Capacite Infraprojects Ltd – Fastest growing focused EPC (building & Housing) player
Incorporated in August 2012, Capacite Infraprojects Ltd (CIL) is backed by strong promoters, Rohit Katyal and Rahul Katyal, having over two decades of experience in the infrastructure industry. CIL has emerged as a preferred construction contractor of private residential, commercial and institutional buildings, which led to a robust revenue growth of 55% CAGR to Rs13.6bn in FY18 v/s Rs2.34bn in FY14. The growth is led by promoter’s strong relationships with marquee private developers, robust engineering skills and skilled workforce. Ownership of core assets and advanced construction technologies have improved construction cycle and resulted superior profitability (EBITDA/PAT margins of 16.7%/6%) and high return metrics. We believe that the growth momentum is expected to continue with strong order book of Rs.5682cr (FY18) which is to be executed in next 3 to 3.5 years.
Geographically, it operates in fast-growing regions of MMR, NCR, Bengaluru, Kochi, Chennai, Hyderabad, and Patna and has undertaken projects from developers such as Lodha, Wadhwa, Oberoi, Godrej, Prestige, Purvankara, Rustomjee, Transcon Developers among others.
Key Investment factors:
Industry tailwinds to support strong growth:
India’s rising population growth, rapid urbanization and increasing nuclearization of families are pushing demand for housing. By FY22, there is expected to be a shortfall of 111 million (Rural-47mn, Urban – 64mn) housing units India there by creating huge supply-demand gap. Government thirst to create housing for all by 2022 and implementation of major policies like RERA, GST and IBC are going to bring radical changes in in the industry. As per IBEF, India’s real estate market is expected to reach a market size of USD 180 billion by 2020 from USD 126 billion in 2015. This not only augurs well for the developers but even the EPC players and CIL too is a direct beneficiary.
The direct impact of RERA is going to lead to consolidation in the real estate segment with a few good dominant players. These players in turn (to adhere to the strict RERA norms) would obviously prefer to work with players with a proven track record of quality construction & timely delivery. This is one single moat that players like Capacite enjoy and would lead to Capacite garnering a disproportionate market share, thereby ensuring high growth in order book over the forecast period. This in turn would lead to elevated valuation metrics.
Experienced promoters, skilled workforce and strong engineering skills gives confidence:
As a startup, CIL was promoted by Mr. Rohit Katyal, Rahul Katyal & Subir Malhotra, who have vast experience in the construction industry. Prior to their current venture, the promoters (Mr. Rohit Katyal & Rahul Katyal) were part of the core management team at Pratibha industries for well over 15 years. Since taking up responsibility at CIL, within 5 years they have ably demonstrated their potential by creating an impressive portfolio of projects with leading developers. With such an experienced management group, it’s safe to assume that the company is in good hands and has the potential to be one of the best in class if it already isn’t.
One of the key reasons for the growth of Capacite is the advanced technology it possess. As per the management, the Company is at par with larger players in terms of technological capability, which has helped it in better project management and ensures timely delivery. CIL follows well established processes to execute projects in an efficient and timely manner.
CIL uses advanced concreting technologies in construction depending on the scale. Ownership of a modern system formwork and other core assets (84% of net block as of Mar 31, 2017) such as tower cranes, passenger and material hoists, concrete pump and boom placers have ensured easy availability and quick mobilisation. Application of various available modern technology options ensures control over execution, thus increasing productivity and reducing the construction time.
It has over 1,000 employees comprising of specialized technicians and engineers and 900 contract workers to deliver world class projects on time. Its ongoing projects employ 10,400 sub-contract workers. Basically, over 80% of the workforce employed under its payroll consists of skilled technicians & engineers capable of handling large & complex projects. In fact, the business model is built around understanding & leveraging construction technologies for speedier & timely completion of projects.
Strong Order book augurs well for revenue visibility:
Despite the industry reeling from multiple headwinds like RERA, GST & demonetization, CIL has managed to grow at a scorching pace. It’s order book has grown at a staggering CAGR of 36% from 1,693 crores in FY14 to about 4,289 crores at the end of FY17. At the end of FY18, the order book stands at 5682 crores, with most of the existing orders originating from marquee logos.
Geographically, the company undertakes projects only in a few cities across India. It is easier to access resources in these geographies, thus resulting in better management of projects & timely completion. Its largest presence is in Mumbai and surrounding areas, wherein it has undertaken maximum projects and comprises 78.5% of the order book. CIL has a disproportionately high market share in high rise & super high-rise projects than the other segments (gated communities, villaments & commercial projects) it operates in. This also translates into higher margins. Currently, 85% of the projects are residential and the rest are commercial. With increasing capabilities, the share of commercial projects is also slated to increase. Almost 90% of the order book comprises of projects from reputed and established players which gives us comfort with regards to working capital management and revenue sustainability.
Going forward, CIL plans to 1) increase its presence in South India, while reducing the dependence on MMR, 2) focus on top 7-10 cities in India, given huge potential in high-rise buildings segment and 3) bid for design & build government contracts from select agencies and municipal corporation, which are closer to existing geography, yield high margins and low working capital in line with existing order book
Healthy margins, low leverage drives better than industry RoE and RoCE:
Growing order book and strong execution capability has led to robust revenue growth of 55% CAGR to Rs13.6bn in FY18 v/s Rs2.34bn in FY14. Robust engineering skills and access to modern technology aided in average EBITDA margin of 16.5% and PAT margin of 6% in FY16-18, which is better than diversified segment peers and in line with single segment focused peers. We expect the trend to continue, given CIL’s focus only on building & housing segment in coming years.
CIL, which had significantly higher receivable days of 147 in FY14, has managed to bring it down to 105 days in FY17. Similarly, payable days have also reduced over the years from 152 days in FY14 to about 101 days in FY17 as creditors were offered better terms. With FY18 being the 1st year of implementing RERA, the creditors and debtor days have gone up mainly on account of increase in Trade Receivables resulting from extended negotiation process in finalizing the amendments in orders due to GST implementation. The Net working capital days (including retention money) stood at 89 days during FY18 as compared to 65 days for FY17. The Net working capital days (excluding retention money) stood at 58 days during FY18 as compared to 34 days for FY17.
Financial Outlook and Valuation:
CIL enjoys a high order book to revenue ratio of almost 4.2 times which gives us revenue visibility over the next few years. We expect the net revenues to grow at a CAGR of 22% to Rs. 2100 crores by FY20. With more focus on higher margin vertical high-rises & super high-rises, we expect EBITDA margins to sustain. Paring of debt is also expected to contribute to improving profitability and deleveraging the balance sheet. We expect the EBITDA to grow at a CAGR of 20% and earnings are expected to grow at a CAGR of 28% by FY20. Further, the return ratios ROE & ROCE are set to decline initially to 12.5% and 18%, respectively, due to the higher base on account of raising of equity and then improve to 15%+ & 20%+, respectively, by FY20. Currently, the stock is trading at 10x EV/EBITDA multiple. With the strong growth and increased valuation multiples we expect the stock to deliver 50% returns in next two years.