Recommendation from Construction - Real Estate sector

This section gives a recommendation of a stock having a stock price below Rs 150 with sound fundamentals and expected to give handsome returns over a one-year time horizon.

VASCON ENGINEERS : BUILDING A FORTUNE

HERE IS WHY
✓An excellent track record in construction
✓Infrastructure boost in favour of the company
✓Sound financial strategies in place

India’s growth in 2023 and beyond will largely be driven by significant strides in key sectors, with infrastructure development playing a crucial role. Investments in building and upgrading physical infrastructure on account of businessfriendly initiatives are essential for increasing efficiency and costs. Infrastructure support for manufacturers is also a top agenda, benefiting the Smart Cities Mission and Housing for All programmes. Taking all this into account, our low price scrip for this issue is Vascon Engineers. Incorporated in 1986, it began operations primarily as a company engaged in engineering, procurement and construction (EPC) services.

Backed by 23 years’ experience in providing these services, the company has completed 179 EPC contracts with a total contract value of ₹880.5 crore. Of these, 155 projects have been for third parties while 24 projects have been developed by the company or other development entities. Additionally, the company is involved in developing a multi-level car parking for Delhi International Airport. It also has a 24 per cent equity interest in a company that intends to focus on infrastructure development such as roads. Vascon Engineers delivered a strong performance in the first half of FY24, driven by a healthy order book and strong execution capabilities. The company’s order book stands at ₹2,854 crore. This robust order book provides visibility for faster project execution and uninterrupted cash flows. Notably, 87 per cent of the order book comprises government projects that offer greater stability and predictability.

In Q2FY24, the revenue of the company stood at ₹217.10 crore, which is 6.18 per cent higher on a QoQ basis, while it decreased by 0.11 per cent on a YoY basis. The company’s PBIDT excluding other income stood at ₹10.49 crore, which decreased by 27.85 per cent QoQ, while on a YoY basis it decreased by 5.07 per cent. The company also maintained a PBIDTM of 4.83 per cent excluding other income. The profit after tax (PAT) witnessed a substantial fall of 60.36 per cent on a QoQ basis, which stood at ₹4.67 crore. 

At TTM, Vascon Engineers is trading at a PE of 16.4 times, which is higher than its three-year median PE. The company has maintained a ROE and ROCE of 11.3 per cent and 11.3 per cent, respectively. It has a three-year compounded sales and profit growth of 25 per cent and 37 per cent, respectively. The company has a debt-to-equity ratio of 0.20 times and interest coverage ratio of 9.12 times. Vascon Engineers has seen significant growth in its order book, financial performance and balance-sheet strength since FY19. The company’s order book has doubled, indicating strong growth momentum. 

The government sector’s increasing contribution provides stability and long-term visibility. The company is strategically leveraging this growth to optimise capacity utilisation, leading to higher revenue growth and improved cash flow generation. It is also strengthening its balance-sheet by using incremental cash flow generation and funds raised from a preferential issue to repay debt. This proactive approach demonstrates the company’s commitment to financial prudence and long-term sustainability. To reiterate, the government’s clear focus on developing infrastructure and move ahead with its plan to provide housing for all will definitely stand in favour of Vascon Engineers and its various projects. Considering all these factors, we recommend BUY.