AUGUST 20, 2018

Result Update VASCON ENGINEERS LTD (VEL)

Stock Details
PRICE RS.27 TARGET RS.48 BUY
Market cap (Rs mn) : 4702
52-wk Hi/Lo (Rs) : 52 / 25 VEL Q1FY19 reported strong growth in EPC business while real estate segment
Face Value (Rs) : 10 reported loss due to lower revenue recognition, increased fixed cost and
3M Avg. daily vol (Nos) : 464,769
unfavorable project mix. The real estate revenue also got impacted due to
Shares o/s (mn) : 174
adoption of new Ind AS 115.
Source: Bloomberg

Financial Summary (consolidated)

Key Highlights
Y/E Mar (Rs mn) FY18 FY19E FY20E  Net revenue for the quarter grew at 15.4% yoy to Rs 939 mn driven by 19.8%
Revenue 5,298 7,052 8,149 yoy growth in EPC business at Rs 835 mn while real estate revenue declined
Growth (%) 10.1 33.1 15.6 by 11.2% yoy to Rs 104 mn. Adjusted for Ind AS 115 impact, the revenue from
EBITDA (26) 596 836 real estate segment grew by 78% yoy to Rs 208.5 mn.
EBITDA margin (%) (0.5) 8.4 10.3
PAT 46 382 577
 EBITDA margins for the quarter also declined by 110 bps yoy on account of
AEPS 0.3 2.4 3.6 loss reported in the real estate segment due to higher fixed cost to market
AEPS Growth (%) 299.4 722.4 50.9 launch pipeline, lower revenue recognition due to accounting changes and
Book value (Rs/share) 38.4 40.6 43.9 losses recognized in Windermere sale.
Dividend per share (Rs) 0 0 0
 VEL witnessed strong external EPC order inflows of Rs 1.9 bn which took its
ROE (%) 0.7 5.6 7.9
Adj ROCE (%) (1.8) 4.5 6.8 external order book to Rs 7.87 bn. VEL targets to add Rs 5 bn of new orders
P/E (x) 93.7 11.4 7.5 in FY19E based on current BG limits which seems to be achievable based on
EV/EBITDA (x) (262.2) 11.0 7.6 Q1FY19 order inflows and future pipeline.
P/BV (x) 0.7 0.7 0.6
 The company has achieved new sales bookings of Rs 1.64 bn which includes
Source: Company, Kotak Securities - PCG
Rs 1.02 bn from new launch of affordable housing project at Katvi, Pune. Its
Shareholding Pattern (%) premium project, ‘Windermere’ in Pune has got new bookings of ~Rs 500 mn.
(%) Jun-18 Mar-18 Dec-17
Promoters 35.0 35.0 36.4
Valuation & outlook
FII 0.1 0.0 0.0 The company is positive on its business segments and expects new sales booking
DII 0.3 0.6 0.4 from the next phase of launches in Katvi, Forest Edge, Coimbatore, etc. Further,
Others 64.1 64.3 63.2
strong EPC order book would drive revenue for EPC segment. We have revised
Source: Company
our estimates lower for FY19E and FY20E factoring in lower revenue from real
Price Performance (%)
estate segment and lower order inflows guidance for EPC segment. The stock is
(%) 1M 3M 6M
trading at FY19E and FY20E PE of 11.4x and 7.5x based on revised EPS of Rs 2.4
Vascon Engineers 0.7 (20.7) (30.1)
and Rs 3.6 respectively. We maintain Buy on VEL with revised SOTP based target
Nifty 4.2 7.4 9.7 price of Rs 48 (Vs Rs 52 earlier).
Source: Bloomberg Quarterly performance table (standalone)

Price chart (Rs) Year to March (INR Mn.) Q1FY19 Q1FY18 % Chg Q4FY18 % Chg

55 Net Revenues 939 814 15.4 1,059 (11.3)

Raw Materials Cost 697 628 10.9 840 (17.0)
45 Gross Profit 242 186 30.4 219 10.5
Employee Expenses 119 85 39.4 138 (14.2)
35 Other Expenses 80 54 48.7 108 (26.3)
Operating Expenses 895 767 16.7 1,086 (17.6)
25
EBITDA 44 47 (6.8) (27) NA
Aug-17 Dec-17 Apr-18 Aug-18
EBITDA margin 4.7% 5.8% -2.6%
Source: Bloomberg
Depreciation 18 17 10.2 21 (11.1)
Other income 41 42 (1.9) 151 (72.7)
Net finance expense 52 58 (10.1) 43 20.0
Profit before tax 15 15 0.7 60 (75.0)
Provision for taxes - - - - -
Reported net profit 15 15 0.7 59 (75.0)
Pankaj Kumar
Net profit margin 1.6 1.8 5.6
[email protected]
+91 22 6218 6434 Source: Company

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AUGUST 20, 2018

EPC revenue witnessed robust growth

The standalone net revenue for the quarter grew at 15.4% yoy to Rs 939 mn driven
by 19.8% yoy growth in EPC business at Rs 835 mn (Vs estimates of Rs 754 mn).
But real estate revenue declined by 11.2% yoy to Rs 104 mn (Vs estimates of Rs
115 mn). Adjusted for Ind AS 115 impact, the revenue from real estate segment
grew by 78% yoy to Rs 208.5 mn and was ahead of our estimates.
The EPC (external) segment witnessed decent growth in revenue as its projects
picked up pace in terms of execution. We expect the execution in the EPC
segment to remain strong based on robust order book and order inflows. Its
subsidiary, GMP is also doing well (after exiting services business) with Rs 500 mn
revenue (in Q1FY19) and made profits. As per management, GMP is on track in
terms of meeting its revenue guidance of Rs 2-2.5 bn.

EBITDA Margin declined due to losses reported in real estate

EBITDA for the quarter declined by 6.8% yoy on account of Rs 20.3 mn loss
reported by real estate segment. EBITDA margin was at 4.7% Vs estimates of 7.9%
due to loss in the real estate segment while EPC EBIT margins at 22.5% was ahead
of estimates of 10%. EBITDA margins for the quarter declined by 110 bps yoy on
account of loss reported in the real estate segment due to higher fixed cost
pertaining to market new launches, lower revenue recognition due to accounting
changes and losses recognized in Windermere sale. In Windermere project the
revenue recognition was also contributed by past inventory sold at lower price
and thus contributed to the loss. As per the management, the current inventory
is being sold at much higher realization and expects profits to be back on track.
Employee expenses in the real estate segment also increased as it has added new
employees for sales and marketing of real estate division. The higher margins in
EPC business is due to contribution of JV project under Ajanta Enterprise which is
expected to continue for next 4 quarters. Post that the margins would normalize
to estimated level of ~12%.

Segmental Breakup (standalone)

(Rs Mn) Q1FY19 Q1FY18 % Chg Q4FY18 % Chg
Revenue
EPC 835 697 19.8 917 (8.9)
Real Estate 104 117 (11.2) 142 (26.7)
EBIT
EPC 188 83 126.3 214 (12.4)
Real Estate (20) 47 - (63) -
Source: Company

Robust order book and future pipeline, reduced inflows guidance

VEL has robust external order backlog of Rs 7.87 bn and internal order book of
Rs 1.8 bn at the end of Q1FY19 which takes total order backlog at Rs 10.7 bn. VEL
has added Rs 1.9 bn of new orders in Q1FY19 and has pipeline of new orders
based on that it is targeting to add Rs 5 bn of projects in FY19E. This is lower than
its previous target of Rs 7 bn due to constraints related to Bank Guarantee (BG)
limit. The company expects increase in BG limit in future based on improvement
in ratings. This would help it in bidding for larger projects in future. Based on
current gross block, VEL can execute Rs 10 bn of EPC work in a year and hence
current balance sheet has strength to achieve growth in next two years.

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AUGUST 20, 2018

Update real estate projects

The company has achieved new sales bookings of Rs 1.64 bn which includes Rs
1.02 bn from new launch of affordable housing project at Katvi, Pune. The
company launched phase 1 & 2 of Katvi project where it sold 550 units out of
total 700 launched in May 2018. The company is expecting approval for launch
of phase 3 in next month. The company would also be launching phase 2 of Forest
Edge and Forest County. It will be launching projects in Madurai also.
In its premium project ‘Windermere’ in Pune, it has got new bookings of Rs 500
mn and expects OC in Tower-2 in current year. Post that, the company would be
looking at refinancing/ repayment of high cost debt of Rs 900 mn related to the
project. It is also targeting to launch phase three of Coimbatore project ‘Tulip’.
The company is expecting strong response to these projects.

Other highlights
 VEL’s has 45% stake in 145 acres of land in Thane. The company needs to
invest in the land to make its contiguous for development. As per
management, the project will take more than 2 years before coming on
drawing board.
 The company aims to reduce its consolidated debt which stood at Rs 2.7 bn
at the end of the quarter. It also targets to reduce/refinance the high cost
debt related to Windermere which it got financed from Edelweiss.
 GMP has received order from Tata steel for the supply of steel doors. As per
management this order would contribute Rs 500 mn of revenue in FY19E and
has potential to contribute upto Rs 1 bn revenue in FY20E.

Outlook and valuation

VEL is positive on its business segments and expects new sales booking from next
phase of launches in Katvi, Forest Edge, Coimbatore, etc. Strong EPC order book
to drive revenue for EPC segment. We believe that the current order book, future
pipeline and strong response to its real estate projects, would help VEL to
turnaround its business. We have revised our estimates for FY19E and FY20E
factoring in lower revenue from real estate segment due to new Ind AS 115,
higher fixed cost and lower order inflows guidance for EPC segment. The stock is
trading at FY19E and FY20E PE of 11.4x and 7.5x based on revised EPS of Rs 2.4
and Rs 3.6 respectively. We maintain Buy on VEL with revised SOTP based target
price of Rs 48 (Vs Rs 52 earlier).
Valuation Table
Segment Multiple Per Share
EPC Business 8 25
Real Estate 1 19
GMP 9 14
Net Debt 10
Total Value 48
Source: Kotak Securities - Private Client Research

Revision in consolidated earnings estimates

Previous Revised % Chg
FY19E FY20E FY19E FY20E FY19E FY20E
Revenue 7171 8817 7052 8149 (1.7) (7.6)
EBITDA margin (%) 8.8 10.3 8.4 10.3 (35.5) bps (4.1) bps
APAT 418 659 382 577 (8.5) (12.4)
AEPS 2.6 4.1 2.4 3.6 (8.8) (12.7)
Source: Kotak Securities - Private Client Research

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AUGUST 20, 2018

Company background
Vascon Engineers Ltd (VEL) has presence in construction and development of
residential and commercial real estate projects with a history of over 25 years. VEL
through its EPC and real estate verticals is active in multiple sectors including
residential, industrial, IT parks, malls, multiplexes, hospitality and community. The
company has presence in more than 10 states and has completed over 200
contracts of approx 50 mn sqft. In EPC, VEL has expertise across various types of
buildings and has capability to execute 8 mn sqft of projects (or Rs 10 bn in value)
per annum. In real estate, its land current portfolio includes 30.9 mn sqft of
saleable area with VEL’s share of 16.2 mn sqft. Its 85% subsidiary, GMP Technicals
Solutions is one of the leading players in clean room partitioning systems and
turnkey solution provider in India having manufacturing facilities in Baddi,
Himachal Pradesh and in Bhiwandi, Thane that is engaged in making fibre doors,
aluminum doors & windows, clean room partition & windows, aluminum sections,
etc.

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AUGUST 20, 2018

Financials: Consolidated
Profit and Loss Statement (Rs mn) Balance sheet (Rs mn)
(Year-end Mar) FY17 FY18 FY19E FY20E (Year-end Mar) FY17 FY18 FY19E FY20E
Revenues 4,812 5,298 7,052 8,149 Paid - Up Equity Capital 1,677 1,741 1,741 1,741
% change yoy (18.1) 10.1 33.1 15.6 Reserves 4,808 4,939 5,322 5,899
EBITDA (158) (26) 596 836 Net worth 6,485 6,681 7,063 7,640
% change yoy (143.0) (83.5) (2381.7) 40.4 Borrowings 2,744 2,700 2,300 2,100
Depreciation 156 143 174 181 Net Deferred tax (84) (72) (72) (72)
EBIT (315) (169) 422 656 Total Liabilities 9,348 9,490 9,472 9,850
Other Income 580 379 250 250 Net block 1,235 1,199 1,125 1,044
Interest 327 253 275 242 Capital work in progress - - - -
Profit Before Tax (62) (43) 397 664 Total fixed assets 1,235 1,199 1,125 1,044
% change yoy (178.0) (31.1) - 67.2 Investments 1,050 856 856 856
Tax 15 4 107 179 Inventories 4,512 4,715 5,313 6,140
as % of EBT (24.2) (8.2) 27.0 27.0 Sundry debtors 2,241 2,056 2,860 3,305
PAT 12 46 382 577 Cash and equivalents 665 558 447 458
% change yoy (85.8) 284.3 722.4 50.9 Loans and advances & Others 1,780 2,173 2,282 2,304
Total current assets 9,197 9,502 10,902 12,207
Shares outstanding (mn) 168 174 174 174 Sundry creditors and others 3,543 4,007 5,334 6,164
AEPS (Rs) 0.1 0.3 2.4 3.6 Provisions 149 164 180 198
DPS (Rs) 0.0 0.0 0.0 0.0 Total CL & provisions 3,691 4,171 5,514 6,362
CEPS (Rs) 1.0 1.1 3.2 4.4 Net current assets 5,505 5,331 5,387 5,845
BVPS (Rs) 38.7 38.4 40.6 43.9 Total Assets 9,348 9,490 9,472 9,850
Source: Company, Kotak Securities – Private Client Research Source: Company, Kotak Securities – Private Client Research

Cash flow Statement (Rs mn) Ratio Analysis

(Year-end Mar) FY17 FY18 FY19E FY20E (Year-end Mar) FY17 FY18 FY19E FY20E
Pre-Tax Profit (62) (43) 397 664 Profitability Ratios
Depreciation 156 143 174 181 EBITDA margin (%) (3.3) (0.5) 8.4 10.3
Change in WC (871) 68 (167) (447) EBIT margin (%) (6.5) (3.2) 6.0 8.0
Other operating activities 533 (456) (14) (86) Net profit margin (%) 0.3 0.9 5.4 7.1
Operating Cash Flow (243) (288) 389 311 Adjusted EPS growth (%) (85.8) 299.4 722.4 50.9
Balance Sheet Ratios
Capex (230) (107) (100) (100) Receivables (days) 176 148 148 148
Free Cash Flow (473) (395) 289 211 Inventory (days) 342 325 275 275
Change in Investments 173 194 - - Loans & Advances 85 104 84 74
Investment cash flow (56) 87 (100) (100) Payable (days) 269 276 276 276
Cash Conversion Cycle (days) 335 301 231 221
Asset Turnover (x) 0.5 0.6 0.8 0.8
Equity Raised 64 65 - - Net Debt/ Equity (x) 0.3 0.3 0.3 0.2
Debt Raised 50 (44) (400) (200) Return Ratios
Dividend & others 148 85 - - RoCE (%) (3.4) (1.8) 4.5 6.8
CF from Financing 262 105 (400) (200) RoE (%) 0.2 0.7 5.6 7.9
Valuation Ratios
Change in Cash (38) (97) (111) 11 P/E (x) 374.1 93.7 11.4 7.5
Opening Cash 702 655 558 447 P/BV (x) 0.7 0.7 0.7 0.6
EV/EBITDA (x) (41.7) (262.2) 11.0 7.6
Closing Cash 665 558 447 458 EV/Sales (x) 1.4 1.3 0.9 0.8
Source: Company, Kotak Securities – Private Client Research Source: Company, Kotak Securities – Private Client Research

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AUGUST 20, 2018

RATING SCALE
Definitions of ratings
BUY – We expect the stock to deliver more than 12% returns over the next 12 months
ACCUMULATE – We expect the stock to deliver 5% - 12% returns over the next 12 months
REDUCE – We expect the stock to deliver 0% - 5% returns over the next 12 months
SELL – We expect the stock to deliver negative returns over the next 12 months
NR – Not Rated. Kotak Securities is not assigning any rating or price target to the stock. The
report has been prepared for information purposes only.
SUBSCRIBE - We advise investor to subscribe to the IPO.
RS – Rating Suspended. Kotak Securities has suspended the investment rating and price target
for this stock, either because there is not a Sufficient fundamental basis for determining, or
there are legal, regulatory or policy constraints around publishing, an investment rating or
target. The previous investment rating and price target, if any, are no longer in effect for this
stock and should not be relied upon.
NA – Not Available or Not Applicable. The information is not available for display or is not
applicable
NM – Not Meaningful. The information is not meaningful and is therefore excluded.
NOTE – Our target prices are with a 12-month perspective. Returns stated in the rating scale are our
internal benchmark.

FUNDAMENTAL RESEARCH TEAM

Rusmik Oza Arun Agarwal Amit Agarwal Nipun Gupta Krishna Nain
Head of Research Auto & Auto Ancillary Transportation, Paints, FMCG Information Tech, Midcap Special Situations
[email protected] [email protected] [email protected] [email protected] [email protected]
+91 22 6218 6441 +91 22 6218 6443 +91 22 6218 6439 +91 22 6218 6433 +91 22 6218 7907

Sanjeev Zarbade Ruchir Khare Jatin Damania Cyndrella Carvalho K. Kathirvelu

Cap. Goods & Cons. Durables Cap. Goods & Cons. Durables Metals & Mining, Midcap Pharmaceuticals Support Service
[email protected] [email protected] [email protected] [email protected] [email protected]
+91 22 6218 6424 +91 22 6218 6431 +91 22 6218 6440 +91 22 6218 6426 +91 22 6218 6427

Teena Virmani Sumit Pokharna Pankaj Kumar Jayesh Kumar

Construction, Cement, Building Mat Oil and Gas, Information Tech Midcap Economist
[email protected] [email protected] [email protected] [email protected]
+91 22 6218 6432 +91 22 6218 6438 +91 22 6218 6434 +91 22 6218 5373

TECHNICAL RESEARCH TEAM

Shrikant Chouhan Amol Athawale
[email protected] [email protected]
+91 22 6218 5408 +91 20 6620 3350

DERIVATIVES RESEARCH TEAM

Sahaj Agrawal Malay Gandhi Prashanth Lalu Prasenjit Biswas, CMT, CFTe
[email protected] [email protected] [email protected] [email protected]
+91 79 6607 2231 +91 22 6218 6420 +91 22 6218 5497 +91 33 6625 9810

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AUGUST 20, 2018

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