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

C&C Constructions

C&C Constructions

C&C Constructions IPO

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C&C Constructions: Invest at cut-off

The initial public offer of C&C Constructions is suitable for investors with a high risk appetite. A comfortable order-book, high-profit margins and consistent financial track record are positives for this construction company that operates mainly in the road and urban infrastructure segments.

Lack of business diversification and dependence on Afghanistan for higher margins are the major risk factors. A two-year investment perspective is necessary for conversion of orders on hand into revenues.

At the price band Rs 270-291, the offer is priced at 12-13 times its earnings for the year-ended June 2006 on the existing equity base. If the current order-book is converted into revenues, as per schedule, the price-earnings multiple would be 9-10 times its likely earnings for the year-ended June 2008 on a post-issue equity base.

Profile

A Delhi-based infrastructure company, C&C Constructions has operations in India and Afghanistan. It plans to raise about Rs 120 crore through this offer. Much of the proceeds are to be used for investment in Build Operate Transfer (BOT) projects in India, towards procurement of capital equipment and for meeting further working-capital requirements.

Comfortable order book

As of December 2006, C&C Constructions had unfinished and new orders adding up to Rs 825 crore. The order book, mainly consisting of road construction (62.5 per cent of orders) and a BOT road project (22.5 per cent), lends visibility to the earnings growth over the next two/two-and-half years.

Until 2005, C&C Constructions had much of its operations in Afghanistan. For instance, for the year-ended June 2005, projects in Afghanistan accounted for 92 per cent of the order-book.

Concentration of business in an area of high political and economic uncertainty raises to the company's business risk profile. However, the company appears to have now shifted its focus, with India accounting for 92 per cent of the order-book as of December 2006. This should mitigate the concentration risk.

Risky, but lucrative

While the company is likely to be focussed on India, we expect it to continue its business in Afghanistan for three reasons — one, the margins are extremely lucrative.

Two, the company has an edge in Afghanistan, having successfully implemented projects in tough terrains with its own logistics and support services, and competed with international players.

Three, the Joint State — USAID (United States Agency For International Development) Plan for 2005-2010 for development of Afghanistan has ensured smooth funding by agencies such as USAID, World Bank and the Asian Development Bank.

A bulk of this funding has been earmarked for roads. Having established its presence in Afghanistan, the company is likely to capitalise on the development work being implemented in the country.

Given Afghanistan's significant contribution to revenues and profits, the risk of order loss remains high. Execution of projects in Afghanistan has technically qualified the company (and its joint venture partner) to bid for projects in India.

This is reflected in the company bagging road and BOT projects (in road and power transmission) locally in quick succession.

The company has implemented most of the projects with its joint venture partner, B. Seenaiah and Company (Projects), a leading contractor for the National Highways Authority of India.

Any move by the latter (B. Seenaiah) to become a competitor may prove detrimental to C&C. Despite being in the road segment, which typically yields low margins, C&C Constructions has managed to maintain operating profit margins (OPMs) which are far superior to margins for players in the road segment. Valecha Engineering, a typical road sector contractor, has OPMs of about 7 per cent.

As against this, C&C Constructions enjoyed 23 per cent for the year-ended June 2006.

However, given the order-book shift, towards India, the margins are unlikely to be sustained. They may, however, remain superior to peers for the next couple of years.