Is Dilip Buildcon the Next Larsen & Toubro?

You don’t need to be right every time in the stock market for becoming rich. Nobody can be. Just be right once and you will win the game for ever. If you regret your chance of catching behemoth like Larsen & Toubro; there is still a chance—buy Dilip Buildcon. It has every ingredient that turns a good company into a great company. The company can be a potential multibagger stock in 2018-19.

Why I’m saying that. Wait! There is a reason. Now consider following:

  1. The company has been able to deliver 90% of its projects before deadline. It has received 320 crore rupees as a pre-completion bonus. This is rare for a sector where 90% construction companies are struggling to complete project in time.
  2. Modern equipment fleet of 8,525 vehicles and other construction equipment enables availability, quick mobilization, and control over execution. This eliminates delays and cost over-runs due to untimely break-downs or non-availability leading to higher execution efficiency. It also helps them save on rentals. It’s reflected as a depreciation in the balance sheet. It also helps them save 1-1.5% more compared to their peers.
  3. CRISIL has assigned A+/stable rating for our long term bank facilities and A1 rating for our short term bank facilities.
  4. Most road construction companies have the presence in 1-2 states, whereas Dilip Buildcon has presence in 16 states. It helps the company to grab more projects.

Infrastructure sector is highly capital intensive and they have to take huge debt for project bidding to execution. In that case, if project gets delayed, company’s balance sheet goes for a toss as they have to pay interest rate to financiers. Apart from this, their cash flow is also blocked. This affects their ability to bid for other projects. This has been the case with IRB Infra, HCC and many other companies whose projects were delayed because of various reasons. This is where Dilip Buildcon has a competitive edge as it has an unmatched execution track record.

For example, recently it completed a mining project in 1+ year, whereas the deadline was 2 years. It completed a dam project in 3 years which was to be completed in 6 years.

Is not this amazing?

This also affects the operating margin of the company because they save on equipment rentals, employees’ salary and other expenses by finishing the project before time. This helps them save 1-2 percent more than other construction companies in this domain. Other companies get these works through sub-contractors. This also saves EMI for the saved period.

They also have a procurement department that buys raw materials directly. Here again they save 1-2 percent because of their bargaining ability because of bulk purchase. For example, the company has a cement supplier in Madhya Pradesh that supplies him cement @175 per packet that was earlier @210 per packet. The company will buy all cement so it was a win-win deal for both of them. They are also big client of Ultratech, HPCL, BPCL and other companies that offer them addition discount.

It has recently raised fund at 8.9%, this is merely 150-basis point above the government of India bond rate.

This is INCREDIBLE!

It’s even lower than the rate at which AAA rated Housing Finance companies borrow. Even L&T raises capital at the rate of 9.15%.

All of this speaks volume about the quality of management of the company. And why it commands so much respect.

AND THIS WHY THEY HAVE THE BEST OPEARTING MARGING IN THE INDUSTRY. SEE WHAT ROHAN SURYAVANSHI HAS TO SAY ABOUT IT:

 

Dilip Buildcon has sold HAM equity to Chatwal, which will give it more cash for bidding new projects.

Infrastructure Outlook

The last 10 years for the sector has not been good. After NDA government assumed power, things started changing positively. The pace of road construction has increased 4-5X compared to UPA-II. Companies operating in the area of road construction are expected to get huge contracts of 700000 crore by the end of 2018. Dilip Buildcon will surely bag orders worth good amount because of their enviable project execution track record.

In the Roads and Highway sector, the current fiscal year has already begun on a very encouraging note with budgetary allocation being increased to Rs. 6, 40,000 Mn. Pickup in awarding is expected to be dominated by the EPC route followed by the HAM route, segments.

Nitin Gadkari worked hard to overcome many obstacles mainly related to land acquisition and environmental clearances. These two were the major impediments in the growth of the sector.

In FY 2014, UPA government has published tender of 3500 kilometers. In FY 2015, government brought contracts worth 8500 kilo meters, FY 2016-9000 km, which increased to 15000 km in FY 2017. Dilip Buildcon has the second highest share in the road construction after L & T in the last three years. They have won many good contracts in the EPC and HAM. Company has 14 projects in the BOT and it has decided to monetize them. It has shown intent to monetize under-construction projects as well.

Competition Has Become More Rational

Bids have become more rational after two decades of consistent competition. Competition has started easing out.  Market players have become more cautious, leading to more rational bids. For NHAI BOT bids, FY2016-17 saw three to four bidders vying for BOT highway projects compared to over 30 bidders in 2012.

Increased Focus on High Margin Business

They are focusing to reduce NWC further through halving number of project sites to 25, lowering inventory and increasing the share of mining that has fortnightly payments.

Optimum Execution Capability

Each department right from Business development & tendering, Building construction, Engineering (billing and planning), Engineering (structure), Engineering (QAQC), Design & technical audit, Contracts management, Survey & design, Fuel management, System admin and monitoring/ equipment management have been given broad responsibilities with functional heads.

Modern equipment fleet of 8,525 vehicles and other construction equipment enables availability, quick mobilization, and control over execution. Eliminate delays and cost over-runs due to untimely break-downs or non-availability leading to higher execution efficiency. Homogenous fleet to ensure spare parts availability and significant savings in procurement and maintenance. GPS installed on all equipment’s for tracking. Manned by trained full-time employees for maximum efficiency. In-house repair and maintenance to ensure availability. (Source: Annual Report)

They have highest number of stone crushers in the country right now.

They try to bid for the projects which are nearby their existing projects. This helps save manpower and equipment deployment cost.

The company is now trying to enhance its portfolio in mining, irrigation, urban development as well. So, the margin may be impacted in the near future naturally. However, considering the judicious and prudent bidding strategy, it is poised to maintain its leadership position.

Favorite of Investors

  • “Baby, there is something happening here,” Mudar exclaims after assiduous number crunching.
  • Nirmal Bang has foreseen that Dilip Buildcon has a target price of Rs. 1324.
  • Dolat capital reiterated buy on the stock due to its differentiated business model, proven execution capability, growth trajectory coupled with improving financials.

Dolat Capital says: “Higher debt reduction in debt vs. expectation If DBL can manage to reduce its debt at much lower level due to a faster reduction in NWC cycle compared to our estimates, then it will positively impact its profitability by a reduction in interest cost and balance sheet by a further reduction in leverage. This may lead to further expansion in its valuation multiples and poises upside risk to our target price.”

Risks

Construction sector can be impacted by government regulatory issues. And since 95% projects of Dilip Buildcon is from government, the risk will always be there. In addition, it has asset heavy model. In the bear cycle of construction sector, its equipment and employees will be a liability. It’s important to know that there are always politicians behind the infra companies and Dilip Buildcon is no exception to. There is a rumor of very powerful CM behind the company. So, it’s up to you how you take this. Whether it’s IRB Infra, Lanco Infra or Indiabulls Real Estate, political affiliations have been apparently clear. I consider this a positive considering the kind of permissions a construction company needs.

CEO has 100% approval rate on the Glassdoor, which reflects the confidence of employees in the company.

Considering the current sweet spot, Dilip Buildcon can easily become a multibagger even from this level.

(Disclaimer: This is not a recommendation. The purpose of this article is to give unbiased information. I’m neither a SEBI approved advisor nor have any advisory service. However, I have position in the stock.)

 

 

 

 

 

5 thoughts on “Is Dilip Buildcon the Next Larsen & Toubro?

    1. I had collected data from annual report which most people ignore. Apart from this, some of this data from insider which I have access to.

      Like

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