Government Infrastructure Loans May Boost Projects, Yet Interest Costs Could Impact Earnings

Key Takeaways

• Government infrastructure funding is poised to boost Ashoka Buildcon’s revenue through expanded road construction opportunities.
  
• Strategic divestments and debt reduction efforts aim to enhance operational efficiency, profitability, and financial health.
  
• Execution and financing risks, coupled with reliance on government projects, could affect Ashoka Buildcon's revenue and profitability if current trends persist.

Catalysts

Engages in the infrastructure development business in India.

• The Indian government has increased its infrastructure budget significantly, which includes a proposal for 50-year interest-free loans to states, as part of a push to accelerate highway projects. This is likely to boost Ashoka Buildcon’s future revenue by creating more opportunities in road construction.
  
• Ashoka Buildcon’s order book stands robust at ₹16,457 crores with significant contributions from road and railway projects. This strong pipeline is likely to contribute to consistent revenue growth and profit margins in the coming quarters.
  
• The company is strategically divesting from five subsidiaries, shifting focus towards a sustainable EPC business, which may improve net margins and streamline operations as it reduces debt and focuses on core areas with higher efficiency and profitability.
  
• The adoption of intelligent and automated machine-aided construction in national highway projects is expected to increase operational efficiency and precision, potentially enhancing profit margins for Ashoka Buildcon.
  
• Ashoka Buildcon's plans to reduce its consolidated debt through asset sales, including BOT and HAM projects, could significantly lower interest expenses, leading to improved net earnings and cash flow.

Ashoka Buildcon Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Ashoka Buildcon's revenue will decrease by 4.9% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 14.5% today to 3.2% in 3 years time.
• Analysts expect earnings to reach ₹2.8 billion (and earnings per share of ₹10.1) by about March 2028, down from ₹15.1 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 45.7x on those 2028 earnings, up from 3.5x today. This future PE is greater than the current PE for the IN Construction industry at 19.2x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 17.94%, as per the Simply Wall St company report.

Ashoka Buildcon Future Earnings Per Share Growth

Risks

• The company's total income for Q3 FY '25 decreased by 10% year-on-year, which could indicate declining revenue growth and profitability if the trend continues.
  
• A significant portion of the company's debt is tied to the completion and sale of assets, and any delays or failures in these transactions could adversely affect their balance sheet and net margins.
  
• There is execution risk related to the completion and monetization of HAM and BOT projects, which constitutes a major part of their financial strategy and could impact earnings.
  
• The interest cost has increased significantly, which could pressure net margins if financing costs continue to rise without corresponding revenue growth.
  
• The reliance on government projects and tender awards presents a risk if there are any policy changes or slower-than-expected project initiation from entities like NHAI or MoRTH, potentially impacting future revenue streams.

Valuation

• The analysts have a consensus price target of ₹281.857 for Ashoka Buildcon based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹357.0, and the most bearish reporting a price target of just ₹213.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹89.3 billion, earnings will come to ₹2.8 billion, and it would be trading on a PE ratio of 45.7x, assuming you use a discount rate of 17.9%.
• Given the current share price of ₹187.16, the analyst price target of ₹281.86 is 33.6% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.