Markets
For Afcons, Vadhvan Port can be a big opportunity
Summary
- Afcons prospects of winning orders is bright given it is the tenth largest international marine and port facilities contractor in the world.
Afcons Infrastructure Ltd stock is finally seeing increased interest from investors after a tepid listing at ₹474 compared to the issue price of ₹463 in November. The stock rose to a new high of ₹570 on Friday. Sure, the recent excitement in the stock was following the order win of ₹1,085 crore from Defence Research and Development Organization.
Still, a big opportunity for Afcons lies in the upcoming Vadhvan Port in Maharashtra. It will be the largest deep-water port in India. As it is likely to be operational by 2030, the ordering process should be in full swing over the next two-three years. The total project cost including land acquisition is ₹76,220 crore. Vikram Suryavanshi, analyst at Phillip Capital, believes that the potential of total orders for the construction of port could be at least one-third of the project cost or ₹25,000 crore. As every infrastructure company has limitations of execution capabilities, the award of orders could be divided among several companies. Suryavanshi believes that a significant chunk of ordering could be for land reclamation, breakwater construction (wall construction for protection against the impact of sea waves) and building of jetty. The size of the potential single order can be gauged from the recent award of order of ₹1,648 crore for land reclamation and shore protection to ITD Cementation India.
Afcons prospects of winning orders is bright given it is the tenth largest international marine and port facilities contractor in the world. Also, it has successfully executed breakwater construction at Chhara Port in Gujarat. In terms of experience of building a jetty, it has executed Sohar jetty project at one of the deepest ports in Oman.
If Afcons wins some orders for Vadhvan Port, it could swell its already healthy order book. The company’s order book has already risen from ₹30,961 crore as of FY24 to ₹34,152 crore at September-end, translating into book to bill ratio of 2.7x. The management had highlighted in the September quarter (Q2FY25) earnings call that they are not comfortable with a very high book-to-bill ratio of above 4x as it creates execution challenges. At the same time, if the ratio slips below 2x, it creates order booking pressure. Hence, the management is comfortable with the ratio being between 2.5x to 3.5x.
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In the half year ended September (H1FY25), revenue (excluding other income that management considers as part of operating income) fell 6% year-on-year. This was attributed mainly to the soft order booking in the previous two years emanating from bank guarantee constraints and slower execution owing to the general elections and an extended spell of heavy rains.
However, the Ebitda margin improved 164 basis points year-on-year to 11.4%. The margin is much higher than that of Larsen & Toubro Ltd’s (L&T) project and manufacturing division's 7.6% in H1FY25, guiding to clock 8%-8.25% margin for FY25.
To be sure, a soft H1 would make Afcons FY25 look dull, but the company has guided for 20%-25% revenue growth for FY26 as the constraints of non-fund limits have been sorted out and order booking momentum is back on track.
Afcons stock is currently quoting at 28x of FY26 Bloomberg consensus estimates. This is in line with the 26x-28x price-to-earnings multiple accorded to L&T’s projects & manufacturing business by brokers such as Motilal Oswal and Prabhudas Lilladher. Considering the execution risks involved, which has led to delays in completion of marine projects in the past, a large near-term upside may be capped.
