Ahluwalia Contracts

Ahluwalia Contracts is changing its order mix to buck the slowdown and continue the growth story in the long run

One year Beta 0.68
Institutional Holding 7.67%
Dividend Yield 2.1%
Current P/E 3.79
Current Mcap Rs 221.24 cr

FINDING A company that has a good track record, strong balance sheet and positive cash flows is the key to success in long term investing. It works across sectors. One such company in the construction sector is Ahluwalia Contracts. Though it is primarily dependent on the real estate sector, it has a strong order book and the mix is expected to change for the better. While, the company’s CAGR in sales stood at 31%, both operating profit and net profit posted a rise of 40% between the fiscal 2000 and 2008. Also, the firm has generated positive cash flows from operations in eight out of the past 10 fiscals. Its debt to equity ratio was less than one for the past few years. The company is expected to continue with its growth story, albeit at a slower pace in the future. Ahluwalia Contracts is a cash contractor and also caters to industries such as healthcare , hotels, educational institutions, etc. It produces ready mix concrete (RMC) on a small scale. The company caters to a wide range of players from government organisations to private sector developers.

GROWTH PROSPECTS:

Ahluwalia Contracts is going to reap the benefit of positive macro-economic and demographic factors in the long term. The company’s order book of Rs 4,150 crore as of December 2008 stands comfortable at 3.85 times trailing its four quarter sales ending September 2008. It has bid for projects worth Rs 1,200 crore including L1 stage orders of Rs 200 crore whereas its strike rate is 20-25%. The company is planning to include more of government contracts, which now include 20% of the total order book, and work for projects such as multi-level car parking, bus/railway terminal, airport,etc. This will enable it to diversify its client base and cut the risk of default.

CONCERNS:

Real estate and IT oriented projects, which form more than 70% of the company’s order book, are going through tough times and it is expected to continue for some more time. The company has experienced some strain in its receivables owing to the downturn in the real estate space. Its average debtor days have gone up from 45-60 days four-five months back to 60-90 days, now. Also, payments are delayed or overdue for 50-55% of the projects. If the situation persists for a longer period, it will impact the liquidity position and cash flows of the company. The company’s average cost of debt at 12% is quite high. Though general interest rate scenario shows a downward bias, it will take some time for benefits to trickle down to users of debt.

FINANCIALS:

In the first half of the current fiscal, net sales rose 55% to Rs 555.7 crore, while operating profit grew 45% to Rs 64.3 crore on sharp rise in raw material and employee costs. Net profit growth was slower at 32.5% due to higher fixed costs at 79.5%. We expect the firm’s growth to slowdown to sub-30% in FY09 and FY10. Margin, particularly net margin, is expected to come under pressure in FY09 owing to higher interest costs. We expect a 190 basis point hit on the net margin from 5.9% in FY08. However, we expect things to slightly improve especially on the margin front in FY10 on lower input prices and interest costs.Thus 25 basis point improvement in both operating profit and net profit margin is expected.

VALUATION:

The stock trades at 3.8 times its trailing four quarter (TTM) earnings ending September 2008. This is on the lower side of 2.83-57.12 times price to TTM earnings multiple band since its listing in February 22, 2007. The stock looks cheap given the visibility in the business.