ICICI Securities Assigns Target Price at Rs 311, Maintains Buy Rating

by | Nov 5, 2024 | 0 comments

In a positive recommendation on Ashoka Buildcon, ICICI Securities Assigns Target Price has given a “Buy” rating on the stock with a target price of Rs 311. According to the research report dated November 4, 2024, brokerage firm ICICI Securities finds several positive developments and growth prospects with the company, making Ashoka Buildcon an attractive investment proposition.

Strengthening Financials through Strategic Asset Sale

The biggest move recently by Ashoka Buildcon has been a commitment to sell its Build-Operate-Transfer assets to India Highway Concession Trust, which is sponsored by a large Canadian pension fund-the Caisse de dépôt et placement du Québec, or CDPQ for short. The proceeds will be in the form of approximately INR 25 billion in size, thereby providing quite an infusion of funds that could be utilized for more than one strategic purpose in its books.

The capital primarily serves as an exit route for Macquarie, the fund which invested in Ashoka Buildcon way back in the year 2012. This had until now been a cause of worry for many investors as delayed plans to facilitate the exit of this investor had been an issue; however, with the funds raised from the asset sale, Ashoka is placed firmly on the right foot to address this and increase investor confidence.

Good times ahead for Ashoka Buildcon Growth

ICICI Securities upgraded its recommendation on Ashoka Buildcon to “Buy” on the back of recent strategic moves that significantly enhanced the company’s financial positioning and operational outlook. Here are a few key reasons why Ashoka Buildcon is a worthwhile investment:

1. Solid Order Inflow:

Order inflow at the company in the first half of FY25 stood healthy at INR 69 billion. This solid order inflow translates to a strong order book worth INR 190 billion, which is a solid foundation for future growth and profitability.

2. Strong Order Book:

The INR 190 billion order book is truly robust for Ashoka, hence presenting a competitive advantage and high revenue prospects for the years ahead. The order book sustains revenues and thus hints at high market demand for the infrastructure capabilities of Ashoka.

3. Sum-of-the-Parts (SoTP) Method of Valuation:

Following the Sum-of-the-Parts (SoTP) methodology, ICICI Securities arrives at a target price of INR 311 per share for Ashoka Buildcon. It is based on the several different aspects of Ashoka’s business operations:

Engineering, Procurement, and Construction (EPC) Business:

At 12x projected FY26 EPS.

Asset Valuation:

HAM assets have been valued at INR 26 billion and BOT assets have been valued at transaction value with the necessary adjustments on account of Ashoka’s obligation to Macquarie.
The cash flow position of Ashoka Buildcon will be improved and strengthened while selling BOT assets to India Highway Concession Trust making room for new projects and partnerships. This again lowers the long-tail risk of the previous asset obligations that had been very high on investor concerns.

Understanding BOT and HAM Assets of Ashoka Buildcon

For investors, it may be essential to understand the asset portfolio of Ashoka Buildcon to gauge the growth prospect. Ashoka Buildcon operates in two different asset models: BOT and HAM. Both represent different approaches to executing and monetizing large infrastructure projects.

BOT Assets:

In the BOT model, it establishes, operates, and maintains infrastructure assets, be it highways or other entities, for a specific term before handing them over back to the state. Offloading these assets to CDPQ’s trust is quite strategic for Ashoka. It gets off long-term asset obligations while deploying all the capital for new growth opportunities.

Hybrid Annuity Model (HAM) Assets:

The hybrid annuity model (HAM) is a Public-Private Partnership model, which is a hybrid model between BOT and EPC models, offering a relatively more predictable revenue stream as compared to BOT and reduced risk exposure. ICICI Securities has placed a value of INR 26 billion on Ashoka’s HAM assets, which suggests confidence in the company’s future generation of revenues from these assets.

Sectoral Advantages and Future Growth Potential

The macroeconomic factors under which infrastructure has good growth prospects in India include:

The government of India still considers infrastructures to be one of the drivers for economic growth and has presented policies with budgetary allocations for road connectivity, urban infrastructures, and transport connectivity. All such attention will reflect positively on companies like Ashoka Buildcon.

Order Pipeline Expanding: The order book of Ashoka Buildcon is solid, representing steady lines of projects for the next several years. The significant intake of orders also highlights the fact that the reputation as well as the technical credentials of the company make it a partner of choice in the realm of infrastructure.

Key Financial Parameters

The valuation of Ashoka Buildcon by ICICI Securities considers the following financial parameters:

  • EPC Business Valuation: The EPC segment is valued at 12x FY26E EPS, which denotes high confidence in the earning growth potential of this business segment.
  • Asset Valuation: HAM assets are placed at INR 26 billion, and BOT is valued based on the transaction value discounted for Macquarie’s exit. These valuations reflect the stable revenue and growth prospects of Ashoka’s asset portfolio.
  • Expected Capital Deployment: The fresh capital inflow in the form of the sale of BOT assets will help not only in Macquarie’s exit but also for Ashoka to invest in new projects, expand its operation, and pay off its existing debt burden.
  • Risks and Challenges to be Contemplated: ICICI Securities still sees hope in Ashoka Buildcon, but investors are advised to look into the following risks:
  • Dependence on Government Policies: Like other infra companies, the majority of Ashoka Buildcon’s revenue comes from government policies and investments in the Infrastructure sector. Any delay or reduction in government spending can hurt its project timelines and revenue promises.
  • Risk of Execution: Most infrastructure projects are prone to issues like regulatory hurdles, land acquisition, and delays in construction among others. Ashoka has to properly handle these risks so that it does not lose out on account of cost overruns or delays in the completion of a project.
  • Competition: The infrastructure sector in India is highly competitive with several established players competing for government contracts. Ashoka Buildcon needs to steadily bank on its technical muscle and strategic alliances to sustain its competitive edge.
  • Macroeconomic Factors: External factors like a rise in interest rates, fluctuating raw materials prices, and potential labour shortages may affect the overall cost and profitability of Ashoka’s projects.

Road Ahead for Ashoka Buildcon

A solid order book, strategic sales of assets, and growth clarity would be fundamental reasons why Ashoka Buildcon should continue its growth in the infrastructure sector. The target price of Rs 311 per share from ICICI Securities reflects confidence through a well-diversified business model and robust financials for Ashoka going forward.

BOT Asset sale to the trust of CDPQ is one of the strategic moves that will further fortify Ashoka’s balance sheet and ensure greater financial elbow room for future project opportunities. It combines a strong order inflow with a valuation approach in multiple facets of the business model of Ashoka, making an attractive investment proposition for those interested in India’s infrastructure growth sector.

Conclusion

Ashoka Buildcon’s recent developments have further cemented the financial base of the company and reinforced its growth trajectory. A Buy recommendation at a target price of Rs 311 from ICICI Securities captures the brokerage’s expectation that strategic initiatives by Ashoka, such as the recently completed BOT asset monetization, would add tremendous value for the shareholders in the long run.

Ashoka Buildcon comes with an extremely promising story for the investor to tap into the fast-expanding infrastructure sector of India. The very stable order book and the framework of strategic asset management set in place, with the clear vision of growth ahead, makes Ashoka Buildcon poised to take advantage of internal and external momentum in infrastructure investments.

This should be balanced by investors considering the prospect of growth inherent in the investment strategy set up in line with the portfolio focus. Ashoka Buildcon stands out as it seeks to enhance operational efficiency as well as growing market presence in the Indian infrastructure landscape, well poised to serve shareholders with strong return generation.

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