Large railway capex plans to benefit GPT Infraprojects Ltd
Infrastructure is going to be one of the strong themes to participate in the current bull market. The large size of under developed infrastructure in India and the massive capex spending by the central and state governments has opened up trillion dollar market opportunity. The troubled infra companies have been deleveraging their balance sheets so as to empower themselves to undertake new projects.
GPT Infraprojects Ltd is a fast growing infrastructure company with stable balance sheet and improving fundamentals. The company has two business segments (Infrastructure and Sleepers) which are driven by the railway capex.
Infrastructure: Company is an EPC player involved in civil infrastructure projects for Railways, Roads, Airports, and Urban Infrastructure. But main focus and strength of the company is in constructing Railway steel girder bridges (Rail over bridges, Rail under bridges). There are only 3-4 companies present in this segment in India.
Concrete Sleepers: GPT is among the first concrete sleeper manufacturers for railway tracks. It has capacity of 2million sleepers per annum at five locations (3 India, and two in Africa). This segment also has limited competition.
Company enjoys limited competition in the both the segments it operates in. There are entry barriers for the any new company to enter in to these segments in terms of pre-qualification. Companies has to take approvals from railway department and should have strong execution history to bid for projects. These factors provide the company to have competitive edge. Strong growth and large size of opportunity that are arising from ongoing railway capex keeps the company in favorable position to enjoy sustainable growth for the next three to five years.
Key infrastructure segments include Roads, Railways, Ports and Airports. Our focus will be on the Railways opportunity as it is the key driver of the company. Indian Railway has embarked upon a massive Rs.8.56 trillion, with the CAPEX plan for 2015 to 2019, which is 90% more than in the combined CAPEX done in the previous 15 years. The performance in the first two years has been strong with nearly 59% and 29% year-on-year growth achievement especially for FY17 and FY16. There is a huge focus on better safety through building in rail over bridges, ending unmanned crossing, etc. Indian Railways is targeting to eliminate all unmanned level crossings from broad-gauge lines by 2020.
The estimated fund requirement for building ROBs and RUBs is Rs.40,000 crore. Further, the fund requirements for bridge rehabilitation is estimated to be over Rs.3,000 crore. Additionally, the government has announced commissioning of the 3,500 km railway line in 2017-2018, up from 2,800 km in 2016-2017. All of these are areas of large opportunity for the company in terms of infrastructure business.
Company has recently commissioned two new plants in Uttar Pradesh. These plants will be used for its order of Rs.246cr from GMR Infra JV and is to be executed in two years. Fundamentals have also seen good improvement in the last two years. With high margin projects and quicker payment cycle, company’s EBITDA margins have crossed 14%+ and working capital cycle has sharply reduced from 225 days to 121 days in the last two years.
The current order book stands at Rs.1850cr out of which Rs.725-750cr of order book will be executed during current financial year. This will lead to 45-50% growth in top line for FY18 against Rs.514cr in FY17. This will be led by the contribution from new plants which will be around Rs.90-100cr in FY18 for sleepers segment. In Africa business, based on order back log, the growth will be around 45-50% for sleepers segment. In infrastructure segment Rs.500cr will be executed during current financial year.
Company is also expecting order inflow of Rs.1500cr during FY18 showing visibility for next three years. The recent order of Rs.240cr if executed, company will be qualified to bid for Rs.1000cr projects. This project is expected to complete in next 36 months. This project execution will be the key turning point for the company as it will jump into the league of next level of growth.
From the past financial performance, company’s both the segments have decent economics which will enable it to generate good cash flows.
With 4% PAT margin on the top line of Rs.725cr, company is expected to post Rs.30cr net profit during FY18. At the market cap of Rs.397cr, company is trading at 13xFY18E earnings. The current order book stands at 3.6x its FY17 revenue shows visibility for next couple of years. From our analysis we believe the company is at an infection point in terms of its business growth and attractive valuations provides good investment opportunity over the medium to long term.