We recommend ?BUY? on DILIP BUILDCON LTD for a target of INR 1365 – valuing the company at P/E 26x of FY19E Earning.
Investment Rationale:
- DBL is known for its timely and efficient project execution skills.
- Largest owner of Construction equipment’s.
- Differentiated Business Model, focusing on roads and government contracts with equipment ownership, skilled manpower, minimal subcontracting and backward integration for profitable growth.
- On track to lower inventory/ working capital cycle.
- Asset Monetization, Limited Capex to aid containing elevated debt levels going forward.
- Superior execution push the revenue growth high; Outlook improved further.
- Dilip Buildcon has Pan India Project Execution Capability.
- Building a strong corporate foundation through timely project delivery.
- In-house design, engineering and construction.
- Established relationship with public sector clientele and excellent pre-qualification credential
Valuations And View:
Dilip Buildcon Limited (DBL) is one of the leading private sector road focused EPC contractors in India. Their core business is undertaking construction projects across India in the road and irrigation sectors. DBL’s strength lie in its ability to execute projects on time, within cost and of the highest quality. We value the business at 26x FY19E EPS and recommend a BUY rating on the stock with a target price of INR 1365 per share.
Risk & Concerns
- Competition risk: The Company competes with a number of Indian infrastructure operators in acquiring concessions for both new and existing road projects. After two decades of consistent competition, it has now eased out relatively in the last two years.
- Capital-intensive business risk: Infrastructure business is capital-intensive by nature. Availability of funds is critical for bidding of projects, paticularly fund based projects such BOT-toll, hybrid annuity model.
- Input cost risk: The availability of the right quality and quantity of resources is critical for the timely completion of infrastructure projects. Any unexpected increase in the input costs will have direct impact on margins.
- Labour risk: People represent the most valuable asset in the construction business. Undue attrition could lead to loss of competitive edge. Recruitment and retention of trained and talented professionals is an industry-wide problem.
Company Background
Dilip Buildcon Limited (DBL) is the largest road construction company in India. Over the years, since its incorporation in 2006, through outstanding track performance of constructing landmark infrastructure projects in record time, DBL has moved to a different league altogether. DBL’s strength lie in its ability to execute projects on time, within cost and of the highest quality. Its clientele in the road segment includes National Highway Authority of India (NHAI), state governments and private companies. The company is also an established player in irrigation, urban development and mining segments.
Dilip Buildcon is one of the leading private sector road focused EPC contractors in India. Their core business is undertaking construction projects across India in the road and irrigation sectors. They specialize in constructing state and national highways, city roads, culverts and bridges. DBL with its differentiated business model that lays on project selection and execution with operational efficiency continues to remain one of the prime beneficiaries of Govt?s Bharatmala project. Initially started with presence in Madhya Pradesh, DBL ventured out into other states in India and currently has presence in almost 16 states. Witnessing opportunities in other space, DBL also diversified into segment like irrigation, urban development and mining in 2014 and 2015.
Products:
- Construction of Roads and Highways
- Irrigation Activity
- Urban Development and Mining Activity
Industry Overview
India has the second largest road network across the world at 4.7 million km. This road network transports more than 60 per cent of all goods in the country and 85 per cent of India’s total passenger traffic. Road transportation has gradually increased over the years with the improvement in connectivity between cities, towns and villages in the country. The Indian roads carry almost 90 per cent of the country’s passenger traffic and around 65 per cent of its freight. In India sales of automobiles and movement of freight by roads is growing at a rapid rate. Population of Indian cities will increase from 340 million in 2008 to 590 million by 2030. The investment required for building urban infrastructure in India, over the next 20 years, is estimated at approximately USD 1 trillion. By 2031, about 600 million Indians will reside in urban areas, an increase of over 200 million in just 20 years.
