Huge opportunities await investors in the roads sector, the fund allocation for which has been doubled to about Rs 3,14,000 crore in the 11th Five-Year Plan ending 2012. More importantly, estimates indicate that over the next decade, about Rs 10,00,000 will be invested in the sector to expand the road network and improve existing roads.
Companies such as Ashoka Buildcon, which has come out with an IPO, are well positioned to leverage the opportunities in the sector.
The IPO, which seeks to make the most of Ashoka’s dominant position and established track record, has been graded four on a scale of five by Crisil. Further, the company’s strong order book, integrated business model, good management, domain expertise and proven execution capabilities make a good case for investment.
| SOUND FUNDAMENTALS | |||
| In Rs crore | FY08 | FY09 | FY10 |
| Revenue | 323 | 518 | 796 |
| Ebitda | 123 | 164 | 214 |
| Ebitda (%) | 38.2 | 31.6 | 26.9 |
| PAT | 33 | 35 | 86 |
| PAT (%) | 10.3 | 6.7 | 10.8 |
| ISSUE DETAILS | |
| Price band (Rs) | 297-324 |
Well integrated
Ashoka Buildcon undertakes engineering, procurement and construction (EPC) work for projects in roads, bridges, industrial buildings and power transmission and distribution sectors. Importantly, the company has an integrated business model, which includes in-house designing, construction, RMC (ready-mix concrete) plants, toll collection, and operation and maintenance of BOT (build-operate-transfer) projects from the bidding stage. This is also a reason why the company earns superior operating margins of about 27 per cent and is able to competitively bid for projects.
The company currently has an order book of Rs 3,260 crore (including projects worth Rs 1,640 crore awarded after May 2010). The current order book is almost four times its reported consolidated turnover of Rs 795 crore in 2009-10 and provides good revenue visibility.
Consistent cash flows
The company is one of the early entrants in the BOT road space, having over 13 years of experience. It is one of the large players in toll-based road projects, having 23 BOT road projects totalling 3,498 lane km. Of these, 17 projects are operational.
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The remaining six projects, which are under construction, are relatively bigger, accounting for about 2,285 lane km (65 per cent of the total lane km). The company had reported a revenue of Rs 165 crore in the BOT segment in 2009-10, which could grow faster as about 971 lane km would be operational by December 2010.
Valuations
Although the opportunities in the sector suggest that Ashoka’s long-term growth prospects continue to be good, over the next two-three years, growth in revenue and profit should be strong on the back of a strong order book and higher revenues from BOT projects.
On the post-IPO equity capital and at the upper end of the price band of Rs 297-324, the issue is valued about 2.2 times its book value and 15 times its earnings per share based on 2010-11 estimates.
While valuations look marginally higher vis-a-vis its peers, thereby capping upsides in the near term, investors with a longer-term perspective can subscribe to the IPO.