Ahluwalia Contracts

Ahluwalia Contracts India (ACIL), a long-established construction contractor, operates primarily in the commercial, residential and industrial contracts space. The stock, at its current price of Rs 62.3, trades at 6.5 times its trailing four-quarter earnings. Investors with a two-three year perspective can consider buying the stock of ACIL

The current price provides a good entry point for this construction contractor. A healthy — and growing — order book of Rs 4,143 crore, expanding margins, execution capabilities across a wide range of projects and low debt levels provide earnings visibility for this company.
Broad-based

ACIL started out as a pure-play civil construction contractor, later migrating to new avenues with the result that it picked up a broad mix of projects. Besides turnkey construction services primarily in the commercial and residential space, the company has a ready-mix concrete division (now hived off into a wholly-owned subsidiary), project design consultancy and electro-mechanical works. A separate subsidiary deals with aluminium works.

Government contracts, which make up 27 per cent of the order book of Rs 4,143 crore (as of March 2009), may be a key focus area for the company in the coming quarters. This could be a positive at a time when order flows from private players remain sedate. Electrical and plumbing contracts form 4 per cent of the order book, with the remaining 69 per cent from private players.

Skewered towards real estate residential projects (which form about a third of the order book), a fair bit of projects are industrial and commercial in nature, countering, to an extent, the currently tepid residential real estate. The company also aims to reduce its dependence on residential real estate.

To this end, ACIL’s wide-ranging project portfolio could give it a leg-up in the infrastructure space. It has started on BOT project bids and has secured one, involving development of bus depot and commercial complexes at Kota. It also has an order for the construction of a passenger terminal for the Birsa Munda Airport, Ranchi.
Growing order book

ACIL’s order book, on an average, has a timeline of 24 months, throwing good light on future earnings. In the past two months alone, the company has announced projects worth Rs 572 crore. The March ’09 order book has grown 32 per cent in the year 2007-08 and now stands at 4.7 times FY-08 sales.

Sales grew at a CAGR of 43 per cent in the past three years, while profits posted a growth of 116 per cent on account of improved operational efficiency.

Quarterly growth, too, has been healthy; the company posted 30 per cent plus growth rates in sales and over 15 per cent growth in net profits in the quarters between April and December 08 (March ’09 quarter and FY 09 results will come out in late June), among the highest related to its peers.
Robust returns

Returns — on capital employed and net worth — have been on an upswing, the former moving up from 28.5 per cent to 56 per cent in the space of three years (2005-08); with the latter up from 16 per cent to 51 per cent in the same period.

Margins have shown a marked improvement as well. At the operating level, they moved from 6.3 to 12.8 per cent and from 1.7 to 5.8 per cent at the net profit level in the years between 2005 and 2008. On a quarterly basis, margins slipped in the September ‘08 quarter compared to the same period in the previous year due to higher raw material and employee costs, but picked up again in December.

Relatively low debt levels (debt-equity ratio was 0.5 times as of March-08) and positive operating cash flows to leverage further to fund projects. Capex for the year, though, was revised to Rs 50 crore from the earlier Rs 75 crore, suggesting a more cautious approach on the back of an economic slowdown and funding constraints.
Concerns

Delays in payments led to an extension of the working capital cycle from 75 to 90 days between September and December 2008. Turnover of assets has also been on the wane, moving from 6.7 times in 2005 to 5.8 times in 2008. Depreciation and taxes have consistently chipped away a good part of margins for the past few quarters.

The company may yet face trouble on its residential project portfolio given that the sector is yet to demonstrate clear signs of a revival. The company may also have to depend on consortiums for the time being to gain a firm foothold in BOT projects in the infrastructure space. This may lead to less lucrative returns until it gains independent qualification.