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Keepin’ the Road Hot
Subdued topline, margin expansion keeps earnings in line
ARSS reported a depressing topline growth of 14.2% YoY at INR3bn (vs
our expectation of INR3.9bn), impacted by the extended monsoon
season during Q3FY11 across the Eastern region of the country. A
277bps YoY expansion in OPMs to 21.8%, led majorly by savings on
raw material and direct expenses, though ensured a 30.8% YoY rise in
operating profits to INR659mn. However, higher interest (+109.4%
YoY) and depreciation (+160.3% YoY) charges played a spoilsport,
containing net profits growth to a meagre 2% YoY to INR261mn.
Diversified order backlog, poised for growth
ARSS closed FY10 with an outstanding order backlog of ~INR35bn
(2.3x FY11E revenues). While high margin railways (45%) and road
projects (43%) have dominated majority of the order book in the past,
diversification into execution of irrigation and canal construction
works is presently on. The same is expected to mitigate the risk of
slowdown in revenues from any segment due to unforeseen
circumstances. The execution period of the present order backlog
stands at 18-24 months, with an average ticket size of INR1-1.25bn
Tone down earnings by 5.8% for FY12, upgrade to ‘Buy’
We tone down our earnings estimates for FY12 by 5.8%, factoring in a
higher than anticipated interest charges on account of rising working
capital requirements. Backed by the 18-24 months revenue visibility
pertaining to the present order backlog, ARSS looks set to deliver a
~30% earnings CAGR over the FY11-13 period. We remain confident
on its management to capitalize on the high growth opportunities in
the sector while maintaining the exhibited performance and
competitiveness. Post the near 43% fall in the stock price over the past
three months, valuations seem attractive for investors looking to make
fresh entries. Upgrade to ‘Buy’ with Mar’12 based price target of
INR796.
Impressive track record, extensive
management expertise
ARSS boasts of an extensive track record of executing
over 86 projects involving construction of 300kms of
roads and highways, 200kms of rail tracks, ten minor and
major bridges including general civil engineering works.
Over the past few years, it has carved a niche for itself by
mobilizing resources and personnel at project sites across
the country at short notice while adhering to quality and
timelines, thereby earning credibility from clients. An
experienced promoter group at the helm of affairs
coupled with the high growth sectoral opportunities on
offer gives us confidence of a continuous ramp up in
business volumes and sustenance of potentially higher
margin projects.
An illustration depicting the farsighted intent of ARSS’s
management is its conscious decision to invest in a fleet
of construction equipment assets. Though the strategy
requires deployment of substantial part of its earnings as
capex every year against hiring of equipments on lease
basis, we believe in the longer run, maintaining a sizable
gross block is an advantage enabling rapid mobilization
of resources across project sites. In addition, a relatively
lesser dependence on outside parties during execution
largely eliminates project level delays and cost overruns.
Exhibit 1: Presence of a large equipment fleet
Description Quantity (Nos.)
Crusher & Crusher plant 26
Hyva , Tipper & Ashok Leyland 334
Tipper Cabin 30
Batch Mix Plant 21
Dozer 2
Loader 25
JCB 3DX 35
JCB 4DX 19
D.G. Set 52
Hot Mix Plant 1
Road Roller 5
Lathe Machine 2
Drum Mix Plant 8
Bitumen Tanker 1
Wet mix Paver 17
Wet Mix Plant 4
Volvo DD 60 4
Transit Mixture* 29
Compressor 8
Tandom Roller 13
Concrete Mixture 5
Crain 12
Soil Compactor 23
Paver Finisher 6
Tata Hitachi 3
Water Pump 64
Source: Company
Exhibit 2: Ownership of 8 crushing plants
Crusher
plants
Location
Capacity per
machine
(tons/hr)
I Champajhar in the district of Khurda 100
II Chhatramain the district of Khurda 150
III Nityanandpur in the district of Dhenkanal 350
IV Bhanjanager in the district of Ganjam 100
V Amalaguda in the district of Ganjam 200
VI Kharbuin in the district of Boudh 200
VII Bhudka, in the district of Ganjam 200
VIII Digapandi in the district of Ganjam 200
Source: Company
Order book set to grow at ~10% CAGR
during FY11-13
ARSS bagged fresh orders worth INR10bn during
Q4FY10 and closed the fiscal with an outstanding order
backlog of ~INR35bn (2.3x FY11E revenues). During the
first three quarters of FY11, the company has already
been awarded new jobs amounting to INR12.8bn
majorly across the railways, roads and industrial divisions.
Given the company’s bidding pipeline of INR90bn in the
current fiscal with additional L1 status for contracts
worth INR5bn (excluding the lowest bidder status in the
City Bus Stand projects at Bhubaneshwar (INR15bn) and
Cuttack (INR7bn)), we expect fresh inflows of INR18bn
and INR25.2bn over the next two years. The same
should translate into year-end backlog figures of
INR40.3bn and INR44.8bn for FY11 and FY12
respectively, contributing towards ~10% CAGR in order
book during FY11-13.
A majority of the company’s existing contracts (~80%)
emanate from various public sector undertakings
including government agencies, reducing the risk of
defaults and delayed payments. Among the private
clientele too, ARSS’s customer centric approach has
enabled it to develop long term sustained relationships
resulting in a fair chunk of repeat/relationship orders.
Few of the key clientele include Ministry of Railways, Rail
Vikas Nigam Ltd, PWD – Orissa, IOCL, NHAI, Vedanta,
JSPL and NALCO. In terms of geography, though ARSS
has been successful in expanding the scope of its
operations across 14 states in India, its dependence on
Orissa & other Eastern States still remains at ~40%.
Sustenance of better OPM, return
ratios till FY13
ARSS has historically been following a strategy of
selectively choosing its clients and projects - a major
factor helping higher OPMs vis-à-vis industry peers. In
addition, an ownership of critical aggregate mines
coupled with the execution of bulk of operations in
Orissa and the adjoining Eastern states (~40%) has
ensured preservation of margins during mobilization of
resources and manpower across project sites. The same
has resulted in the company registering an average OPM
of 15.2% over the past five years and 16.6% over the past
three years. Helped by lower commodity prices, OPM for
Q2FY11 peaked to an all time high of 22.7%.
We expect a healthy flow of fresh order inflows from
Eastern states to continue over the next 18-20 months
backed by a pick-up in industrial activity (particularly
metals) and opening of fresh tenders by the Indian
Railways on the Eastern Freight Corridor. The same
should ensure sustenance of better OPMs (18.5% for
FY11 and 17.5% for FY12) albeit a likely increase in
commodity prices. Backed by the continuation of growth
momentum on the operating front, we anticipate the
average return ratios during FY11-13 to remain robust at
24.6% (RoCE) and 29.4% (RoNW).
Valuation & Recommendation
Revise earnings estimates: We tone down our earnings
estimates for FY12 by 5.8% factoring in a higher than
anticipated interest charges on account of rising working
capital requirements.
High revenue growth to bolster 30%
CAGR in earnings for FY11-13
Backed by the 18-24 months revenue visibility pertaining
to the present order backlog (~INR39bn) along with the
additional fresh inflows expected during Q4FY11, ARSS
looks set to deliver a 38.5% CAGR in its business volumes
over FY11-13 period. Consequently, we expect revenue
figures of INR15.4bn and INR22.2bn for FY11 and FY12
respectively. A strong operational performance backed
by a better margin profile vis-à-vis peers should translate
into a 30.4% CAGR in earnings. Hence we calculate ARSS
to post net profits of INR1.2bn and INR1.6bn during the
aforementioned period, translating into a fully diluted
EPS of ~INR80 and INR107.
Valuations attractive post recent
correction, upgrade to ‘Buy’
Our revised target price of INR796 based on the average
of the three valuation methodologies adopted indicates
a potential upside of 24% from present levels. We have a
positive outlook on ARSS and remain confident on its
management to capitalize on the available high growth
opportunities in the sector, while maintaining the
exhibited performance and competitiveness. Post nearly
43% fall in the stock price over past three months we
believe the valuations seem attractive for investors
looking to make fresh entries. Upgrade to ‘Buy’ with
Mar’12 based price target of INR796.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Keepin’ the Road Hot
Subdued topline, margin expansion keeps earnings in line
ARSS reported a depressing topline growth of 14.2% YoY at INR3bn (vs
our expectation of INR3.9bn), impacted by the extended monsoon
season during Q3FY11 across the Eastern region of the country. A
277bps YoY expansion in OPMs to 21.8%, led majorly by savings on
raw material and direct expenses, though ensured a 30.8% YoY rise in
operating profits to INR659mn. However, higher interest (+109.4%
YoY) and depreciation (+160.3% YoY) charges played a spoilsport,
containing net profits growth to a meagre 2% YoY to INR261mn.
Diversified order backlog, poised for growth
ARSS closed FY10 with an outstanding order backlog of ~INR35bn
(2.3x FY11E revenues). While high margin railways (45%) and road
projects (43%) have dominated majority of the order book in the past,
diversification into execution of irrigation and canal construction
works is presently on. The same is expected to mitigate the risk of
slowdown in revenues from any segment due to unforeseen
circumstances. The execution period of the present order backlog
stands at 18-24 months, with an average ticket size of INR1-1.25bn
Tone down earnings by 5.8% for FY12, upgrade to ‘Buy’
We tone down our earnings estimates for FY12 by 5.8%, factoring in a
higher than anticipated interest charges on account of rising working
capital requirements. Backed by the 18-24 months revenue visibility
pertaining to the present order backlog, ARSS looks set to deliver a
~30% earnings CAGR over the FY11-13 period. We remain confident
on its management to capitalize on the high growth opportunities in
the sector while maintaining the exhibited performance and
competitiveness. Post the near 43% fall in the stock price over the past
three months, valuations seem attractive for investors looking to make
fresh entries. Upgrade to ‘Buy’ with Mar’12 based price target of
INR796.
Impressive track record, extensive
management expertise
ARSS boasts of an extensive track record of executing
over 86 projects involving construction of 300kms of
roads and highways, 200kms of rail tracks, ten minor and
major bridges including general civil engineering works.
Over the past few years, it has carved a niche for itself by
mobilizing resources and personnel at project sites across
the country at short notice while adhering to quality and
timelines, thereby earning credibility from clients. An
experienced promoter group at the helm of affairs
coupled with the high growth sectoral opportunities on
offer gives us confidence of a continuous ramp up in
business volumes and sustenance of potentially higher
margin projects.
An illustration depicting the farsighted intent of ARSS’s
management is its conscious decision to invest in a fleet
of construction equipment assets. Though the strategy
requires deployment of substantial part of its earnings as
capex every year against hiring of equipments on lease
basis, we believe in the longer run, maintaining a sizable
gross block is an advantage enabling rapid mobilization
of resources across project sites. In addition, a relatively
lesser dependence on outside parties during execution
largely eliminates project level delays and cost overruns.
Exhibit 1: Presence of a large equipment fleet
Description Quantity (Nos.)
Crusher & Crusher plant 26
Hyva , Tipper & Ashok Leyland 334
Tipper Cabin 30
Batch Mix Plant 21
Dozer 2
Loader 25
JCB 3DX 35
JCB 4DX 19
D.G. Set 52
Hot Mix Plant 1
Road Roller 5
Lathe Machine 2
Drum Mix Plant 8
Bitumen Tanker 1
Wet mix Paver 17
Wet Mix Plant 4
Volvo DD 60 4
Transit Mixture* 29
Compressor 8
Tandom Roller 13
Concrete Mixture 5
Crain 12
Soil Compactor 23
Paver Finisher 6
Tata Hitachi 3
Water Pump 64
Source: Company
Exhibit 2: Ownership of 8 crushing plants
Crusher
plants
Location
Capacity per
machine
(tons/hr)
I Champajhar in the district of Khurda 100
II Chhatramain the district of Khurda 150
III Nityanandpur in the district of Dhenkanal 350
IV Bhanjanager in the district of Ganjam 100
V Amalaguda in the district of Ganjam 200
VI Kharbuin in the district of Boudh 200
VII Bhudka, in the district of Ganjam 200
VIII Digapandi in the district of Ganjam 200
Source: Company
Order book set to grow at ~10% CAGR
during FY11-13
ARSS bagged fresh orders worth INR10bn during
Q4FY10 and closed the fiscal with an outstanding order
backlog of ~INR35bn (2.3x FY11E revenues). During the
first three quarters of FY11, the company has already
been awarded new jobs amounting to INR12.8bn
majorly across the railways, roads and industrial divisions.
Given the company’s bidding pipeline of INR90bn in the
current fiscal with additional L1 status for contracts
worth INR5bn (excluding the lowest bidder status in the
City Bus Stand projects at Bhubaneshwar (INR15bn) and
Cuttack (INR7bn)), we expect fresh inflows of INR18bn
and INR25.2bn over the next two years. The same
should translate into year-end backlog figures of
INR40.3bn and INR44.8bn for FY11 and FY12
respectively, contributing towards ~10% CAGR in order
book during FY11-13.
A majority of the company’s existing contracts (~80%)
emanate from various public sector undertakings
including government agencies, reducing the risk of
defaults and delayed payments. Among the private
clientele too, ARSS’s customer centric approach has
enabled it to develop long term sustained relationships
resulting in a fair chunk of repeat/relationship orders.
Few of the key clientele include Ministry of Railways, Rail
Vikas Nigam Ltd, PWD – Orissa, IOCL, NHAI, Vedanta,
JSPL and NALCO. In terms of geography, though ARSS
has been successful in expanding the scope of its
operations across 14 states in India, its dependence on
Orissa & other Eastern States still remains at ~40%.
Sustenance of better OPM, return
ratios till FY13
ARSS has historically been following a strategy of
selectively choosing its clients and projects - a major
factor helping higher OPMs vis-à-vis industry peers. In
addition, an ownership of critical aggregate mines
coupled with the execution of bulk of operations in
Orissa and the adjoining Eastern states (~40%) has
ensured preservation of margins during mobilization of
resources and manpower across project sites. The same
has resulted in the company registering an average OPM
of 15.2% over the past five years and 16.6% over the past
three years. Helped by lower commodity prices, OPM for
Q2FY11 peaked to an all time high of 22.7%.
We expect a healthy flow of fresh order inflows from
Eastern states to continue over the next 18-20 months
backed by a pick-up in industrial activity (particularly
metals) and opening of fresh tenders by the Indian
Railways on the Eastern Freight Corridor. The same
should ensure sustenance of better OPMs (18.5% for
FY11 and 17.5% for FY12) albeit a likely increase in
commodity prices. Backed by the continuation of growth
momentum on the operating front, we anticipate the
average return ratios during FY11-13 to remain robust at
24.6% (RoCE) and 29.4% (RoNW).
Valuation & Recommendation
Revise earnings estimates: We tone down our earnings
estimates for FY12 by 5.8% factoring in a higher than
anticipated interest charges on account of rising working
capital requirements.
High revenue growth to bolster 30%
CAGR in earnings for FY11-13
Backed by the 18-24 months revenue visibility pertaining
to the present order backlog (~INR39bn) along with the
additional fresh inflows expected during Q4FY11, ARSS
looks set to deliver a 38.5% CAGR in its business volumes
over FY11-13 period. Consequently, we expect revenue
figures of INR15.4bn and INR22.2bn for FY11 and FY12
respectively. A strong operational performance backed
by a better margin profile vis-à-vis peers should translate
into a 30.4% CAGR in earnings. Hence we calculate ARSS
to post net profits of INR1.2bn and INR1.6bn during the
aforementioned period, translating into a fully diluted
EPS of ~INR80 and INR107.
Valuations attractive post recent
correction, upgrade to ‘Buy’
Our revised target price of INR796 based on the average
of the three valuation methodologies adopted indicates
a potential upside of 24% from present levels. We have a
positive outlook on ARSS and remain confident on its
management to capitalize on the available high growth
opportunities in the sector, while maintaining the
exhibited performance and competitiveness. Post nearly
43% fall in the stock price over past three months we
believe the valuations seem attractive for investors
looking to make fresh entries. Upgrade to ‘Buy’ with
Mar’12 based price target of INR796.
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