Dilip Buildcon is an outlier in road sector, topline growth at 50%: Rohan Suryavanshi

We are targeting about 17-18% and that is what we have worked with in the last few years, says Rohan Suryavanshi, Director - Strategy & Planning, Dilip Buildcon, talking to ET Now.

Edited excerpts:


Are things looking great for the road industry?

Absolutely. The road industry has not had this good ever. This year, we have seen record order inflows -- even higher than last year! So, we are at a very good space. f Personally as a company, our market share from the total National Highway Authority of India (NHAI) and the Ministry of Road Transport & Highways (MoRTH) has remained almost the same in the same region. Last year, we had about 14.5% of overall market share of the NHAI and MoRTH. This year, it has gone slightly above Rs 15,000 crore. In terms of total order that we have received this year, we have almost doubled ourselves. You can see how much the activity has improved so that we are still at the similar order level. It has been a great year. Kudos to the whole team that they have been so on top of the game and they have managed to give out so many orders.

15% market share is a very large market share and you are competing against the likes of an L&T or NCC or even bigger players. How did you manage to get such a large market share in such a competitive market?

Of course, we were competing against very good companies. However, what sets us apart is that we are present in 17 states across the nation, which no other construction company except L&T does. This whole strategy of being diversified across the country has only happened because we do everything on our own. We use our own equipment. We have our own people doing it. Everything is vertically integrated.

What we are able to do no other construction company is able to deliver. When we go on order anywhere, we are doing it on the basis of our strength unlike other construction companies which have to find sub-contractors there and that is really what helps us. Along with that, we have been executing at a break neck pace. From last year’s top line of Rs 5000 crore, we are going to be finishing this year at about Rs 7500 crore or so. So, it is almost a 50% growth in the top line. We are an outlier in the industry from that sense. As our own execution pace picks up, we need more and more orders to keep up with future growth.

That is all in the past. Bank of America Merrill Lynch came out with a recent note and they are saying that highway construction sector presents a very large opportunity and they are putting some numbers here. They are saying there is going to be an over 2.5 times rise in tender pipeline versus the three-year history. Do you think you can beat your last year’s performance in 2018 as well?

Absolutely. I am very confident because this is an election year. Now the thing that gives me a lot of confidence is; number one, the budgetary allocation that has been done for the sector has increased from what it was last year.

Number two, the highway ministry has decided that they are going to upgrade an higher number of state highways to national highways.

Number three, they have reduced the traffic that is required from upgrading a two-lane to a four-lane. You would be very surprised that 75% of the roads in our country are still single lane or two lane and I am talking about national highways, forget the other roads.

So there is a huge opportunity and especially in an election year, the government has very clearly articulated his intent that they want to stimulate the economy as much as they can. They want to build assets and this is what really gives us that kind of confidence.

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The last time we were chatting, you said that land acquisition was a problem. Have things eased out there?

Land acquisition will always be a challenge. The reason it is a challenge is because while all these projects for example in our case are given by the national government, our order book at 99% is from the national government but the land acquisition or environment clearances, all the other clearances that are required are all a matter of the state. The state government is trying to acquire all this land while the project has been awarded by the national government and they want that money. So, it is always difficult when you are straddling between two different government agencies so that is why it remains a challenge. The government has definitely improved it by leaps and bounds over the last few years but there are always ways that they can improve it further more.

What works for you is not just the fact that you have superior execution capabilities but it is also that you have been able to milk these projects at regular intervals -- revenue and profit wise. How will the hybrid annuity model helping construction companies like you?

You are very right. We have been able to churn these projects around very quickly than the industry. Hybrid annuity is a new mode that the ministry came out with. The ministry is constrained by their budget and that’s why they need to go to the PPP mode.

What is good in the HAM model is that the government put in the game. They put say 40% of the equity during the construction and the rest 60% is something that they pay through deferred payment of annuities. Now this model is great for someone like us who knows that we are great at the execution part and then we are resuming very little risk because we do not have to worry about how the traffic is going to grow from here to the next, we are taking… basically what we are doing is that we are taking the national government’s paper and working on that. So, it is a great model from that sense. It also provides comfort to the bankers that whatever money they are accounting for right will come in future. So overall, it is a great model for the stakeholders.

What is the kind of market share that you are targeting in terms of bidding for more projects under the HAM model?

We do not specifically target a market share in the hybrid annuity model (HAM). All these numbers that I gave were for our consumption and it is not that internally we are targeting 15% or 20% of the total NHAI orders. When we think about these things, we think about okay where how does our balance sheet look like, how much equity do we have, what are our growth plans, where do we need to go from here? All these things are what really dictate our decisions whether we want to take more HAM projects or EPC projects.

One large concern for the entire road sector would be that PSU banks may not be lending aggressively. Ehen we met couple of chairmen off the record, personally I have come back with the feeling that PSU banks are scared now to grow their balance sheet given how things have moved. Are you getting a hint that it may not be that easy to get credit lines going?

You are absolutely, right. PSU banks they have been fighting fire on multiple fronts. The kind of support that we expected or the national government expected is not there. However, PSU banks are doing this on a case by case metric. For someone like us with a track record of doing all of their projects before time, if you look at the annuity portfolio, EPC portfolio that we have done, all my older PPP projects were done at least six months to a year before schedule commissioned date. All of them were taken at a lower debt cost than what was the government estimates on those projects. These things give a great comfort.

Also, in all the projects that we take, revenue is assured. It is an annuity, unlike tolling. It is definitely unfortunate that the banks have taken a positive stance on this because back in the last upcycle, when they were taking bets on toll which they had no idea about. In our case, you have the national government bond and that is probably the best paper that they can get, I guess.

How do I calculate NPV because that is how you look at a road company or a construction company? I need to look at interest rates, calculate your cash flows and arrive at NPV? In a rising interest rate environment, when you are backed by an annuity, how does the NPV looks?

The government has done a very good job in all these assets, there is a floating interest rate, right guidelines, it is a very comfortable position for the bankers.

So, you will have the same spread?

Exactly, we will have the same spread.

There is no denying that yours is one of those dream stocks which if someone bought on listing day, there will be smiles all around. Right now, irrespective of the market environment, the problem is that there is very less float in the market. When is it that promoters will bring down that mandatory 1% stake down?

It is a good problem to be with. We are very happy with the way things have panned out for us and with the way the markets and the investors have responded to our story. However, we would need to bring down this stake. The timeline for that is August 2019 because it needs to be done within three years, however, there are no immediate plans to do this. We will take a call on this as and when we feel it probably makes sense and we need to find a good way…

At Rs 1200, does the stock look expensive to you?

I do not think it is a function of price, you know it would be a function of what our internal requirements might be. Ultimately whether I sell it at Rs 1200 or Rs 1000 or Rs 1500, does not matter. Eventually, we end up owning majority of the stake, majority of the company and this is the only business that we do For us, it is more important to keep growing this business ever since my dad runs this business. He has kept on putting all the money cumulative from the business back into the business, so we have no other distractions.

But at Rs 1200, do you think the stock is fairly valued or do you think it is a little expensive?

I think it is undervalued for the potential that the company had.

What about your average internal rate of return? What is it that you are targeting for the projects that you are entering because as more and more projects come in, there will be a lot more players trying to garner a part of the pie. How do you manage to keep your profitability?

Yes, more and more players are coming in and there are more smaller players who have larger ambitions right now. What has helped us is that the overall pie has also increased. Even though our percentage share in the old business has been same, the orders that we keep this year is actually more than the total orderbook that we had at the end of last year. So, that is always a function of the industry. What you need to do as a company is go bid for projects at the right time, make sure that you have a healthy order book like right now we have a 3.5-4 year forward looking order book. We are not in a hurry to bid for orders at an aggressive rate but yes industry will keep moving.

Is there a target, is there something that you work with on a return basis?

Yes, we do. We have whenever we take EPC projects or HAM projects, there are different targets that we work with but if I were to simplify it, on an EBITDA basis, we look at about 17-18% and that is what we have worked with in the last few years.