Sushil Finance views on Mangalam Cement, Avaya GlobalConnect, Ahluwalia Contracts

Sushil Finance on Mangalam Cement - Target Rs 235

Sushil Finance has recommended buy rating on Mangalam Cement with a target of Rs 235, in its research report.

"Mangalam Cements (MCL), a B.K. Birla Group company, manufactures Cement and Portland Pozzolana Cement (PPC) using the dry process and markets them under the brand names of Mangalam and Birla Uttam. The manufacturing units of the company namely Managalam Cement and Neer Shree Cement are both located at Morak in the Kota district of Rajasthan. The company has a very strong Balance Sheet with zero Net Debt & Net Cash of Rs 285 million and we expect it Net Cash accruals to grow to Rs 2084 million by FY11. At the CMP, the stock trades at an attractive valuation of 3.9x its FY11 earnings and EV/EBIDTA of 1.2x FY11E, with high FY11 ROE of +20%," says Sushil Finance research report.

Sushil Finance on Avaya GlobalConnect - Target Rs 245

Sushil Finance has recommended buy rating on Avaya GlobalConnect with a target of Rs 245.
"Avaya GlobalConnect, with its best in class communications products & solutions and alliances with global technology leaders, is uniquely positioned to offer high-quality solutions to enterprises across industries. Recently, the Company has taken several measures to reduce its operating cost and has developed many industry-specific solutions, which are well-accepted by its customers. These continuous efforts have started benefiting the Company, while in Q4FY09 its profitability has improved significantly. Going forward, we expect AGC’s consolidated APAT to grow by 36.5% & 22.7% in FY10E and FY11E respectively."

"At the CMP, the stock is trading at an attractive valuation of 9.1x & 7.4x its FY10E & FY11E earnings of Rs. 20 & Rs. 24.5 respectively. Moreover, AGC has strong balance sheet with high net cash and is available at an attractive 2.3x FY11E EV/EBITDA. We recommend “BUY” rating on the stock, with a price target of Rs 245, at which the stock would quote at PER of 10x based on FY11E Earnings," says Sushil Finance research report.

Sushil Finance on Ahluwalia Contracts - Target Rs 228

Sushil Finance has recommended buy rating on Ahluwalia Contracts with a target of Rs 228, in its research report.

Ahluwalia Contracts, ACIL has a strong order book of Rs 53 billion and its order-book to bill ratio is likely to improve further in near future. This gives a clear visibility to the earnings of the company for more than two years. Its strategy to increase infrastructure order book would ensure growth until a demand revival is seen in the retail and commercial projects. We expect the company to grow at a CAGR of 30% for next two years. At CMP , the stock is trading 14x FY11E EPS of Rs.14 & 10x FY12E EPS of Rs 19. Given its strong order book, strong balance sheet and proven track record of the management of timely execution of the projects, ACIL is well poised to ride the construction boom in the country and thus we initiate coverage with a Accumulate rating on the Company with a target price of Rs 228 (based on 12x its FY12E EPS of Rs 19).

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.