C&C Constructions

Investors can take advantage of recent price declines to buy the stock of infrastructure player C&C Constructions. At Rs 161, the stock is available at a bargain valuation of just 5.3 times trailing the 12-month earnings, a discount to peers such as Valecha Engineering and Ahluwalia Contracts. Those already invested may use the price decline to average costs. C&C's strengths include successful projects in tough terrain and diversification into urban infrastructure projects. Healthy operating margins and a sizeable order-book add to the attraction.



The order book stands at Rs 3,600 crore, thrice FY10 revenues. An average execution period of 30 months offers near-term earnings visibility. Trimming dependence on the road segment, C&C branched into water and sewerage, railways (together, 19 per cent of order book) and buildings (27 per cent). Central and State government spends on urban infrastructure development and dedicated freight corridors provide opportunities to ramp up segment contributions, where the margins are also higher. In the buildings segment, it is undertaking on Build-Operate-Transfer (BOT) basis a commercial complex attached to a bus terminus.

C&C has projects in Afghanistan and Bihar, where the margins are higher, competition is lower and a first-mover advantage helps in sustaining repeat orders. Geographically, the company is fairly well-diversified, with operations in Punjab, Haryana and Kerala among other places. It also has a joint venture with Spain-based Isolux Corsan which can help it obtain high-value BOT projects in Indian as well as global markets such as Vietnam, Africa and the Soviet block. This venture is likely to boost revenues in the third quarter of FY11.

Revenues and net profits clocked 52 per cent and 27 per cent compounded annual growth for the past three years. Operating margins dropped to 15 per cent in FY10 from 17 per cent in FY11, owing to high raw material costs. Margins are, however, well above those of peers. The September 2010 quarter saw margins improving to 19 per cent. C&C invests in ownership of key equipment which, while ensuring timely availability and reducing hiring costs, does bite into margins. Depreciation, together with interest outgo, lowered net margins to 4 per cent for FY10 (4.9 per cent for FY09). Debt-equity ratio is 1.2 times. The company plans to raise funds of up to Rs 450 crore by this yearend for investment in joint ventures and BOT projects. Investors may limit portfolio exposure to this stock, given its small-cap status.

via BL