Investors of Dilip Buildcon had ‘hit the expressway’ to wealth generation as the stock zoomed to highs of Rs 1,250 in May 2018, in less than two years of its listing.
Since its listing in August 2016 at Rs 240, the stock has multiplied over five times.
Then, the road seems to have taken a turn as the stock price slipped over 30% and is now trading around Rs 800 mark.
Why The Downturn?
The stock hit a roadblock earlier this month when the BSE brought the company under enhanced surveillance and put the stock in the ASM (Additional Surveillance Measure) list.
Additionally, the rumours with respect to auditor troubles and the sudden resignation of the Chief Financial Officer (CFO) of the company did nothing to bring the stock move back on track.
Questions have also been raised on the asset sale deal with Shrem Infraventures and Shrem Group’s ability to pay the sale proceeds.
To add to the nervousness, street is also concerned if the company has ‘bit more than it can chew’ with respect to its balance sheet and management bandwidth and the burgeoning order book.
The Road Ahead?
To assuage investor concerns, the management did come out with a lot of clarifications.
First up, the management guided for Rs 10,000 crore revenue (25-30% growth year-on-year) and Rs 18,000-20,000 crore worth of order inflows in FY19.
They reiterated that they see no pressure on margins going forward. The management also believes that they are adequately funded as the working capital days have come down to 96 in FY18, against 130 a year ago.
They called the speculation on auditors woes baseless and released a statement from auditor themselves, stating that they are continuing their engagement with the company.
Regarding Shrem deal, the management clarified that they have already received Rs 570 crore from the company and will receive further Rs 610 crore in FY19.
They also mentioned that all the outstanding and future debt in the 24 assets shall be transferred to Shrem Group.
But The Question Is – Is The Street Buying The Management Commentary?
The brokerages do see the management comments as the building blocks that can get the stock back on track.
Out of 19 brokerages, 14 had a buy rating on the stock, four had hold, while only one advised to sell the counter.
The consensus 12 month target averages between Rs 1,200-1,250 per share, suggesting a 40-50% upside from current level.
Despite the recent speculations, brokerages like Credit Suisse upgraded the stock to outperform given the strong outlook.
Global research house, Nomura, believes that the concerns on reported execution and margin credibility seems exaggerated, while HDFC Sec doesn’t see management bandwidth to be a problem and remains confident of the company meeting the funding requirement without further stake dilution or significant debt addition.
Value Versus Peers
If you look at peer comparison, Dilip Buildcon is trading at an attractive price against peers given the recent correction.
Peers like PNC Infratech and KNR Construction are trading at valuations of 20 times FY19 earnings, while Dilip Buildcon is available at 15 times FY19 earnings given the recent correction.
The order book of Dilip Buildcon is the largest amongst peers, giving it revenue visibility as well as the growth delivered in FY18 PAT at 70% is much higher than peers like KNR Constructions Ltd and Sadbhav Infrastructure Projects, which delivered 10-20% growth
Technical Expert, Ashwani Gujaral of AshwaniGujral.com, however, doesn't share the brokerage view. He said it's better to avoid controversial stocks, which are marred by speculation of auditor issues. Give the controversy, he believes the stock could fall further and advised to invest in good quality names.
While valuation of Dilip Buildcon looks attractive, perhaps investors are still watchful of auditor issues and would want to be more surefooted before betting big on such midcaps again.As one says, there is no royal road to learning.