Ashoka Buildcon: Q2-25 Earnings Call Highlights

Transition marked by divestments, acquisitions, & focus on higher-margin projects. Optimism driven by new projects & asset monetisation. Outlook positive with strong order book & debt reduction

Money Muscle

Nov 26, 2024

ashokabuildcon.com | NSE: ASHOKA

1. Key Takeaways

1.1 TLDR

Ashoka Buildcon is navigating a transitional phase marked by strategic divestments, acquisitions, and a focus on higher-margin projects.
Short-term profitability remains under pressure due to legacy projects
Long-term outlook appears positive with a strong order book, anticipated debt reduction, and a strategic shift towards improved margins.

1.2 Operational Highlights:

Industry Overview and Ashoka's Position: India's road infrastructure investment boom is driving growth in connectivity and economic development. Ashoka Buildcon is capitalising on this opportunity through its active participation in NHAI's projects, including TOT and InvIT initiatives.
Strategic Divestment and Acquisition: Ashoka Concessions Limited (ACL), a subsidiary, has entered into an agreement to divest 5 subsidiary companies for an enterprise value of INR 5,718 crores, resulting in an equity value of INR 2,539 crores. Simultaneously, Ashoka Buildcon is acquiring a 34% stake in ACL from Macquarie SBI Infrastructure Investment Private Limited and SBI Macquarie Infrastructure Trust for INR 1,526 crores. These transactions highlight a strategic shift towards consolidating ownership and streamlining its portfolio.
Land Monetization and Project Updates: The company successfully monetized land owned by Viva Highways Limited (wholly owned subsidiary) for INR 453 crores. Ashoka Buildcon secured new projects from MMRDA, CIDCO, and MSRDCL, boosting its order book. Additionally, the company received completion certificates for HAM projects and declared commercial operation dates for various stretches, paving the way for annuity receipts.
Financial Performance and Outlook: The company recorded a consolidated revenue growth of 16% YoY in Q2 FY25, driven by robust performance in the power EPC segment and land monetization. EBITDA margins for the standalone business remained under pressure due to legacy projects with lower margins nearing completion. Management guided towards a flattish revenue growth for FY25 with potential improvement in EBITDA margins in H2. Double-digit margins are expected to return in FY26 as new projects with higher margins contribute to revenue.

1.3 Key Themes:

Order Book: The current order book stands at INR 11,104 crores as of September 30, 2024. Including new orders received post-September and L1 bids, the total order book stands at INR 15,424 crores.
Debt Profile: Consolidated debt stood at INR 6,881 crores as of September 30, 2024. The company expects a significant debt reduction of INR 3,000-3,500 crores by March 2025 through monetization proceeds and debt restructuring.
Working Capital: Increased working capital requirements, particularly in the power EPC segment, contributed to a rise in debt. The management expects this trend to reverse in the coming quarters as projects near completion.
Margin Improvement: While legacy projects continue to impact margins, the company is securing new projects with double-digit margins. This transition is expected to reflect positively on profitability starting FY26.

1.4 Key Quotes

On double-digit margins: "The double-digit numbers would be seen only in Q1, Q2 FY '26."
On order inflow guidance: "We hope we should pick up around INR4,000 crores to INR5,000 crores in the balance part of the year."
On debt reduction: "We expect that at least of INR3,000 crores, INR3,500-odd crores of debt definitely will go down before March. And then balance will happen in post March."
On land sale: "It has been sold. We have declared it was sold to Microsoft India."

1.5 Analyst Concerns:

Margin trajectory: Analysts expressed concerns over the consistent delay in achieving double-digit EBITDA margins and sought clarity on the timeline and drivers for margin improvement.
Working capital management: The significant increase in debt, primarily attributed to working capital requirements, raised questions about the company's working capital management practices.
Debt reduction strategy: Analysts sought details on the debt reduction strategy beyond monetization proceeds, particularly in light of the anticipated delay in achieving operating cash flow generation sufficient to deleverage.

Ashoka Buildcon Limited Q2 FY '25 Earnings Call FAQ

1. Why has Ashoka Buildcon's debt increased significantly in the first half of FY '25?

The increase in debt is primarily attributed to a longer working capital cycle in power sector projects secured in FY '23. These projects, nearing completion, demanded higher working capital, funded through loans from subsidiaries and working capital lenders. This trend is expected to reverse, with a debt reduction of INR 300-400 crores anticipated by June '25 as these projects conclude and receivables are collected.

2. When can we expect Ashoka Buildcon to achieve double-digit EBITDA margins again?

While previous guidance suggested a quicker return to double-digit margins, it's now expected in Q1/Q2 of FY '26. This delay is due to the lower margin projects secured post-COVID coming to an end. New projects are being bid and secured at 11%-12% margins, ensuring double-digit profitability in the future.

3. What is the status of Ashoka Buildcon's plans to monetize the Jaora-Nayagaon and Chennai ORR projects?

The Share Purchase Agreement (SPA) with NIIF for these assets has expired. However, the company continues to engage with potential buyers. For Chennai ORR, the company is consolidating its stake and restructuring debt before taking it to the market. For Jaora-Nayagaon Toll Road Company, permissions are awaited from the state government for a share transfer, and the company aims to consolidate the remaining stake held by Macquarie.

4. How is the land sale by Viva Highways Limited reflected in Ashoka Buildcon's Q2 FY '25 financial results?

The INR 453 crore land sale is recorded as regular revenue in the consolidated financial statements. This is because land purchase and sale are part of Viva Highways Limited's regular business operations. The profit from this sale, after accounting for expenses, is approximately INR 370 crores.

5. What is the outlook for Ashoka Buildcon's revenue growth in FY '25 and FY '26?

While FY '25 revenue is expected to remain flat compared to the previous year due to the conclusion of existing lower-margin projects, a growth of 10%-15% is projected for FY '26. This growth will be driven by the execution of the current order book and new orders secured at higher margins.

6. What is the remaining equity commitment for the HAM projects and the planned capex for H2 FY '25?

The remaining equity commitment for current HAM projects is approximately INR 100 crores, expected to be fully infused before March '25. Planned capital expenditure for the second half of FY '25 is estimated to be between INR 35-40 crores.

7. What is the book value of the land bank remaining after the recent sale, and what is its estimated market value?

The remaining land bank held by subsidiaries has a book value of approximately INR 210 crores. Considering an average hold period of 6-7 years, its estimated market value could be 3x-4x the book value, representing a significant potential for future monetization.

8. How will the proceeds from the sale of 5 BOT projects to the Indian Highway Concessions Trust be utilized?

Of the total enterprise value of INR 5,718 crores, INR 2,539 crores represents equity value. After settling the INR 1,526 crores payment to SBI Macquarie for their 34% stake, the remaining proceeds will be utilized to reduce Ashoka Buildcon's consolidated debt, which is expected to decrease by at least INR 3,000-3,500 crores before March '25.

Source: Link to Earning Call Transcript

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