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Keepin’ the Road Hot
Subdued topline, margin expansion keeps earnings in line
ARSS reported a depressing topline growth of 14.2% YoY at INR3bn (vs
our expectation of INR3.9bn), impacted by the extended monsoon
season during Q3FY11 across the Eastern region of the country. A
277bps YoY expansion in OPMs to 21.8%, led majorly by savings on
raw material and direct expenses, though ensured a 30.8% YoY rise in
operating profits to INR659mn. However, higher interest (+109.4%
YoY) and depreciation (+160.3% YoY) charges played a spoilsport,
containing net profits growth to a meagre 2% YoY to INR261mn.
Diversified order backlog, poised for growth
ARSS closed FY10 with an outstanding order backlog of ~INR35bn
(2.3x FY11E revenues). While high margin railways (45%) and road
projects (43%) have dominated majority of the order book in the past,
diversification into execution of irrigation and canal construction
works is presently on. The same is expected to mitigate the risk of
slowdown in revenues from any segment due to unforeseen
circumstances. The execution period of the present order backlog
stands at 18-24 months, with an average ticket size of INR1-1.25bn
Tone down earnings by 5.8% for FY12, upgrade to ‘Buy’
We tone down our earnings estimates for FY12 by 5.8%, factoring in a
higher than anticipated interest charges on account of rising working
capital requirements. Backed by the 18-24 months revenue visibility
pertaining to the present order backlog, ARSS looks set to deliver a
~30% earnings CAGR over the FY11-13 period. We remain confident
on its management to capitalize on the high growth opportunities in
the sector while maintaining the exhibited performance and
competitiveness. Post the near 43% fall in the stock price over the past
three months, valuations seem attractive for investors looking to make
fresh entries. Upgrade to ‘Buy’ with Mar’12 based price target of
INR796.