B L Kashyap and Sons

Investors with a long-term perspective can consider buying the stock of construction contractor, BL Kashyap & Sons (BLK), currently trading at Rs 427, at a multiple of 17.6 times its standalone trailing four-quarter earnings.

Increasing signs of a revival in the real-estate segment and diversification into other business streams could augur well for the company’s revenue growth after a lacklustre performance in FY-09.

The company’s sound track record of quality and timely construction in industrial, commercial and residential real-estate has enabled it bag projects from some of the leading developers in the country.
Bright spots

BLK suffered heavily as a result of the realty slump that started in 2008, when construction contracts dwindled as a result of lower off-take across various user segments.

Note that the company still leans heavily towards realty developments — residential, retail, commercial and IT projects constitute 46 per cent of the order book .

Post-March 2009, these segments have shown a slow uptick in off take. Increase in demand in the residential real-estate now appears evident what with some developers hiking the price of their new projects.

Further, according to a Cushman & Wakefield report, even while the office market is expected to witness a fall in demand in 2009, a 19 per cent compounded annual growth is expected between 2009-13.

Both these developments, if sustained, would bode well for BLK’s earnings growth.

The re-rating being witnessed by realty developers in the stock market could also offer some clues on the prospects in store for BLK.

Hotels, where the company has a 19 per cent concentration, however, remains a grey area, as the segment is yet to demonstrate clear signs of pick-up.

Revenue streams

After the slump in its core business provider — real estate — last year, BLK diversified into the promising infrastructure segment in early 2009.

Of its March 31 ‘09 order book size of Rs 2000 crore, about 6 per cent (Rs 125 crore) is for infrastructure and PSU contracts, and the company is the lowest bidder for a further Rs 200 crore. BLK goes in for joint bids where it cannot qualify for projects on its own.

That apart, almost 30 per cent of the order-book comes from industrial projects and projects from corporate end-users such as HCL and Tech Mahindra and order book, thus, does not depend entirely on the fortunes of the real estate sector.

Affordable housing is another area which the company will focus on. Total order book stands at 1.37 times its FY-09 sales, lower than some peers, but a quick execution schedule of 12-18 months could serve it well.

BLK will also generate revenues from monetising land parcels held in its wholly-owned realty subsidiary, Soul Space Projects, as well as selling developed space to its clients.

About Rs 110 crore is expected to flow in by the end of FY10, with a further Rs 60 crore in the pipeline, according to company estimates.

Financials

Sales fell 5 per cent in FY-09, while net profits slid far more by 32 per cent due to high labour costs and interest.

However, the company managed a three-year CAGR of 46 per cent and a net profit growth of 39 per cent.

Though the company has not seen cancellation of projects, it has slowed down execution on a few where it has foreseen payment delays. Working capital turnover has been affected, dropping from 4.8 times in FY-08 to 2.4 times in FY 09.

Operating margins have slipped 2.8 percentage points in FY 09 from the previous year, but have held at 10.6 per cent, improving further to 12 per cent in the June 2009 quarter. However, interest and depreciation costs have dragged net profit margins.

That said, debt-equity ratio is low at 0.26 times, and the company will use proceeds derived through Soul Space to meet debt obligations.

via BL