C&C Constructions

Investors with a long-term horizon may capitalise on attractive valuations to buy into the stock of construction contractor C&C Constructions. Currently trading at Rs 181.5, the stock is valued at 8 times its trailing four-quarter earnings.

C&C Constructions’ core competency is in road infrastructure, the segment accounting for 61 per cent of the order-book. This segment may see a pick-up in the coming years, with the focus on infrastructure development. Entry into BOT projects and other infrastructure spaces such as railways, water and sanitation, as well as commercial buildings provides a balance to the order-book and a platform for expansion into bigger projects and new segments.

Order-book growth has been healthy; at 75 per cent (to Rs 3,057 crore) since the start of the current financial year in June 2008. The order-book features a 14 per cent overseas exposure, constituting projects in challenging areas such as Afghanistan, which offer superior margins. It is executable over a period of 30 months, providing good earnings visibility for the coming quarters.

In tandem with the order-book, sales too clocked strong growth at 50 per cent-plus over the past four quarters, despite the general economic slowdown. Sales growth is suggestive of fast-paced execution, allowing it to secure more contracts while building on credibility. The company has traditionally banked on joint venture partners to qualify for bigger bids and enter new construction segments. That said, the company has also managed to bag projects on its own merits; share of joint venture projects in its order-book has dropped to 45 per cent in the March 2008 quarter over 55 per cent the quarter before. Another strategy is to own most of its equipment. While that may mean increased capex in the short-term, it ensures timely availability of critical equipment and easy mobility between projects.

A shift away from the Afghan projects, high employee costs and interest payouts due to debt-funded growth have cut down margins significantly over the past few quarters; this may continue. Debt is currently 1.5 times equity, and will be capped at 1.75 times. Increased project intake and execution has stretched the working capital cycle, but that should get addressed with easing credit availability.

via BL