SOURCE: INCRED RESEARCH, COMPANY REPORTS  

Around 20% of latest OB of companies in our coverage comprise hybrid annuity model (HAM) projects. The concessionaire bears 60% of the project cost of HAM projects and the project-awarding authority bears the remaining 40%.

12% of FY22 OB comprises build-operate-transfer (BOT) projects, which the concessionaire has to fund entirely. As a result, the companies in our coverage have to fund 24% of FY22 OB. 

DBL, PNC and NCC trade at an average 23%/34% discount to their 5-year/ Mar 17-19 average EV/EBITDA, respectively. We believe strong EPC sales growth in FY23F-24F can rerate the valuation multiples close to historical levels. KNR Constructions trades at a sharp 38%/29% premium to its 5-year/ Mar 17-19 average EV/EBITDA, respectively.

SOURCE: INCRED RESEARCH, COMPANY REPORTS  

Salient features of 1QFY23 results

Dilip Buildcon - pieces falling in place for a strong FY24F: Sales rose 5% qoq while opex rose 6% qoq, leading to EBITDA declining 13% qoq. EBITDA margin declined 530bp yoy on account of cost overrun due to delay in legacy HAM projects won in FY18. DBL mentioned that the remaining value of low-margin projects is just Rs4-5bn (2% of OB) – which augurs well for margin in the rest of FY23F. DBL gave sales guidance of Rs100bn for FY23F with ~13% EBITDA margin – we believe this is achievable as OB stands at Rs273bn (2.9x TTM sales). Around 85% of OB is likely to be live by 4QFY23F, which augurs well for execution in FY24F.

IRB Infra - operating results in line but PAT elevated due to one-off: PAT was boosted by Rs4.2bn sales/ Rs3.7bn EBITDA arbitration award from the National Highways Authority of India or NHAI. Excluding the one-off, EPC sales / EBITDA declined 17%/ 27% yoy, respectively. EPC OB was at Rs95bn in Jun 2022 (2.6x TTM sales) – no new orders in 1QFY23. Tolling at IRB Infra’s assets/ private InvIT/ public InvIT grew 8%/ 12%/ -28% qoq, respectively. After the recent equity raising, net debt/EBITDA ratio is likely to reduce from 4.6x (FY21) to 1.3x (FY23F). We believe this can rerate IRB’s EPC vertical, but at 72% equity dilution.

PNC Infra - 3.1x order book cover provides revenue visibility: Sales/EBITDA declined 6%/ 5% qoq, respectively, while EBITDA margin was flat qoq but  down 120bp yoy due to high raw material prices. PNC Infra gave guidance of 15% yoy EPC sales growth and 13-13.5% EBITDA margin for FY23F – in line with our estimates. PNC Infra has Lstatus in seven HAM projects of Rs74bn EPC value (not part of OB). Including these, OB stands at Rs204bn (3.1x TTM sales).

NCC - strong execution and order flow: Despite a 6% qoq dip in sales, EBITDA rose 5% qoq. EBITDA margin was at 9.5% (vs. 8.5% in 4QFY22), and NCC expects it to rise to 11.5% in subsequent quarters with the easing of prices of key raw materials. Post Rs144bn orders in FY22-1QFY23, OB/sales ratio is at 3.7x. NCC expects ~Rs40bn revenue from the Rs99bn Jal Jeevan Mission project of Uttar Pradesh government in FY23F.  

KNR Constructions - slow execution mars results: EPC sales/EBITDA declined 12%/19% qoq, respectively, and EBITDA margin was at 18.5% vs. 20.3% qoq and the 3-year average at 20% due to muted execution in irrigation projects. OB in 1QFY23 stood at Rs86bn (2.5x TTM sales). KNR has won a Rs7.7bn HAM project (Chittoor-Thatchur) which is not a part of Jun 2022 OB. Including this, OB rises to Rs94bn (2.7x TTM sales). The entire OB is expected to be the under construction phase in the rest of FY23F.

IRB InvIT - strong results driven by tariff hike: Gross toll for four assets (excluding Pathankot-Amritsar, Bharuch-Surat, and Surat-Dahisar) grew 70% yoy as traffic yoy in 1QFY22 was impacted due to the second Covid-19 wave and tariff hike of 8-10% in all projects since 1QFY22. Payout was Rs2/unit, in line with the guided run-rate of Rs8/unit for FY23F – a 14% yield based on CMP. Based on CMP and InvIT regulations, IRB InvIT can have debt of up to Rs75bn vs. net debt of Rs12bn as at end-Mar 2022. Thus, we estimate that further acquisitions of up to Rs63bn can be funded via debt, beyond which equity raising would be required. We believe IRB InvIT trades at a fair valuation with an internal rate of return or IRR of 9.5% with 4% p.a. long-term traffic growth, in line with a 3.8% traffic CAGR over FY18-20.

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