CCCL: Buy

South-based Consolidated Construction Consortium Ltd (CCCL) is a pure play construction contractor. The company is well-placed to capture opportunities in both sectors that it operates in — realty and infrastructure — and retains the flexibility to shift between them based on sector prospects. It has a sizeable short-term order backlog more than half of which comes from existing customers, suggesting execution skills that are not easily replicated by other players.

At Rs 126, the stock trades at five times its trailing 12 month earnings, at a premium to some peers. Enterprise value stands at 0.32 times its trailing 12 months sales and 0.26 times its projected FY10 revenues. Buying this stock will pay in the long term, given the company’s wide-ranging expertise, focus on construction contracting alone and reputation for delivering quality which will help it tide over a slowdown in the coming few quarters.
Healthy Order Book

The current value of outstanding orders stands at Rs 3,650 crore, up almost Rs 1,000 crore from the order book at the beginning of this financial year. Order backlog is 2.5 times the 2007-08 revenues. CCCL’s projects span a short duration averaging 12 to 18 months, thus ensuring quick transition of orders into revenue and medium-term earnings visibility. One longer term project is the Chennai airport project commanding a 30 month timeline.

Centred on pure construction contracts, CCCL does not have any projects on long-term Build-Operate-Transfer models. Price escalation clauses are built into over 80 per cent of contracts. In a bid to tide over the slowing pace of order inflow, CCCL has relaxed its benchmark for order value, and sought to broaden expertise in various sectors which would serve it in bidding for a greater diversity of projects.
Order book composition

The order book is dominated by commercial construction projects with 45 per cent of the orders stemming from this segment. Industrial contracts are about Rs 600 crore (16 per cent). Share of infrastructure contracts has been slowly increasing, currently at about Rs 1,440 crore or 38 per cent of the order backlog. Having been contracted for airport projects, bridges, it hopes to solidify presence in the infrastructure space by booking orders in water treatment plants, metro rail construction, power and similar projects. Residential construction forms a minimal portion of the order book, and will remain so for the coming quarters. Outstanding contracts are worth about Rs 30 crore, less than 1 per cent of the backlog. This may shield it considerably from the marked slowdown and liquidity problems that are currently holding up realty projects. A conscious effort is being made to include a greater proportion of public sector projects to reduce its dependence on the private sector on which front the company is facing payment delays.
Financials

Sales and profits grew at a CAGR of 85 and 114 per cent, respectively, over the past three years. Return on capital employed improved on a year-on-year basis, from 31 to 33 per cent in the space of three years. Return on investment moved up as well, from 23 to 27 per cent. Turnover of working capital into sales picked up from 2.6 times in FY06 to 3.7 times in FY 08. On the funding side, CCCL still retains a part (Rs 51 crore) of its IPO proceeds and it operates at a low leverage of 0.4 times, ranking lower than most peers. Interest cover is fairly strong at about 11 times, leaving the company reasonably comfortable to meet fund requirements.
Concerns

The past two quarters have seen CCCL’s revenues continue to expand at a fast clip, even as margins fell. The September quarter saw a 22 per cent increase in sales compared to the same quarter in 2007, but operating and net profits dipped 5 and 37 per cent, respectively. The December quarter fared slightly better with sales up by 30 per cent over the same period in 2007, as operating and net profits declined by 6 and 32 per cent. Margins suffered with a 144 basis points cut in operating margins in the December quarter over the preceding quarter.

Five order cancellations worth Rs 395 crore and a slowdown in execution of select projects due to clients’ funding constraints meant that successive quarters saw sales sliding. Though manpower costs have increased on a quarterly basis, the company has held back hikes in salaries though it is not resorting to workforce cuts. The average period for debt collection too has increased from 51 days at the start of this financial year to the current 60 days. The next few quarters may see sluggish order inflows, slower execution of projects or maybe further cancellations, but the company remains one of the preffered exposures in the construction space.