ASHOKA BUILDCON :OUTSTANDING CONTRIBUTION TO ROADS AND HIGHWAYS !!!

Scrip Code: 533271 / ASHOKA

CMP:  Rs. 199.00; Buy at Rs. 195 - 200 levels.
Medium to Long term Target: Rs. 215; STOP LOSS – Rs. 183.00; Market Cap: Rs. 1,047.75 Cr; 52 Week High/Low: Rs. 283.00 / Rs. 181.08

Total Shares: 5,26,50,860 shares; Promoters : 3,54,81,587 shares –67.39 %; Total Public holding : 1,71,69,273 shares – 32.61 %; Book Value: Rs. 147.97; Face Value: Rs. 10.00; EPS: Rs. 21.49; Div: 00.00 % ; P/E: 9.26 times; Ind. P/E: 21.45; EV/EBITDA: 5.70.

Total Debt: Rs. 282.42 Cr; Enterprise Value: Rs. 1,330.17 Cr.

ASHOKA BUILDCON LTD: The Company was incorporated in 1976 and is based in Nashik, Maharashtra - India. Ashoka Buildcon Limited operates as an infrastructure development company in India. It focuses on developing and building infrastructure facilities on design, build, finance, operate, and transfer (DBFOT) basis in highways; and engineering, procurement, and construction (EPC) basis in highways and the power sector. The company is also involved in the sale and installation of software solutions. The company operates in four divisions: Build, Operate, and Transfer (BOT); EPC; RMC and Bitumen; and Toll Collection Contract. The BOT division builds and operates roads and bridges on Built Operate and Transfer basis. It has interest in 21 BOT road projects including road projects in Maharashtra, Madhya Pradesh, Chhattisgarh, Karnataka, and Orissa. The EPC division is involved in the engineering, design, procurement, and construction of roads, bridges, distribution transformers, electricity substations, commercial buildings, industrial buildings, and institutional buildings for third parties. This division also constructs, maintains, and repairs roads and bridges for BOT division. The RMC and Bitumen division manufactures and sells ready-mix concrete, bitumen, and pre-cast concrete poles. The Toll Collection Contract division collects tolls on roads and bridges owned and constructed by third parties. Ashoka Buildcon ltd is compared with Praj Industries Ltd, Infotech Enterprises Ltd, Marg Ltd.

Investment Rationale:

Ashoka Buildcon ltd came with an IPO on September 2010 with an issue price of Rs. 324/share and rise about Rs. 225 Cr with an objective to meet working capital requirements, investment in capital equipment, prepayment & repayment of project loans of the company, to fund certain subsidiaries for prepayment and repayment of their loans. Ashoka Buildcon and GVR Infra Projects, a consortium (50:50) emerged as the lowest bidder for the road project in Chennai. The project was by Tamil Nadu Road Development Company Ltd (TNRDC) for their project namely Development of Chennai Outer ring Road Phase II from Nemilicheri in NH 205 to Minjur in Thiruvottiyur – Ponneri – Panchetti (TPP) Road for Design, Build, Finance, Operate & Transfer (DBFOT) basis at Chennai, in the state of Tamil Nadu. The project is on annuity basis with a Concession period of 20 years & TNRDC’s cost of the project is around Rs. 985.44 Cr. The Public works department, PWD (Maharashtra) has withdrawn the toll collection rights from Ashoka Buildcon Ltd for Ahmednagar Karmala road project which was under BOT Scheme (with toll rights) prematurely, which were to expire on November 04, 2015. Ahmednagar Karmala project was envisaged in 1991 with reference interest rate linked to RBI published rate. Based on an index of lending rates (published by leading banks) which have been in downward trend, PWD has recalculated the concession termination date as Nov 4, 2012. Toll collection which was in effect on 17^th November 2012 has already been discontinued. The notification states that the lending interest rates have been changed by the RBI and consequently as per contract provisions, the concession period in view of new lending rates reworked, has ended before Nov 14, 2012. This termination will negatively impacted on near term profitability of the Project which contributes around 4.5 % or Rs.16/share in the overall fair value of Rs 350/share. The project has an expected toll collection of Rs. 2.75 Cr in FY13E which is 8.6 % of the overall toll collection for Ashoka Buildcon & Adjusted PAT from this project for FY14E stood at Rs 2.00 Cr which is 13 % of FY14E consolidated APAT. Considering it was a debt free mature project in its portfolio the profit contribution to the overall consolidated PAT is much higher. Ashoka Buildcon ltd’s 2 other projects also faces the risk of early termination. The PWD (Maharashtra) is in the process of expanding the existing 2 lane state highways network at 10 or 11 stretches to 4 lanes. PWD (Mah) has already awarded a part of Ahmednagar Karmala Tembhurni stretch to Supreme infrastructure in Dec-10 for expanding the stretch to 4 lanes. Management indicated that there are two more projects in its portfolio which are based on similar concession agreement i.e. Pune Shirur and Sherinallah put together commands another Rs 10/share or 3 % of value in Some Of The Part valuation. Total Value at risk owing to such a decision is 7.5 % of overall SoTP owing to such a move. One can buy based on cheap valuation with a target price of Rs 215.

Outlook and Valuation:

Ashoka Buildcon’s subsidiary Ashoka Concessions Ltd received the first tranche of the $150 million investment being made by two private equity funds – Macquarie SBI infrastructure Fund and SBI Macquarie Infrastructure Trust. The company will use these funds as equity in various projects under construction. The PWD (Mah) has awarded 6 projects so far to ABL from these 2 projects have already achieved termination i.e. Dhule bypass & Anwali Kasegaon on a natural course. Company’s management highlights that 2 projects out of the remaining 3 i.e. Pune Shirur and Sherinallah are based on similar concession agreement & both of these projects might face early termination risk after the termination of Nagar Karmala project. Both put together commands 3 % of SoTP or Rs 10/share. In terms of overall revenue contribution to the toll collection Sherinallah and Pune shirur commands 10 % and 6 % in terms of profitability based on FY14E. Sudden removal of tolling rights for Ahmednagar Karmala came in as a surprise. The project comprises 5 % of the company’s fair value based on FY14E target price. Such an event can at max be replicated on two other projects as guided by the management. Overall Ashoka Buildcon Ltd even after the termination of Nagar Karmala is still collecting toll at 3 other projects from PWD (Mah). At the current market price of Rs. 199.00, the stock is trading at a PE of 8.96 x FY13E and 7.96 x FY14E respectively. The company can post Earnings per share (EPS) of Rs. 22.20 in FY13E and Rs. 25.00 in FY14E. One can buy Ashoka Buildcon with a target price of Rs. 215.00 for Medium to Long term investment.

KEY FINANCIALS	FY11	FY12	FY13E	FY14E
SALES (Rs. Crs)	1,302.00	1,500.00	1,903.30	2,307.60
NET PROFIT (Rs. Crs)	100.80	124.80	116.80	131.60
EPS (Rs.)	19.10	23.70	22.20	25.00
PE (x)	10.70	8.60	9.20	8.20
P/BV (x)	1.20	1.00	0.90	0.80
EV/EBITDA (x)	9.10	8.20	9.50	9.60
ROE (%)	14.90	13.00	10.70	10.80
ROCE (%)	11.00	7.80	3.70	3.00

I would buy ASHOKA BUILDCON with a price target of Rs. 215.00 for the medium to long term target. As I always say, I am a long term believer in markets & I do respect the markets and will keep a strict stop loss of 8 % or Rs. 183.00 on your every purchase.

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