Afcons A Niche Diversified EPC Play, Jefferies Says; Starts at Buy
Jefferies says the company's diversified segmental and geographic exposure de-risks its business model and widens its opportunity pipeline
(The Corner Office Journal) -- Jefferies said Afcons Infrastructure Ltd. is a play on India's infrastructure capital expenditure upcycle and initiated coverage on the stock with a Buy call and a base case target price of 580 rupees.
The target price implies a return of 25% from the stock’s closing price of 464 rupees on the National Stock Exchange yesterday.
Quality EPC Player
“Niche diversified EPC (engineering, procurement, and construction) play,” Jefferies said in an investor note.
The brokerage said Afcons is among India’s largest listed diversified EPC companies after Larsen & Toubro (L&T) and it is present across the infrastructure spectrum, including road, rail, water/irrigation and marine.
Jefferies said hydrocarbon is also an area of expertise, where L&T is primarily the other prominent player. Geographically, Afcons works in 30 countries, with focus on Africa, the Middle East and Southeast Asia, it noted.
The brokerage said Afcons is a quality EPC player in a double-digit top-down growth opportunity.
Jefferies expects India's infrastructure and industrial capital expenditure to rise at 11% CAGR in FY24-FY27E between power and water, among others.
Healthy Order Flow
The brokerage said the company’s FY25 revenues are weak as FY24 orders spilled into FY25, given the general elections.
However, its FY25 order flow is likely to be at a record high of 218 billion rupees ($2.50 billion) versus previous FY22 peak of 169 billion rupees, it added.
Jefferies said its FY24-FY27E revenue CAGR is 9% and FY25E-FY27E is 17%, backed by an estimated 41% order flow CAGR in FY24-FY27E.
The brokerage said FY24-FY27E EBITDA should see a 12% CAGR with margins rising from 10.3% to 11.1%.
Management Focus
Jefferies said growth with margin/returns has been the management's focus unlike other mid-sized EPC companies, which faced a difficult 2010-2020 period on leverage and returns.
The brokerage said Afcons, even pre-IPO, had a 0.5x net debt-to-equity, which has dropped to 0.1x post IPO and should remain at levels similar to that in the medium-term.
The company’s FY24 net working capital is also healthy at 21% of sales, it added.
Profit Growth Outlook
Jefferies said the company's diversified segmental and geographic exposure de-risks its business model and widens Afcons opportunity pipeline, while its track record reflects return, margin and cash flow focus versus aggressive bidding approach.
“We believe profits will rise 72% in FY24-FY27E, backed by orders, some operating leverage and lower interest cost,” Equity Analyst Lavina Quadros and Equity Associate Koundinya Nimmagadda wrote in the note.
The brokerage has a target price of 740 rupees on Afcons, based on its upside scenario assumptions.
Note: $1 = 87.3027 Indian rupees
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