Vascon Engineers Ltd.

Transcription

1 August 10, 2012 Vascon Engineers Ltd. development with conscience CMP ` 40 Target ` 63 Initiating Coverage - Buy Key Share Data Face Value (`) 10.0 Equity Capital (` mn) M.Cap (` mn) wk High/Low (`) 62/34 Avg. Daily Vol BSE Code NSE Code VASCONEQ Reuters Code VASC.BO Bloomberg Code VSCN IN Shareholding Pattern (as on June 30, 2012) Corporates 53% Others 5% FII's 1% Institutions 2% Promoters 39% Source: Capitaline Financials (` mn) Particulars FY11 FY12 FY13E FY14E Net Sales Sales Gr. 35.5% -30.0% 9.2% 30.6% EBIDTA PAT PAT Gr. 20.7% -78.7% 90.5% 76.3% EPS (`) CEPS (`) Key Ratios Particulars FY11 FY12 FY13E FY14E Int Cover (x) P/E (x) P/BV (x) P/Cash EPS (x) M.Cap/Sales (x) EV/EBIDTA (x) ROCE (%) 7.8% 0.9% 5.9% 8.3% ROE (%) 8.9% 2.1% 3.5% 5.9% EBIDTM (%) 9.6% 3.9% 10.1% 10.9% NPM (%) 6.2% 1.9% 3.3% 4.4% Debt-Equity (x) Price Performance Vascon vs BSESMALLCAP 5% 0% -5% -10% -15% -20% -25% -30% -35% -40% -45% Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Vascon BSESMALLCAP Analyst: Vineet P. Agrawal Tel No.: ; Mobile: vineet.agrawal@skpmoneywise.com Company Profile Incorporated in 1986, Vascon Engineers Ltd (Vascon) is an EPC services and real estate development company. Vascon has presence in States like Maharashtra, Goa and Tamilnadu. The company has become turnkey solution provider in EPC segment, since the acquisition of GMP Technical Solutions in FY10. Majority of its revenues are generated through EPC services. Investment Rationale Strong Order backlog of ` 34 bn in EPC services- topline from the segment expected to grow with the CAGR of 17%: Vascon s third party order book is growing at a CAGR of 29%. Currently, it has order backlog of ` 34 bn. Vascon has received orders worth ` 15.2 bn during FY12. We expect Vascon s topline for the segment to grow with a healthy CAGR of 17% between FY12-FY14. Unique business model for real estate resulting in low D/E among peers: Majority of Vascon s projects are through JDAs and JVs. Under JDA, Vascon acquire the development right of the land in exchange with pre-determined portion of revenues. Thus, the company doesn t have to invest in land which is one of the major costs in construction business. This brings down the D/E of the company. Currently, company is maintaing D/E of 0.4x which is quite exceptional in real estate business. Vascon has 64 mn sq ft of land for development of which 57.4% and 6.7% comprises JDAs and JDAs with JV respectively. Focus on Township projects in suburbs meeting customers demand: Slowdown in real estate sales in metropolitan (Tier I) cities, due to skyrocketing prices and muted demand, has led the developers to focus on developing townships in the suburbs and Tear - II cities. Demand for residential properties is strong in suburbs due to lower to moderate cost of projects in these areas. Keeping this in view Vascon has launched various townships in suburbs of metropolitan region and Tier-II cities. These projects includes amenities such as pharmacy, market place, garden, jogging track, party halls etc. fulfilling the aspirations of the prospective customers. Outlook & Recommendation At the current market price of ` 40, the stock is trading at a P/E of 14x and 8x on FY13E and FY14E earnings of ` 2.8 and ` 5.0 respectively. We recommend BUY rating on the stock with a target price of ` 63/- (56% upside) in 18 months using the SOTP method of valuation. Page 1 of 13

2 Industry Overview Introduction: The real estate sector has emerged as one of India s largest drivers of economic growth. As a sector, it provides large scale employment and contributes significantly to the GDP. The sector is divided into four sub-sectors: housing, retail, hospitality, and commercial. The housing sub-sector contributes 5-6% to the country's GDP. Meanwhile, retail, hospitality and commercial real estate are also growing significantly, catering to India's growing needs of infrastructure. Market size of real estate in India has grown with the CAGR of 10% between FY08 FY11. The sector has generated revenue of USD 66.8 mn in FY11. The Demand drivers for real estate are: Growth in tourism leisure and health care Foreign tourist arrival in India are expected to rise at a CAGR of 10.9% per annum during this is expected to give rise to the number of hotel beds from current 235,000 to 461,000 by Growing healthcare the sector is estimated to 15% per annum from India is expected to need additional 920,000 beds, entailing an investment between USD 32 bn to USD 50 bn over Emergence of nuclear families and growing urbanization Urban population is increasing and is expected to cross 590 mn by Urbanization and growing household income is driving demand for residential real estate and growth in the retail sector. Positive Government policies such as ease in housing finance, housing for economically weaker section, 100% FDI for development of townships, hotel and tourism sector. Tier II and Tier III cities attracting sheen: The demand fundamentals of the India story are now focused around Tier-II and Tier-III cities that have sufficient economic activity, be it industrial, service sector-driven or incentive-driven programs by the State Government. Moderate income class is growing in these cities. Their aspirations are now well supported by expanding credit availability - even if non-subsidized, and relatively lower land prices. All of this is helping smaller property markets to remain stable. Demand in cities like Bhopal, Faridabad, Lucknow, Bhubaneswar, Ahmedabad and Surat is still holding up and rates are showing an uptrend, unlike in metros where sales numbers are pretty dismal with most builders resisting any correction, so far. Property prices in Bhopal and Faridabad have jumped nearly 25% in the past one year. Rates have also gone up in cities like Lucknow, Ahmedabad and Surat. Speculative elements are robust in larger markets like Mumbai and Delhi, while in Tier - II and Tier - III cities there's mild speculation. This helps in stable and steady price appreciation than volatile price movements. SKP Securities Ltd. Page 2 of 13

3 Metros have become center of attraction and are mostly investor-driven, who want to make a quick return and exit. Smaller towns are not hit by this euphoria of urban centers and are constantly doing better. Investor money is very limited in smaller towns. This growth in Tier-II cities and smaller towns can be attributed to rising investments across industries including information technology and ITES, rapid industrialization leading to improvement in infrastructure and urban governance. Cities like Patna, Bhopal, Indore, Jaipur, Kochi, Ahmedabad, Coimbatore, Surat, Mangalore and Gandhinagar have seen better transactional activity in the past few months as prices did not appreciate much. These markets are volume-driven than value. Cities like Thrissur, Trivandrum, Calicut and Kochi have seen huge activity in the recent months due to growing IT culture, pilgrimage and gold centers, and some being silk business hubs, industry experts said. Industrialization is also happening in the suburbs of Metros and Tier I Cities, due to unavailability of space and demand, which is attracting developers in these areas. Development of Navi Mumbai and Talegaon near Pune are a few good examples. Given the proximity of these cities to metros or Tier-I locations, it usually has a rippling effect as industries consider these locations as an alternative. The saturation in Metro cities has also prompted hoteliers to foray into, Tier - II and Tier - III cities, across India. At present, hoteliers are investing in cities like Jaipur, Chandigarh and Kochi, among others. Mid-market and luxury hotels, both are growing in these non-metro cities. Government policies have also significantly contributed to the development of hotels in Tier I and Tier - II cities. For instance: The approval for SEZs in Madhya Pradesh, Gujarat, West Bengal and other states has led to inflow of businesses in these states, thereby increasing the demand for hotel rooms. Advantages of non-metro cities are Lower land prices; Lower operating cost for instance electricity is cheaper in Bhopal compared to Gurgaon, since the Indian government practices third degree price discrimination; These cities offer the diversity of tourism, which includes medical tourism, spa tourism, religious tourism, adventure tourism and business tourism. Goa and its adjoining suburbs are currently the hot favorite for medical conferences and advertising agencies. This has triggered the demand for hotel rooms in these areas. Outlook Development of suburbs and Tier II and Tier - III cities has stimulated demand for land and developed real estate across industries. Demand for residential, commercial and retail real estate is rising throughout India, accompanied by increased demand for hotel accommodation and improved infrastructure. Further, presence of a large number of Fortune 500 and other reputed companies will attract more companies to initiate their operational bases in India thus, creating more demand for corporate space. The Indian real estate market size is expected to touch US$ 180 billion by Page 3 of 13

4 The Company: A Snap Shot Vascon Engineers Ltd (Vascon) is an engineering, procurement and construction (EPC) services and real estate development company. It has presence in various states such as Maharashtra (Pune, Mumbai, Nagpur, Amboli), Goa, Tamil Nadu (Coimbatore) etc. Vascon was incorporated in 1986, primarily as an EPC company; however, it has entered in to real estate development in the past few years. It also owns and operates selected projects. Business mix of the company is as follows: Vascon EPC Services (Revenue Contribution (FY12): 60%) Real Estate (Revenue Contribution (FY12): 17%) GMP & Hospitality (Revenue Contribution (FY12): 23%) Source: Company and SKP Research EPC Services: The Company provides EPC services for its own projects as well as third parties. The third party clients of the company includes Ruby mills (Mumbai), Symbiosis Education Institutes, Sinhagad Education Society, Cipla, Dr. Reddy s Lab, Tata Housing, Adani Township, Goa Institute of Management etc. Vascon has constructed factories, hospitals, hotels, commercial & residential complexes, shopping malls, multiplexes, IT parks and other buildings under EPC services. The Company has completed more than 200 EPC contracts with construction over 40 mn sq. ft. as of March 31, Vascon currently has a strong order backlog of ` 34 bn. The Company received orders worth ` 15 bn during FY12. Maharashtra contributes 67% to the total order book followed by Gujarat and Tamil Nadu with the contribution of 12% and 10% respectively. Vascon competes with L&T, Shapoorji Pallonji & Co Ltd, Ahluwalia Contracts Ltd, B L Kashyap & Sons Ltd, Consolidated Construction Consortium Ltd (CCCL), Punj Lloyd Infrastructure Ltd etc., in this segment. Real Estate Development: Vascon s real estate business comprises of the development of residential and office complexes, shopping malls, multiplexes, hospitality properties, IT parks and other buildings. Vascon ventured into real estate to garner the advantage of strong EPC base which provides cutting edge to rise above industry standards. Page 4 of 13

5 These projects are taken directly or through subsidiaries or other business entities such as joint ventures and Joint Development Agreement (JDA). The company focuses on Tier II and Tier III cities in India, for real estate development, such as Pune, Nashik, Aurangabad, Thane, Chennai, Madurai, Belgaum and Chandigarh. The spectrum of real-estate development activities includes: identification and acquisition of land; providing EPC services and sales and marketing of completed projects. Vascon has completed more than 40 projects envisaging more than 7 mn sq. ft. of saleable area, till date. Currently, the company is developing 64 mn sq. ft. of saleable area through its different business entities of which Vascon s share is 37 mn sq. ft. This segment contributed about 17% to the total revenues in FY12. Vascon is now increasing focus on real estate development which will gradually increase its contribution to the revenues and margins of the company. GMP: Vascon has acquired 90% stake in Mumbai based GMP Technical Solutions Pvt. Ltd. (GMP), in FY10. GMP specializes in modular clean rooms such as Iron clean rooms, glass reinforced polymer clean room, HPL clean room, laminar air flow units etc. The Company also deals in clean room doors, fire resistant doors, load bearing ceilings, bio-safety cabinets and so on. GMP is also present in office partitions, air shower and barrier isolator. GMP is the only company to produce all kind of partitioning systems. These products finds usage in various industries such as pharmaceutical, electronics, foodstuffs, medical engineering, surface engineering, microsystems engineering, optics, office partitions and so on. The company has its manufacturing facility in Baddi, Himachal Pradesh. GMP exports its products to Africa, Middle East, Gulf and Europe. Vascon is now better positioned to exploit the synergies as it has now become a turnkey solution provider to its EPC clients in the industries such as pharmaceuticals, hospitality and health care. Hospitality: Apart from EPC services and real estate development, Vascon also has stakes in renowned star rated hotels. Vascon holds % stake in Galaxy resorts, Goa (3 star); 26% stake in Hyatt, Pune (5 star); and 28.7% stake in Holiday Inn, Pune (5 star). Vascon has recently sold its stake in Golden Suites, Pune for ` 40 mn. Page 5 of 13

6 Investment Arguments Strong order backlog of ` 34 bn in EPC services topline from the segment expected to grow with the CAGR of 17% in next couple of years: Vascon has a strong order backlog of ` 34 bn from its EPC segment. Details of the order book is as follows: No. of Orders Finished (` bn) Backlog (` bn) Total (` bn) Third Party Contracts Own Contracts Total Source: Company Investor Presentation - June 2012 Healthy Growth: Third party order book of the company is growing at the CAGR of 29% for past two years. The following graph indicates the order intake by Vascon from third parties, in past two years: ` bn Third party Orders FY10 FY11 FY12 Source: Company Investor Presentation - June 2012 Residential, industrial and commercial segment contributes 33%, 30% and 23% respectively to the total order book. Vascon has received ` 15.2 bn worth order in FY12, with the y-o-y growth of 24%, details of which are as follows: Project Name Location Type Contract Value (` mn) Reniassance Industrial Park Mumbai Industrial 11,000 Parthenon Phase II Mumbai Residential 1,860 "Kshitij" Parmanandwadi Mumbai Residential 964 Delano - DLF Goa Residential 429 Tivoli Nagpur Residential 228 PNR Housing Coimbatore Residential 160 Monotype Grihaniram Pune Industrial 141 Cipla API - II Kurkumbh Industrial 135 Cipla API - II Kurkumbh Industrial 124 Cummins India Amboli Industrial 72 Symboisis Noida Institution 39 Ramkunj Finishing Work Mumbai Residential 30 Cipla Verna Warehouse Goa Industrial 23 Total 15,205 Source: Company Investor Presentation - June 2012 Page 6 of 13

7 Vascon maintains cordial relationship with its clients such as Cipla, Adani and so on by providing in time quality construction which helps them to garner repeat orders. With the strong order backlog and healthy reputation with its clients in place, Vascon is well positioned to cater the industrial and residential growth in Tier II and Tier III cities. We expect the EPC segment of company to grow at a CAGR of around 17% between FY12 FY14. Revenue mix at a glance: 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 21.8% 23.3% 22.3% 18.7% 19.8% 16.6% 23.4% 26.8% 69.0% 60.4% 54.4% 54.4% FY11 FY12 FY13E FY14E EPC Real Estate GMP & Others Source: Company & SKP Research Unique business model for real estate resulting in low D/E among peers: Vascon, generally enters in to joint development agreements (JDA) with land owners to acquire development rights to their land in exchange with pre-determined portion of revenues generated from the projects. Vascon s real estate portfolio at a glance: Development Land Reserves Potential Attributable to Vascon (mn sq ft) mn sq ft % to total share of Vascon Land Owned by Vascon % JDAs % JVs % JDA with JV % Total % Source: Company Investor Presentation - June 2012 and SKP Research This helps the company to gain developmental rights of lands without having to invest large amount of money to purchase such land and thus the debt-equity ratio of the company is less than one in the industry. Page 7 of 13

8 D/E comparison: 4 3 D/E (x) FY09 FY10 FY11 Source: Capitaline & SKP Research Sobha Dev DLF Unitech Vascon Further, these JDAs provide Vascon with significant control over all aspect of development and sales of the project as the company either own majority stake or control these JDAs. Focus on Township projects in suburbs meeting customers demand: The real estate prices are getting out of reach for the middle class home aspirants in metropolitan cities due to sky rocketing prices, rise in interest rates, and unwillingness of developers to bring down the prices. Gurgaon has seen the maximum price appreciation at 21.4 per cent, followed by Mumbai at 13.2 per cent, and Pune 12.5 per cent, in 2011 compared with the previous year. This has lead to rise in unsold residential real estate with the highest (102,758 units) units unsold in Delhi NCR region, followed by Mumbai Metropolitan region (90,512 units), in Thus, the developers are now focusing on developing townships in the outskirts of Metropolitan and Tier II cities. This has boosted the demand for residential units in these areas due to following reasons: majority of the people in India belong to middle income group and the prices are moderate in these areas due to lower land prices; saving of time and cost of transportation when goods and services are available in one place; commercial activities like establishment of corporate plants and industries are also happening in these areas due to scarcity of land in metropolitan cities. Keeping this in view Vascon has also launched various townships near cities like Pune, Nashik, Coimbatore such as Willows, Nature Springs, Vista, Forest County, Tulips, Windmere etc. which is in the proximity of schools, and offices saving residents from long hectic travelling. With the success of these projects Vascon is also planning to launch some more townships like Orgadam, Chennai; Vista Phase III, Nashik; and Neelambur, Coimbatore. These projects will include amenities like pharmacy, market place, garden, jogging track, party halls etc. fulfilling the aspirations of the prospective customers. Page 8 of 13

9 Strong relationship with clients in EPC segment - enjoys repeat business: Vascon has developed strong and cordial relationships with its retail and corporate customers as well as investors in the real estate market, during the last two decades through high quality standards and timely delivery of projects. The Company, thus, enjoys repeat business with many of its EPC clients. Around 25% of the current order book comprises of repeat order. Key Concerns Speculative activities by investors increases price and lowers sales velocity: These days, developers ropes in the investors with surplus money with a promise of stipulated returns. This causes developers to raise the prices which stagnates the demand resulting in project delays. The chart below shows the price and affordability mapping: Unfair and Speculative Market Undervalued Market Unfair and Speculative Market Corrective Phase Jan, 05 Oct, 05 Oct, 06 Nov, 07 Jun, 08 Dec, 08 Mar, 09 June, 09 Sept, 09 Dec, 09 Mar, 10 Jun, 10 Sept, 10 Dec, 10 Mar, 11 Jun, 11 Sept, 11 Interest Adjusted Affordability Index Inflation Adjusted Price Index Source: Industry Data Any speculative interest of investors in Tier - II and Tier - III cities may result into delay in projects which in-turn may decrease the volumes (sale of units) of the company, thus, negatively impacting the topline and margins. Rising interest rate a cause of concern: The real estate market is significantly affected by changes in interest rates among other factors such as Government policies, economic conditions, income levels, demographic trends etc. Any rise in interest rate (though, seems unusual at the present economic scenario) may adversely affect the topline and margins of the company. Page 9 of 13

10 Financial Outlook Net Operating Income (` bn) % % % FY12 FY13E FY14E 40% 30% 20% 10% 0% -10% -20% -30% -40% % Growth Top-line to grow at a CAGR of around 20% For FY12, net sales declined to ` 7.2 bn by registering de-growth of 30% y-o-y basis due to underperformance of EPC services division. Revenues from EPC segment declined from ` 7.1 bn in FY11 to ` 4.3 bn in FY12. This has happened due to postponement two major projects from HDIL and TNLA for almost one year. These two projects could have been resulted in the revenue of ` 2 bn in FY12. Real Estate segment has also seen de-growth of 42% due to high interest rate and slowdown in general macro economic conditions affecting the sector. Source: Company & SKP Research On the contrary to the above two segments, GMP has shown an impressive growth of about 62% last year. We expect the company to grow at a CAGR of 20% between FY12-14 with the revival of economy on the back of economic reforms to be announced by the Government of India. EBITDA margin to be maintained around 11% Vascon has witnessed an EBITDA margin of 3.9%, a fall by 570 bps, in FY12 due to construction expenditure incurred by the company on stalled EPC projects. We expect the company to improve its margin at around 11% by FY14 on account of improvement in overall business scenario % 10.9% 12.0% 10.0% % 5.0% EBIDTA (` mn) % FY12 FY13E FY14E 8.0% 6.0% 4.0% 2.0% 0.0% EBIDTA Margin (%) PAT (` mn) % 1.9% FY12 FY13E FY14E 4.0% 3.0% 2.0% 1.0% 0.0% PAT Margin (%) Source: Company & SKP Research PAT margin to stabilize around 4.4% PAT margin has declined to 1.9% in FY12. We expect PAT margin to stabilize around 4.4% by FY14. EPS of the company is expected to grow from ` 1.5 in FY12 to ` 5 in FY14. Page 10 of 13

11 Valuation At current market price of ` 40, the stock is trading at a P/E of 14x and 8x of FY13E and FY14E earnings of ` 2.8 and ` 5 respectively. We recommend BUY rating on the stock with a target price of ` 63/- (56% upside) in 18 months using the SOTP method of valuation details of which are as follows: Segment Valuation Multiple Value Fair Value Method (x) (` mn) (`) RE NPV EPC EV/EBIDTA GMP EV/EBIDTA Total Fair Value Source: SKP Research Desk Page 11 of 13

12 Financial Outlook FINANCIALS (All data are in ` mn unless specified, Y/e March) Income Statement FY11 FY12 FY13E FY14E Balance Sheet FY11 FY12 FY13E FY14E Net Operating Income Equity Capital Operating Expenditure Reserves EBIDTA Net Worth Depreciation Loan Funds EBIT Minority Interest Interest Deferred Tax Liab Other Income Total Liabilities EBT Net Fixed Assets Exceptional Item Capital WIP Tax Investments Minority Interest Net Current Assets PAT Deferred Tax Assets EPS (`) Total Assets Cash Flow Statement FY11 FY12 FY13E FY14E Ratios FY11 FY12 FY13E FY14E PBT Valuation ratios (x) Add: Depreciation, Interest P/E & Other Exppenditure P/Cash EPS Net change in WC, Tax, Int P/BV Cash Flow from Operating EV/EBIDTA Activities EV/Sales Capital Expenditure Earning Ratios (%) Investments, Sales of FA, Dividend received and EBIDTAM 9.6% 3.9% 10.1% 10.9% others OPM 8.3% 1.3% 7.9% 9.3% Cash flow investing NPM 6.2% 1.9% 3.3% 4.4% Activities ROE 8.9% 2.1% 3.5% 5.9% Cash flow from Financing ROCE 7.8% 0.9% 5.9% 8.3% Activities B/S Ratios Net Increase/Decrease in Current ratio (x) Cash & Cash equivalents D/E (x) Opening Cash Balance Debtor Days Cash balance of acquired Creditor Days subsidiaries Inventory Days Closing Cash Balance FA/Turnover (x) Page 12 of 13

13 Notes: The above analysis and data are based on last available prices and not official closing rates. SKP Research is also available on Bloomberg, Thomson First Call & Investext Myiris, Moneycontrol, Tickerplant and ISI Securities. DISCLAIMER: This document has been issued by SKP Securities Ltd (SKP), a stock broker registered with and regulated by Securities & Exchange Board of India, for the information of its clients/potential clients and business associates/affiliates only and is for private circulation only, disseminated and available electronically and in printed form. Additional information on recommended securities may be made available on request. This document is supplied to you solely for your information and no matter contained herein may be reproduced, reprinted, sold, copied in whole or in part, redistributed or passed on, directly or indirectly, to any other person for any purpose, in India or into any other country without prior written consent of SKP. 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SKP Securities Ltd Contacts Research Sales Mumbai Kolkata Mumbai Kolkata Phone Fax researchmum@skpmoneywise.com research@skpmoneywise.com Skp.sec@bloomberg.com Member: NSE BSE NSDL CDSL NCDEX* MCX* MCX-SX FPSB *Group Entities INB/INF: , BSE INB: , CDSL IN-DP-CDSL , DPID: , NSDL IN-DP-NSDL: , DP ID: IN302646, ARN: 0006, NCDEX: 00715, MCX: 31705, MCX-SX: INE Page 13 of 13