Diversification into coal MDO and rail appears synergistic; significantly de-risking future sales mix; new Rs 810 TP DBL’s diversification into related sectors leads to semi-annuity type revenue stream over the next five years.
DBL can exit the hybrid annuity model assets earlier, leading to inflows of Rs 20bn over FY22-23F.
Diversification into coal MDO and rail appears synergistic; significantly de-risking future sales mix; new Rs 810 TP DBL’s diversification into related sectors leads to semi-annuity type revenue stream over the next five years; maintain Buy with TP of Rs 810 (62% increase) DBL management has stated its intent to diversify from roads and highways to other sectors. We note the company’s significant and synergistic progress in the direction, with its entry into railways and also into coal mining development and operations (MDO). We believe that benefits from this will be visible in the longer run. Coal MDO operations secured by DBL can lead to sustainable OCF of Rs 2.4- 2.7bn/pa in steady state. DBL has secured Siarmal MDO, with peak production level of 50 mntpa, for a concession period of 25 years. This contract carries production risk while price risk is on the client, i.e. Coal India. With land compensation already paid and clearances in place, we expect limited operational risks.
We estimate annual OCF (operating cash flow) of Rs 2.4-2.7bn and revenues at Rs 15-18bn/pa during peak production phase. With cost escalation clauses in the contract, we expect limited commodity cost risks. We see significant MDO opportunities ahead. DBL’s entry into rail can be linked to its strong presence in roads, as well as presence in metros. DBL is taking up composite civil works contracts from RVNL. DBL, with its experience in highway earthworks, sub-base construction, and having large stone crushing operations, can operate in this segment in a synergistic manner.
We expect de-leveraging at the standalone level, driven by early cash realization from asset sales: Under new regulations, DBL can exit the hybrid annuity model assets earlier, leading to inflows of Rs 20bn over FY22-23F. This can cover equity needs for projects and allow further uptake of new projects.
Trading at ~9x FY23F EPS of Rs 65.6 (underlying EPC P/E at ~7x). We value the stock at 11.0x (vs 8.5x earlier, based on strong infra prospects) FY23F EPS (based on a sustainable long-term ROE of 17.5%) and add BOT/HAM investments at book value (FY22F) to arrive at a higher TP of Rs 810, implying ~39% upside, and maintain ‘buy’ rating. Key risks are slowdown in ordering, WC deterioration and weak execution levels.