Ashoka Buildcon rides on a robust order book

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Ashoka Buildcon Ltd’s results for the September quarter were a mixed bag, with lacklustre revenue growth offset by an order book that looked inspiring.

As in the case of its peers, the monsoon led to a blip in the pace of the company’s project execution. To add to this, some slow-moving projects delayed revenue accretion.

Net revenue at Rs452 crore was 5.3% lower than a year ago, due to contraction in revenue from the engineering, procurement and construction (EPC) segment, which comprises a major chunk of the total. The very small BOT (build-operate-transfer) road projects, however, posted a jump in revenue as both traffic on the routes increased and toll collections grew.

In spite of lower revenue, the early completion of one key power transmission and distribution (T&D) project in Bihar gave a leg-up to profitability. Ashoka Buildcon reported an impressive 220 basis points year-on-year growth in its operating margin to 17.4%. Raw material costs came down as a percentage of sales. A basis point is 0.01%.

But analysts are concerned about some slow-moving projects in the company’s order book. A report by HDFC Securities Ltd says that it has lowered its revenue guidance for fiscal year 2017 from the earlier 10-15% to 5-8%. But the report also adds that a higher share of EPC projects may help reduce margin volatility as it gets the advantage of commodity price variations, which is not possible in BOT projects where costs are fixed.

What is most impressive, though, is the order book of Rs5,500 crore following order inflows of around Rs1,900 crore during the September quarter. That assures revenues for the next three years. Further, a higher share of roads in the order book increases profitability compared to T&D projects.

Investors are hopeful that higher toll collections on the back of improving macroeconomic conditions should be a long-term positive for Ashoka Buildcon’s stock. Toll collections will improve cash flows and ease balance-sheet stress.

Still, the stock has underperformed the benchmark mid-cap indices in the last few months, with demonetization dampening the sentiment further