C&C Constructions

Investors with a medium-term horizon may buy the stock of construction contractor C&C Constructions, on the merit of its low valuations, operating efficiencies, comfortable order book position with shorter execution periods and wide geographical presence.

At Rs 229, the stock trades at a modest PE of 7.5 times trailing four-quarter earnings, lower than peers such as Valecha Engineering. Investors may accumulate the stock on declines linked to broad markets.

Roads and highways have long been the mainstay of the company, and this segment forms 52 per cent of the Rs 2,738-crore order book (as of March 2010). C&C has carved a reputation for timely execution in difficult terrains such as Bihar and Afghanistan.

In recent times, it has also moved to mitigate risks of sector concentration by increasing presence in higher margin railways (14 per cent of order book), commercial and industrial buildings (29 per cent of order book). It has begun to execute contracts in the water and sanitation segment and power transmission lines too.

The company is thus poised to increase order intake as spending on infrastructure and urban development grows. The order book stands at 3.7 times the sales of FY09 (July 2008 to June 2009) with an average execution period of 24 months, providing near-term earnings visibility.

C&C also undertakes contracts through joint ventures, allowing access to bigger projects and boosting own expertise. It has recently partnered Spain-based Isolux Corsan through which it will be able to execute projects in Asia and much of the Soviet bloc in segments such as oil & gas, power transmission, railways and roadways and bridges. C&C has a strategy of owning high-end equipment, with investment increasing over 60 per cent in FY09. Such investment ensures timely availability of critical equipment, besides operational efficiency. Operating margins are a healthy 24 per cent for the nine months ended March 2010, up from the 19 per cent in the same period the previous year, far superior to its peers. Net profit margins for the same period were at 4.7 per cent against 3.7 per cent last year on account of high depreciation warranted by machinery investment and interest costs on borrowing to fund projects and equipment. Such margin suppression may not persist in the long term as the company completes sourcing key equipment. Sales increased 33 per cent for the nine-month period ending March 2010, while net profits grew 67 per cent.

via BL