cr.) and fresh issue of shares (Rs 430 cr.)
  • The promoters of DBL are Dilip & Seema Suryavanshi and Devendra Jain who holds 90.25% stake, (post IPO 75.6%). PE fund Banyan Tree Growth Capital holds 9.75% (post IPO 2.53%).
  • The shares quotas to QIB, NIB and retail are of 50:15:35. Objects of the issue – repayment of term loans (Rs 202 cr.); working cap. funds (Rs 200 cr.) and general corp. purposes (Rs 252 cr.)
  • Post IPO holding % are Promoter 75.6, Banyan Tree GC 2.5, IPO -QIB 10.9, NIB 3.4, retail 7.6%
  • The IPO grey market premium on DBL is Rs 17-19, a positive indication (on 29th July).

Introduction

  • DBL is an EPC firm into construction projects for roads, irrigation and commercial buildings.
  • DBL had revenues and profits of Rs 4,315 crores and Rs 197 cr. resp. in FY16. Its revenue, EBITDA and PAT have grown 58.1%, 61.0% and 38.1% CAGR over 6 years.
  • DBL owns a fleet of 7,345 vehicles and other construction equipment. DBL is one of the largest employers in construction in India with 19,746 employees in FY16.
  • DBL’s business comprises of: (i) construction business, where they undertake roads, irrigation and urban development projects on an EPC basis; and (ii) infrastructure business, under which they undertake road projects on a BOT basis with a focus on annuity projects. See Fig 1.
  • For FY16 govt. contracts accounted for 76.3% and private contracts 23.7% of the order book.
Dilip Buildcon, Revenues and Order book, JainMatrix Investments

Fig 1 – Revenues by Vertical/Fig 2 – State wise order book for FY16 (click to enlarge images)

  • Mr. Dilip Suryavanshi is the CMD. He has 32 years’ experience in construction, and is President of the MP Builders Association. Devendra Jain is the CEO & ED of DBL has 17 years’ experience in construction. Prior to joining DBL, he was an assistant professor.
  • The DBL Directors pay is detailed in Exhibit 3.
Remuneration, JainMatrix Investments

Exhibit 3 – Director Remuneration in FY16

  • DBL’s marketing and business development for construction are carried out centrally in Bhopal, MP. DBL is currently pre-qualified to bid for BOT projects with a contract price up to Rs 2,140 cr. and EPC projects with a contract price up to Rs 1,253 cr. The pre-qualification has helped increase their target market size and maintain the order book growth.
  • As of FY16 end, DBL had an order book of Rs 10,778 cr., consisting of 50 third party road EPC projects – 6 own road BOT, 3 irrigation, 1 mining, 1 cable-stayed bridge and 3 urban development. The construction order book was 84.6% of total in FY16. Also see state wise break-up in Fig 2.
  • In the last 5 years, DBL has completed 47 road projects in MP, Gujarat, HP, Rajasthan and Maharashtra, with an aggregate length of 5,612 lane km.

Business Model, News and Updates for DBL

  • DBL has a policy of no subcontracting and no equipment on rental. This has helped it build in house human resource capabilities as well as own and maintain capital equipment.
  • DBL carefully selects projects and strives for geographical clustering of these outside MP. This helps in utilization of construction assets and reduce environmental and forest clearance risks. It also paves the way for regional strengths. DBL leverages its manpower, equipment and materials and saves transportation costs, thus achieving economies of scale.
  • DBL has a good record for projects completed on time. DBL received early completion bonuses of Rs 192 cr. for 11 of its BOT projects and Rs 28.6 cr. for 10 govt. EPC projects over the last 5 years.
  • DBL won a contract to build India’s second largest cable bridge on Zuari river in Goa.
  • DBL is targeting to realize around Rs 11,000 cr. revenue by FY18.
  • In June 2012 Income Tax dept. conducted raids on promoter Dilip Suryavanshi, teacher-turned local business tycoon Sudhir Sharma and associates at 10 locations, including Indore and Bhopal in MP. The IT officers found incriminating documents related to tax evasion that were seized. The ED later sought details from the IT dept. regarding an alleged Rs 140 cr. FEMA violation from South Africa. (TOI news).
  • DBL on 29th July raised ₹196 crore from anchor investors ahead of the IPO. It allotted 89.6 lakh shares at ₹219 apiece to 10 anchor investors. They include SmallCap World Fund, American Funds Insurance Series, Abu Dhabi Investment Authority, Nomura Singapore, Grandeur Peak Emerging Markets, DB International (Asia), HDFC Trustees Company and IDFC Infrastructure Fund.

Roads Industry Outlook

  • We are skeptical of the sector as it faces risks like high working capital, long project gestation, poor and expensive funding options, land acquisition issues, PIL & litigation pressures and many govt. clearances.
  • The transport sector constitutes 6% of the country’s GDP and 70% of this is from roads. India has an extensive road network of 52.3 lakh km which is the 2nd largest in the world.
  • Roads form the most common mode of transportation and are the main arteries for travelling across India. It is estimated that 60% of the freight and 85% of the passenger traffic is carried by roads.
  • National highways (NH) which account for 2% of the total road network length in India, carry 40% of the road traffic volume. Additionally, state and major district roads carry another 40% of traffic volume and account for 20% of road length (adding up, the 80-20 rule applies).
  • Under NDA rule, GoI has launched initiatives to upgrade and strengthen highways and expressways. The NHAI and the Ministry of Road Transport & Highways sanctioned projects for 2,337 km in FY16. An outlay of Rs 26,600 cr. was provided, and 6,300 km of NHs & 8 bypasses were to be completed.
  • GoI aims to develop 57,653 km of National Highways under programs like NH Dev. Project (NHDP), Special Accelerated Road Dev. Program for NE (SARDP-NE) and NH Interconnect Improvement Project (NHIIP).
  • In the BOT model private developers invest funds for constructing roads, and recover this through toll collection. However the BOT model has in 2010-15 faced high failure rates. To revive the sector, the new govt. reverted to the EPC model, where the road construction is funded by the govt. In Apr 2015 the govt. launched a hybrid annuity model where project costs are shared with developer in a 40:60 ratio. So govt. provides 40% of the project cost to start work while the rest of investment is from developer.
  • IRB Infra Ltd and Sterlite Power Grid are preparing to list their Infra Investment Trusts (InvITs). These Trusts hold income-generating infra assets, and offer regular yields and liquidity to developers. They may attract longer duration funds, allowing better asset – liability matching. InvITs are expected to encourage higher FDI in the infra sector, reduce the burden on bank funding and allow developers to unlock tied-up capital. This is a positive sign for the industry including Dilip Buildcon.
  • Over the next 5 years, it is expected that NHAI would award more than 22,500 km of projects. With BOT projects losing favour, NHAI has been awarding more EPC and hybrid projects.
  • It is expected that investments in road projects will grow 2X to Rs 8.6 lakh crores over the next 5 years. Investments in state roads are expected to grow steadily, while those in rural roads will rise at a slower pace, impacted by a drop in budgetary allocations and funding constraints. Source: RHP/CRISIL Research.
  • As per IBEF (GoI), the Roads and Bridges construction sector size in 2016 was Rs 1,11,209 cr. So the market share of DBL in the sector is 3.9%. 

Financials of DBL

  • DBL’s revenue, EBITDA and PAT have grown 58.1%, 61.0% and 38.1% CAGR over 6 years.
  • The revenues have grown steadily, however the margins of DBL are volatile. The years 2014-15 saw poor financials (the entire sector was underperforming). Most contracts awarded earlier faced implementation and cost & time overruns. See Fig 4.
Fig 4 – DBL financials, JainMatrix Investments

Fig 4 – DBL financials

Fig 5 – DBL cash flows, JainMatrix Investments

Fig 5 – DBL cash flows

  •   DBL paid a dividend of Rs 0.025/share (Rate of 0.25%) in FY16, a yield of 0.01% which is very small. Dividend has been paid for several years but the rates have been falling.
  • DBL has been able to generate free cash flows only in FY16 of the last 6 years. DBL could be on a strong revival backed by govt. policy initiatives and growing order book size. Fig 6.
  • The cash per share including Reserves & Surplus and Cash in Balance sheet is Rs 73/share (post IPO). This indicates that the current operations of DBL are available in IPO at (219-73) = Rs 146/share.
  • DBL has a ROE of 19.6% in FY16 (source RHP) making it the industry leader. This is a positive.
  • It has a booked to bill ratio of 2.5 (FY16) – is good and improving  over 3-4 years, Fig 6.
Order book position, JainMatrix Investments

Fig 6 – Order book position

Benchmarking                                                         

Benchmarking, JainMatrix Investments

Fig 7 – Benchmarking (Click Image to enlarge)

We benchmark DBL against peer Infra companies like Ashoka Buildcon, IRB Infra, etc. See Fig 7.

  • DBL appears to be available at slightly expensive valuations in terms of P/E and P/B.
  • High RoE, RoCE and 3 year sales growth are positives.
  • Employee costs are good in proportion to profits.
  • D/E is moderate to high. Margins are average in line with other industry players.

Positives for Dilip Buildcon Ltd and the IPO

  • DBL has a good presence in MP, its home state. Beyond MP, it operates in geographical clusters for projects which helps with efficiency and asset utilization. DBL has an efficient business model. The execution through strong operations helped DBL receive early completion bonuses for many projects.
  • Large employee strength and construction assets. It also has a fine factory/ campus in Bhopal.
  • Strong growth in financials and order book. Their O/B grew at 48.1% CAGR over 4 years.
  • Promoters Dilip Suryavanshi and Devendra Jain have solid experience profiles.

Internal Risks

  • The firm has a business concentration in MP with 40% of the O/B coming from there Fig 2.
  • All firms in the sector faces business risks like high working capital requirement, long project gestation periods, govt. clearances and PIL/ litigation issues. DBL is no exception.
  • We worry about allegations of political connections in MP and the litigations listed in the RHP. While we understand that in a business such as infra development, there are always going to be legal, law and order and regulatory challenges, but DBL appears to having an excessive number of such issues.
  • The 2012 IT Department case of tax evasion and FEMA is an issue. While the firm is attempting to settle this issue, there is no clarity on addl. tax liabilities, or even more such cases against the firm.
  • The top 3 promoters were paid high salaries – 10% of FY16 profits. This is not shareholder friendly.
  • DBL has an accounts receivable period of 108 days, higher than industry average of 80-90 days. This is partly because the govt. is the major customer.
  • A promoter has pledged 54.1 lakh equity shares, 4% of the post IPO share capital, to raise funds. We understand this is a norm in Real Estate/ construction sectors. But its a negative.
  • DBL’s revenues from projects are unpredictable and subject to seasonal variations. However the firm records revenues using % completion method and revenues are not recognized until there is reasonable progress on a contract. This is a good/ conservative method.

External Risks

  • A political regime change in MP may affect their current projects and orders booked pipeline.
  • Competition is intense in road projects, particularly in EPC projects rather than BOT.
  • The Land acquisition Act in India specifies the process and compensation. It has undergone several changes recently, and we expect more changes. The uncertainty affects the roads EPC industry.
  • BOT projects are evaluated based on traffic projections. In this sector, many BOT companies are facing financial pressures due to rosy projections during evaluation and high competition during bidding.

Overall Opinion

  • There is an urgent need to upgrade Indian infrastructure such as roads and highways. This was reflected in the Feb 2016 Indian budget announcements. We can see that on one side highways have improved a lot in the last decade; at the same time most newly launched capacity is quickly at a high utilization!!
  • There are signs of revival in old stuck projects as well as momentum in bidding for new ones.
  • In this sector Dilip Buildcon has built a good growing business, and is expanding from an MP centric firm to an all India operating entity. It has good policies and business model.
  • However valuations for DBL are expensive compared to higher quality peers such as IRB.
  • Sector specific challenges like cash flows, debt, litigation, pledging and regulatory issues worry us. The roads construction sector by its very nature today offers very few attractive opportunities. Investors can look at profitable / high certainty sectors other than infra EPC.
  • As an investment, we recommend an AVOID on DBL IPO.

JAINMATRIX KNOWLEDGE BASE 

See other useful reports:

  1. IRB Infrastructure – May 2012 report
  2. Do you want to be a value investor?
  3. Mahanagar Gas IPO 
  4. How will Brexit impact Indian investors?
  5. A Repurpose for our PSUs
  6. How to Approach the Stock Market – A Lesson from Warren Buffet
  7. An IPO Roundup and Update 
  8. JainMatrix Track Record May 3rd, 2016
  9. Thyrocare IPO – Wellness for your Wealth
  10. New Banks: Big Changes in Small Change
  11. Equitas IPO – Leader in SF Banks
  12. Announcement – SEBI approval as a Research Analyst
  13. Alkem Labs IPO
  14. Goods And Services Tax (GST): Integration And Efficiency
  15. Syngene IPO: Good Pharma R&D spinoff from Biocon

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Disclaimer

This document has been prepared by JainMatrix Investments Bangalore (JM), and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of JM. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, JM has not independently verified the accuracy or completeness of the same. JM has no known financial interests in Dilip Buildcon or any related group. Neither JM nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient’s particular circumstances and, in case of doubt, advice should be sought from an Investment Advisor. Punit Jain is a registered Research Analyst under SEBI (Research Analysts) Regulations, 2014. JM has been publishing equity research reports since Nov 2012. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com.

Indian Equity – Winds of Change

  • December 16th 2011

The Indian Stock market has been buffeted by a lot of changes in the last few quarters. As a long term investor, one needs to track the key moves and tweak the overall outlook and investment strategy in line with these. While there is a lot of noise and headline grabbing information flying around, there are three key themes that are re-shaping the economy and markets right now:

Inflation is starting to fall, and Interest rates are peaking

The economy has been attacked by inflation that has been eating away at cash in hand and fixed investments. Inflation definitely impacts corporate results.

Cost of input like raw materials and services rises, and corporates need to raise prices to protect margins. Inflation tests corporate pricing power, and on an overall basis depresses earnings.

JainMatrix Investments

Inflation and Interest Rates - JainMatrix Investments

RBI tries to fight inflation, by raising interest rates, which slows economic growth. As we can see, the interest rates have been raised sharply by RBI. I believe from here on, the inflation rates will start to fall. And RBI will arrest the rise, and even start to drop interest rates.

  • This situation is good for Interest rate sensitives in our economy, such as Banks, NBFCs, Automotives and Real Estate. These businesses prosper as interest rates fall.
  • Infrastructure sector is also debt intensive, and may stabilize (it has fallen sharply in the last year) on lower Interest rates.

Some of my reports in these sectors are:

  • Yes Bank (see link to report).
  • Mundra Port and SEZ (see link to report).
  • L&T Finance (see link to report). It has fallen since the IPO, but should recover in a better environment
  • Muthoot Finance (see link to report). Same as above.
  • Bharat Forge (see link to report)

INR has weakened against the USD

The persistent inflation, trade deficit and increasing fiscal deficit are taking their toll on the INR. The rupee has weakened against the USD, and currently is in the 52-53 range. India has a trade deficit,  and the situation is worsened when inward flow of FDI/FII capital stops. In response, we have to recalibrate our sectoral expectations.

Petrol and imported goods will get expensive. Exports in unhedged USD denominations will get more lucrative. The gainers will be exporters, like IT services, Gems & Jewellery, Auto exporters, Engineering exporters and Petroleum.  The losers will be importers, as well as firms with large USD (or foreign currency) denominated debt.

Some of my reports in these sectors are:

  • eClerx Services (see link to report). A good buy at these levels.
  • Bharti Airtel (see link to report ). This firm is a good long term buy, but may suffer in short term due to USD denominated debt

The Power sector is in trouble

The power sector extends across generation, transmission, distribution, power focused lenders and EPC firms focusing on these sub sectors. The power sector is a key driver of GDP, as most firms depend on the Utilities for supply. There is an overall 9-15% shortage of power generated, and demand is growing at 5-6% per annum.

The State Electricity Boards face a complex situation of supply shortfall, political pressure to provide free power to Agriculture, Transmission and Distribution losses and thefts. In addition, the power price has to be approved by State level Tariff Boards.

  • The current situation is that many of the Indian SEBs are in crisis due to losses and Cash Flow problems. They are unable to pay for the fuel, or pay the EPC contractors of new plants.
  • Another issue is the supply of fuels. There is a Coal shortage as Coal India Ltd is unable to produce enough. Many utilities have been forced to procure Coal from Australian and Indonesian mines at higher tariffs. Gas too is in short supply. The Reliance wells have underperformed

Until the Central and State governments free up the market, and restructure loans and help clean up this mess, investments in this critical sector will dry up and suppliers / EPC players will face financial pressures.

  • Except Fuel suppliers

The only sub-sector in Power that may remain in good shape would be the Upstream resource rich companies. These firms either produce raw fuels domestically or import this. The sheer demand growth will ensure that this subsector will be protected and be a defensive play within Power.

Some of my reports in these sectors are:

  • BGR Energy (see link to report).
  • Coal India (see link to report).
  • Petronet LNG (see link to report)

As a long term investor, it does not make sense to react to short term events. But if a theme is to pan out over 1-2 years, it makes sense to adjust the portfolio weightages accordingly.

In depressed times, I recommend that retail investors should choose a safe, large cap portfolio and invest in a SIP fashion. See link to report.

Gold also is both a good protector of wealth as well as a hedge against global financial uncertainties. See link to report.

Good luck with your choices.

:-)

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Disclaimer:

These reports and documents have been prepared by JainMatrix Investments Ltd. They are not to be copied, reused or made available to others without prior permission of JainMatrix Investments. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com.

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