Capacite Infraprojects — creating the right kind of capacity to grow

This can be vouched from the fact that in the private construction space today, which is highly competitive and far more stringent in its requirements, the company has gained a substantial market share. Its growing order book is a good indicator. Over the last three years, its order book has grown at about 94% annually to Rs 4,289 crore in FY17, currently standing at Rs 5,240 crore or close to four times its sales.

Quality of growth

What is more, the company wants to ride a quality growth. Even if the margins are high in projects which come up with the extended payment cycle, the company would not take unless similar terms are matched by the creditors like suppliers of metals, cement and other construction material that accounts for 40-50% of the overall cost.

To put in perspective, the company’s debtor days stay at 100 days, which is equal to the creditors of 96 days.

Moreover, it would sign projects only with an advance and a letter of credit, without which it would prefer to walk away from the project. But this comes with its costs as the company has lost several projects to competitors.

“We are happy that there is so much to be done. We never intend to grow our topline at the cost of putting pressure on the balance sheet. Every single project that we bid follow stringent working capital cycle norms. Even if you compromise in one or two projects and incidentally a bad cycle hits the industry, it can undo all the efforts and jeopardise the balance sheet,” said Rohit Katyal, Executive Director & CFO, Capacite Infraprojects.

This is precisely the reason that its working capital days at about 35 days and debt to equity at 0.3 times is one of the lowest in the industry. But how does the company ensure that it grows with such stringent trade practices? During financial year 2014-17, the company’s sales had grown at 70% annually, accompanied by 90% growth in net profit.

“We are a process-driven organisation. The private clients particularly have no compulsion, they are more than willing to spend little more for quality of construction, timely completion, design and technological capabilities where we score relatively high. We have bagged projects from Tata, Godrej, Lodha Group and Oberoi and others that itself speak about the credentials we built in the industry,” says Rohit Katyal.

Strong moat

Is it coming at the cost of margins and return on equity? If it has a moat, does it reflect in return ratios?

The company has consistently improved its operating margins from 10.2% in FY14 to 14.5% in FY17 and return on capital employed from 20.1% to 33% during the same period, drawing its strength from pricing power and operational efficiencies such as fixed assets turnover ratio of over four times. The company believes that with the surging order book (Rs 5,240 crore having an execution cycle of 36), there is a long way to go in terms of growth that would drive operating efficiencies further.

“It would be difficult to replicate past growth considering the high base effect, but in the light of large order book that we have and the opportunities that are there in building space particularly in emerging segments like airports, railways, institutional office space and opening up of the market in tier two cities, we are hopeful of making decent growth,” said Rohit Katyal.

Growth at reasonable valuations

Backed by a strong order book, the Street is expecting a 28-30% annual growth in sales over the next two years. Moreover, with 100-150 basis point jump in operating margins, growth in earnings could be little higher at about 30-35%. Based on FY20 estimated earnings of about Rs 25 a share, the stock at current market price of Rs 341 per share is trading at 14 times.

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