Stock Review: Ahluwalia Contracts

Investors expecting realistic returns can take exposure in Ahluwalia Contracts (India)'s stock with an investment horizon of at least two years

 

MID-TIER construction company Ahluwalia Contracts (India) (ACIL), has a reasonable project execution history and sound order book. Although the firm has a plain vanilla business model, it has, over a period of time, demonstrated its ability to execute projects in time. Given its future order pipeline, investors looking for realistic returns can take exposure in this stock with an investment horizon at least two years.

BUSINESS:

Ahluwalia Contracts (India) focuses on building residential and commercial real estate properties on a subcontract basis. With a pan-India presence, ACIL has grown at a steady pace over the last few years. The firm has a client list comprising groups such as ITC, Mahindra and HCL, and repeat orders account for 60% of its order book.ACIL closed FY10 with 1,560 crore in revenue.

   The company had an order book of 5,000 crore as of June 31, 2010, just over three times its revenue for 12 months to June 2010. As the firm has diversified its presence in the infrastructure area, there is almost an equal business split between private and government sector contracts in its order book.

   One-third of its order book is from real estate residential projects with the balance split between industrial and commercial projects. The firm has recently ventured into new segments including construction of power generation plants besides roads and other civil infrastructure work under the build operate transfer (BOT) mode.

GROWTH:

With increasing thrust of the government on improving infrastructure in the country backed by higher spends, ACIL can tap into the growth prospects given its history of timely execution of orders. The company's future strategy is to focus on its core business of construction of residential and commercial properties even as it diversifies further into the infrastructure sector. It recently bagged an order of 72 crore for the development of a bus terminal in Kota, Rajasthan. It also won a few civil construction projects in the power generation sector and expects it to contribute around a quarter of total orders in the next couple of years.

FINANCIALS:

The company's standalone net revenue clocked a compounded annual growth rate of 40%, while net profit grew a tad faster at 43%, over the last four years. While revenue growth was due to timely execution of projects, earnings growth was due to better operational efficiency and lower nonoperational expenses.

   ACIL has maintained positive operating cash flows over the last five years owing to a lean net working capital cycle compared with its peer group. Lower capital gearing is one advantage for ACIL over its peers. ACIL has a debt-equity ratio of 0.86, much lower than the industry average of 1.20 for the year ended March 2010. This has allowed the firm not to go for equity dilution like many other companies over the last one year, and has resulted in higher return on equity of 21% as compared with an industry average of 17%.

VALUATIONS:

The stock has been beaten down 20% since mid-October and at the current market price of 175, the scrip is trading 15 times its standalone profit for the 12 months to end-June 2010. This looks modest compared with the industry average of price-earning multiple of 24.Assuming a 20% to 25% annual growth in revenues for the current fiscal and for the following year, we expect the company to close with a net profit of 140 crore in FY12. This means ACIL is trading around eight times the estimated two-year forward earnings, which provides reasonable upside potential for the stock.

CONCERNS:

The company has been in the thick of things over the past two weeks over alleged irregularities on payments related to the scam-tainted CWG that has also taken a toll on its stock price. The firm also faces a potential delay in payments from realty firm Emaar-MGF for a subcontract work. Emaar MGF's bank guarantee from a separate project for the CWG has been blocked and even as the firm is in the queue to raise fresh funds, its payment due to ACIL may get delayed that will affect earnings position for the immediate quarter.