Consolidated Construction: Invest at cut-off

Investors can subscribe to the initial public offer of Consolidated Construction Consortium (CCC), an integrated construction services company.

Bright growth prospects, backed by demand for quality construction contractors, strong management bandwidth and an order-book that lends visibility to earnings growth over the next couple of years are positives for this offer.

At the offer price of Rs 460-510, the price-earnings multiple is 14-16 times the company’s estimated consolidated earnings for FY-09 on an expanded equity base.

This valuation is comparable to its nearest peer B. L. Kashyap and Sons.

At the offer price band, the market capitalisation of the company’s stock on listing would be Rs 1,700-1,900 crore.

Profile and objectives

CCC undertakes turnkey building contracts for corporates, infrastructure and realty players and the Government. The company cannot be termed as an infrastructure or real-estate player and can be better defined as a pure construction company that offers a wider range of services. The company has clients in sectors such as IT, manufacturing, retailing and education. The offer proceeds (Rs 170-190 crore) are to be primarily used for acquiring construction equipment and for investments in subsidiaries, which provide allied construction services.

Lesser risks

The profile of CCC inspires confidence as it is primarily into a business with lesser risks and uncertainties than are typically associated with infrastructure and real-estate players. For instance, the company does not face risks related to buying or developing land or any slowdown in the infrastructure order-flow from the Government.

No doubt, the margins for a pure construction player may not be as lucrative as the others in the industry.

However, higher volume of business could make up for this. Infrastructure and real estate companies are holding huge orders that need to be executed and the likes of CCC are likely to benefit from this. CCC could also benefit from higher corporate capital expenditure outlays.

The demand for CCC’s service is reflected in a compounded growth of 75 per cent and 125 per cent in its sales and net profits respectively over the last three years. The company’s order-book of Rs 2,200 crore as of August 2007 is over 2.5 times its sales for FY-07.

Well-structured

CCC’s diversification in terms of business, client mix and geography points to a well thought out model to mitigate risks.

One, although CCC’s current order-book is concentrated in the South (92.5 per cent), it has been making headway in States such as Rajasthan, Himachal Pradesh and Delhi.

Two, in terms of client mix, the company has a healthy variation of clients from various sectors with almost 40 per cent of them turning in for repeat orders. Three, the service/product mix, although tilted towards core construction, has a healthy sprinkle of mechanical and engineering services and interiors (through subsidiaries) to the extent of 17 per cent.

With the company further investing in its subsidiaries, the allied services offered by it is likely to emerge as value-adds for improving the operating profit margin, which is now 8 per cent.

Four, the company does not depend so much on business from the Government (which is about 16 per cent of order-book), thus reducing the risk of any slowdown or stoppage in projects due to delays.

Five, fixed price contracts at about 15 per cent of current orders means that the rest of the projects are likely to enjoy price pass through for any raw material hikes.

We do however, see challenges arising from the company’s plans to build a food processing Special Economic Zone through a subsidiary. We have not factored in the same in our valuations due to lack of visibility.