Dilip Buildcon Limited (DBL) has recently emerged as one of the most talked about companies in the road sector. In August 2016, the company took the initial public offering (IPO) route to tap the equity market. Marking its rapid progress, the company achieved a compound annual growth rate (CAGR) of 38.2 per cent in revenue growth on a consolidated basis during the past five financial years (2011-12 to 2015-16). Meanwhile, it also claims to have higher growth margins than most of its peers.
Expanding project portfolio
As of March 2016, road projects accounted for 87 per cent of DBL’s overall business. Over the past five years, it has completed 51 road projects spanning about 5,900 lane km in Madhya Pradesh, Gujarat, Himachal Pradesh, Rajasthan and Maharashtra. In addition to these projects, it has also managed to secure projects in 10 other states – Tamil Nadu, Chhattisgarh, Punjab, Jharkhand, Haryana, Telangana, Andhra Pradesh, Karnataka, Uttar Pradesh and Goa.
DBL’s order book has also grown manyfold in the past couple of years as a result of the government’s push on infrastructure spending. As on October 31, 2016, the gross order book of the company stood at over Rs 220 billion.
In the past one year, the company has been on a winning spree with respect to national highway projects. DBL has recently started undertaking projects based on the hybrid annuity model (HAM) and secured a contract for fourlaning of the Lucknow-Sultanpur highway in Uttar Pradesh in this mode, at an estimated cost of Rs 28.45 billion. On November 2, 2016, DBL won the contract for rehabilitating and upgrading parts of National Highway-66 in Maharashtra to be implemented under Phase IV of the National Highways Development Programme on a HAM basis at an estimated cost of Rs 9.14 billion. DBL has also won the award for building the second-largest cable suspension bridge in the country. This iconic project is being built over the Zuari river in Goa.
Aiming to achieve a growth of 20 per cent in the current financial year, the company is looking at bidding for big-ticket projects.
“DBL has always been a very risk-averse and conservative player when it comes to building a road portfolio. We have focused mostly on annuity assets where the returns are assured by the government. This has been a very successful model for the company where all the stakeholders have been handsomely rewarded. Currently, DBL has 12 operational assets and eight under construction which will get completed over the next two years. The company is evaluating how to best monetise these assets and will do so at an appropriate time,” says Rohan Suryavanshi, head, strategy and planning, DBL.
DBL’s consistently good performance can be attribute d to its distinctive approach in the road construction and maintenance business. Its strategic business model focuses on clustering projects geographically and this has helped it achieve maximum efficiency and thus profitability. Most of the build-operate-transfer (BOT) projects undertaken by the company have been selected “opportunistically” in terms of their location to derive economies of scale. While this has worked well, DBL also plans to diversify its portfolio across a wider spread of states so as to make the company immune to income fluctuations resulting from business concentration in limited geographical areas.
DBL is also the owner of the largest number of construction equipment in the country. As on March 31, 2016, it possessed a fleet of 7,345 vehicles and other construction equipment from renowned suppliers such as Schwing Stettar, Metso, Wirtgen and Vogele. This ownership enables the company to ensure high availability of equipment, low equipment cost and timely completion of projects. This has also contributed to the high profitability of the company.
Its steady execution track record and strong creditworthiness has further aided the company‘s performance. As on March 31, 2016, most of the 36 engineering, procurement and construction (EPC) projects and 11 BOT projects allotted to the company were completed ahead of time resulting in immense client satisfaction. It also received early completion bonuses amounting to Rs 1.91 billion for the 11 BOT projects and Rs 0.28 billion for 10 government EPC projects. This has improved its creditworthiness in the eyes of the lenders and increased its ability to bid for larger projects.
The numbers game
Over the past five fiscal years, the financial strength of the company has improved greatly. Its order book depicts the company’s strong revenue outlook. Moreover, achieving a CAGR of 38.2 per cent of revenue growth on a consolidated basis, coupled with the fact that the company has never defaulted on the repayment of its borrowings, has improved the credibility of the company.
DBL’s order book has grown significantly over the past four years. Looking at end-March figures, the order book stood at Rs 33.19 billion in 2013, growing to Rs 51.6 billion in 2014, and to Rs 74.74 billion in 2015. As on March 31, 2016, the order book stood at Rs 107.78 billion, of which government contracts accounted for 76.27 per cent while private contracts accounted for 23.73 per cent. The growing value of the order book can be attributed to the increased threshold limit for pre-qualification for future projects. The company is pre-qualified to bid for BOT projects priced at up to Rs 21.4 billion and EPC projects priced at up to Rs 12.53 billion. This has therefore enabled DBL to tap a larger market and maintain the growth of its order book.
With respect to growth in total revenue, the company recorded a CAGR of 38.2 per cent over the past five years (2011-12 to 2015-16). However, its net profit after tax has fluctuated over the same period. As on March 31, 2016, the company recorded a net profit after tax of around Rs 1.96 billion. This was the first year after 2012-13 when profit grew year on year over 2014-15.
Stellar response to IPO
The company went public in August 2016 and received an overwhelming response from the market. DBL’s IPO was subscribed by over 22 times. Reportedly, the public issue received bids for over 443 million shares as against the 21.3 million on offer at the close of the issue. The company had earlier raised over Rs 1.96 billion by allotting 8.958 million shares to anchor investors priced at Rs 219 per share.
Highlighting the benefits of the IPO, Suryavanshi says,“To take advantage of the government’s ambitious plans in infrastructure and keep its growth going the company went public. With this money the company has reduced debt and is ready to make the most at a time when the government has laid out big plans and investments for the whole infrastructure sector. It would also be important to note that private equity firm Banyan Tree exited through the IPO and made almost a fourfold return in four years.”
Although the company’s top line growth of 60 per cent for the year 2015-16 may not be sustainable, DBL targets achieving a growth of 20 per cent in 2016-17 with a greater focus on getting quality projects rather than just in terms of quantity. The company is also likely to reduce its debt of Rs 25.13 billion and is aiming to reduce its debt-equity ratio from 2.51 to 2.27 in the current financial year. It may also reduce its working capital cycle from 136 days to 110 days. Moreover, DBL’s plan to diversify its project portfolio across a greater number of states will enable it to make strategic investment plans that would lead to higher gains in the future.
While the company’s focus so far has primarily been on increasing its revenues by securing projects on an EPC basis, it now plans to secure BOT projects that can benefit from resources already deployed at projects in locations nearby. It may also consider BOT projects with an annuity component to ensure cash flows and reduce the risk of income fluctuations. In order to make more efficient use of its capital, DBL could explore opportunities to optimise its portfolio by either retaining the existing BOT projects or by acquiring additional ones that yield higher returns. In the years ahead, the company is expected to maintain the growth momentum in terms of both securing projects and building financial strength.