Dilip Buildcon: Rising orders point to better outlook

Earnings could get a leg-up from early completion of projects

Shares of Dilip Buildcon have gained a lot of traction recently, rising over 18 per cent to nearly ~962 from the closing low of ~812 in the first fortnight of February, after consolidating since October last year. And, there could be more gains in store.

The optimism comes on account of the company receiving letters of award in the past one week from the National Highways Authority of India (NHAI) for two new hybrid annuity model projects worth ~44.73 billion in Karnataka and ~20.13 billion in Andhra Pradesh. Moreover, it has been declared the lowest bidder by the NHAI for three new hybrid annuity model projects valued at ~53.90 billion in Karnataka and Jharkhand.

The new orders, along with those won earlier in the quarter, suggest that the company will meet its FY18 order guidance. This is in contrast to the muted pace of ordering by the NHAI during the first nine months of FY18, which had led to some concerns over the company’s revenue growth, despite its good execution track record.

Analysts at JM Financial had said while the current pace of execution was overwhelming, higher execution also implies pressure on order inflows to maintain growth.

Nomura, too, had said strong execution led to an increase in FY18 sales, and order inflows in Q4 of FY18 would be the next trigger. The brokerage maintained its ‘positive’ stance on the stock, with a target price of ~1,265.

The company, despite slow order flows in the first nine months (about ~35 billion), had maintained its order guidance of ~80-100 billion for FY18.

Increased budgetary allocations on infrastructure and the Bharat Mala project, among others, are likely to drive the order flows for the company, thereby driving its earnings.

Divyata Dalal at Sytematix Shares said with order flows having picked up now, the higher-than-expected orders, coupled with timely execution, could lead to an upgrade in revenue and earnings visibility. However, higher order inflows and execution of hybrid annuity model projects can put pressure on its working capital requirements, which needs to be monitored, Dalal said.

Analysts at Kotak Institutional Equities said winning bids by Dilip Buildcon suggest rational pricing by market participants, as the company had won ~114 billion worth of road construction orders in the 11 months of FY18, more than the ~110 billion project cost estimated by the NHAI. This means no risks to profitability.

Given its track record of early completion of projects, Dilip Buildcon can also benefit from the associated bonus, said Soumen Chatterjee, head of research at Guiness Securities. Also, those at Nomura said the firm’s operating profit margins were to improve on early completion bonus. They expect a 250-basis point sequential improvement in margins in the March 2018 quarter to about 20 per cent.