More upside in Dilip Buildcon stock

Rising orders, leaner balance sheet, low borrowing cost to drive earnings

The Dilip Buildcon stock, which hit an all-time high on Wednesday, has risen almost fivefold in the past year. The strong investor sentiment is on account of a fast-growing order book, leading to regular improvement in revenue expectation. This, coupled with efforts to reduce debt and consequently interest costs, is expected to drive earnings further.

The recent order worth Rs 518 crore for engineering, procurement and construction (EPC) work in four-laning some sections of National Highway 48 in Karnataka and news on fundraising further lifted the sentiment. The new orders bode well for the company, which already has an order book (pending execution) of Rs 14,200 crore, equivalent to 2.5 years of annual revenue. As it expects another Rs 7,000-8,000-crore worth of new orders by March, revenue visibility could improve further. 

 

FY19, too, should see the flow improve, given the government's focus on infrastructure and proposed projects such as Bharatmala. Analysts expect NHAI ordering to be scaled up, with road projects of 5,000-6,500 km expected in the next six months. With projects under Bharatmala and others underway, analysts at Kotak Securities expect Dilip Buildcon to actively participate in the coming bids and its order inflow growing from Rs 7,000 crore in FY18 to Rs 11,500 crore in FY20. This should drive earnings expectation further and Divyata Dalal at Systematix Shares says even after the current run-up in the stock price, an uptick in order flow could lead to more gains.

The company is also planning to raise Rs 600 crore through issue of convertible debentures, aimed at reducing its high-cost borrowing. It has finalised sale of its build-operate-transfer (BOT) portfolio of road assets at an estimated Rs 1,600 crore (estimated price-to-book value of 1.05). The sale of capital-intensive BOT projects will boost return on capital employed (RoCE) to 28 per cent in FY19, according to analysts at Axis Securities. While the sale will help cut debt, Rs 4,230 crore at the consolidated level at the end of March 2017 (debt-to-equity ratio 2.5 times), this will also improve credit ratings and lower interest costs (by 100 basis points). 

On the whole, a growing order book, effort to improve project execution, strengthening of the balance sheet (reduction in working capital and debt) and lower interest costs are reasons why analysts remain positive on the stock. Kotak Securities estimates revenue and net profit to grow 23.6 per cent and 32 per cent, respectively, annually over FY17-20. If the company can achieve such growth, expect sentiment to remain elevated.