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MOSL: ASHOKA BUILDCON (Buy)-Catalysts emerging; concerns appear overdone

ASHOKA BUILDCON: Catalysts emerging; concerns appear overdone

(ASBL IN, Mkt Cap USD0.4b, CMP INR102, TP INR150, 47% Upside, Buy)

In this note, we look at the key concerns related to Ashoka Buildcon (ASBL), which have been impacting the stock performance despite superior execution demonstrated by the company over the past two years.

• Revenue visibility improves with recent order wins, appointed dates: A key concern about ASBL has been the sharp depletion of its order book owing to superior execution and the dearth of new orders. Thus, the OB/rev ratio declined from the peak of 4.8x at end-1QFY19 to 2.2x at end-1QFY20. In fact, adjusted for the pending appointed date (as of end-1QFY20) in two HAM projects, the OB/rev ratio stood at a mere 1.8x, raising concerns about the sustainability of the superior execution rate. However, since then, two key positive developments have transpired: (i) ASBL has secured orders worth INR22.6b, of which INR8.7b is from its own HAM project and (ii) it has secured the much-awaited appointed date for the two HAM projects. Thus, the order book has grown 28% from the 1QFY20 level to INR104.3b, with an OB/rev ratio of 2.7x. Even if adjusted for the appointed date of the one recently won HAM project, the OB/rev ratio stands at 2.5x, which improves revenue visibility from the lows of end-1QFY20. 
• Pending exit of P/E investor from the asset portfolio not worrisome: The second key concern on the stock has been the pending exit of the PE investor from Ashoka Concessions (ACL) as it explores to sell off the entire portfolio of road assets by Mar’20. We do not consider this too worrisome and rather see it as an opportunity to gain exposure to the stock. Our confidence stems from the fact that the key variable for value discovery, i.e. the base traffic, is known for the portfolio and we don’t see any negative surprise to our NPV-based valuation for the portfolio. We value ABL’s stake in ACL at P/Inv of 0.7x. We expect the monetization of ACL’s portfolio to be completed by end-Dec’20 at best, as against management’s expectation of end-Mar’20.
• Low dependency on new order wins over near term: We forecast EPC revenue CAGR of 13.9% over FY19-21. We note that our revenue estimates over the next two years just factor in 7% contribution from new order wins. Our EPC net profit CAGR stands at 4.2% over FY19-21 as we have also built in 110bp contraction in the EBITDA margin over the next two years as we do not expect the peak margins of 13.6% in FY19 to sustain.