Afcons Infrastructure Limited (Avoid)

Highlights

Afcons Infrastructure Limited (AIL) is part of Shapoorji Pallonji Group. AIL incorporated on 1959 and it is a infrastructure, engineering and construction company with a legacy of over 6 decades. AIL has a strong track record of executing numerous complex, challenging and unique engineering, procurement and construction (EPC) projects both within India and internationally.

In last 11 years they have successfully completed 79 projects across 17 countries with a total historic executed contract value of Rs. 563.05 bn. As of June Q1FY25, they have 65 active projects (i.e., ongoing projects) across 12 countries.

AIL projects cover five major infrastructure business verticals (i) Marine and Industrial, covering ports and harbour jetties, dry docks, wet basins, breakwaters, outfall and intake structures, liquefied natural gas tanks and material handling systems. (ii) Surface Transport, covering highways and roads, interchanges, mining related infrastructure and railways. (iii) Urban Infrastructure, covering elevated and underground metro works, bridges, flyovers and elevated corridors. (iv) Hydro and Underground, covering dams and barrages, tunnels (including large road tunnels) and underground works, water and irrigation & (iv) Oil and Gas, covering both offshore and onshore oil and gas projects.

AIL maintain a strategic equipment base comprising a wide range of heavy machinery and specialized equipment. This equipment base, along with the ability to source other high-tech equipment and in-house capabilities in managing specialized equipment, has been instrumental in winning several complex projects, such as the Atal tunnel, the High-Speed Railway Project, the Delhi – Meerut regional rapid transit system, Delhi Metro Phase IV.

Out of the total proceeds of Rs. 54,300 mn, Rs. 800 mn would use for CAPEX towards purchase of construction equipment, Rs. 3,200 mn would go towards funding Working capital, Rs. 6,000 mn would go towards repayment of certain borrowings. Rs. 2,500 mn would go towards general corporate purpose and Rs. 41,800 mn would go towards existing selling shareholders of the company.

Key Highlights

• The Indian construction industry value stood at Rs. 23,978.0 bn as of the FY23 and is projected to be, growing at a CAGR of 9.5 pct-10 pct between the FY23-FY28 to reach a market size of Rs. 38,508.9 bn by the FY28. Afcon is well placed to capitalise such big market opportunity.
• The company also benefit from the strong parentage of the Shapoorji Pallonji Group. The Shapoorji Pallonji Group has a legacy of over 150 years, and its strong reputation, global presence and extensive industry experience assists AIL in the growth of business and operations. Additionally, AIL gain access to the Shapoorji Pallonji Group’s network enabling strategic collaborations, business development opportunities and knowledge sharing.
• AIL order book is diversified across business verticals. Although their Urban Infrastructure business vertical forms the largest part of their order book, it has different components which ensure that order book continues to remain diversified. As of Q1FY25 they have a orderbook of Rs. 317,474 which is ~2.39x of FY24 of sales.
• Their government contracts are sourced from a wide range of entities across geographies and include a number of state agencies and public sector undertakings. Further, they maintain longstanding relationships with a number of private and government clients globally. This includes Arcelor Mittal, with whom they have an association of over 10 years
• Company executes certain projects through joint ventures, which further enhance AIL competitive position. Collaborating with established and respected companies in the industry allows them to leverage their expertise, networks, and credibility, facilitating smoother entry into new markets and enhancing overall business reputation.
• AIL’s key growth strategies include (i) Selectively pursue large value and complex projects (ii) Maximizing opportunities in existing markets and expanding footprint in overseas markets (iii) Focus on cost management (iv) Optimizing project execution and management (v) Growing a highly skilled and motivated workforce and strengthening AIL equipment base.
• Sales of the company has grown by 9.73 pct CAGR during the period FY22-24 and EBITDA and Profit grew 21.72 pct CAGR and 12.28 pct CAGR over FY22-24. During FY24, company reported sales of Rs. 132,675 mn which grew by 4.99 pct YoY while EBITDA rose by 15.24 pct YoY to Rs. 15,831 mn as EBITDA margin expanded from 10.70 pct in FY23 to 11.60 pct in FY24. As of FY24 the company reported profit of Rs. 4,497 mn which was grew by 9.46 pct YoY. AS of Q1FY25 company registered sales/EBITDA/Profit of Rs. 31,544 mn/Rs. 3,717 mn/ Rs. 916 mn.

Key Risk

• AIL business significantly depends on projects awarded by government or government-owned customers, which subjects them to a variety of risks. Such projects contributed to 69.80 pct of its Order Book.
• Terminating projects prematurely may result in missed payments, negatively impacting the company’s financial health and operations.

Financial Performance

Peer comparison based on FY24 Financials

Valuation

Afcons Infrastructure Limited (AIL) is the flagship infrastructure engineering and construction company of the Shapoorji Pallonji group, a diversified Indian conglomerate, and have a legacy of over six decades. They have a strong track record of executing numerous complex, challenging and unique EPC projects both within India and internationally. At the upper end of the price band of Rs. 463 the issue is priced at a PE of ~46.5 its FY25E annualised earnings. The issue looks fully priced. One can avoid this issue.

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