Ahluwalia Contracts

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Ahluwalia Contracts, a mid size construction company, is well placed to benefit from the planned investments in the infrastructure sector, especially in urban infrastructure. Nevertheless, the company’s current order book of over Rs 5,000 crore indicates good revenue visibility for the next 2-3 years. The company’s foray into other promising areas of infrastructure construction such as power, road and water would now start reflecting in its order book and revenues leading to higher and sustainable growth in the coming years. Surprises could also come in the form of acquisitions in the near term aided by its cash balances which will strengthen its presence in other infrastructure verticals.

Core competence
Ahluwalia Contracts’ core strength lies in its ability to execute building construction projects on time which are not only reasonably large in size but also demand high quality of work. Some of the prestigious projects the company has executed independently include the ITC Grand Hotel in Mumbai, the Rs 1,000 crore Common Wealth Games Village, projects for Delhi Metro and many others. Currently, the company generates over 70 per cent of its revenues from building construction projects for the commercial, residential, institutional and retail segments. Notably, the company has been able to maintain a diversified portfolio in terms of clients as well as geographies.

Diversification strategy
Currently, infrastructure construction projects like metro rail, airports, water treatment and other urban infrastructure (like multi-level car parking, etc), account for only about 20 per cent of the company’s order book. However, the company is now planning to enhance focus on infrastructure projects, where opportunities are large and the government has planned huge investments, such as water treatment, power plants and roads. The company is already pre-qualified and has submitted its bids for some of the highway projects.

Acquisition plans
To fill its skill gaps in the construction business, the company intends to acquire an infrastructure company for which it will utilise the Rs 90 crore of cash balance in its books. “We might acquire companies in the infrastructure segment having exposure to roads and other segments like water. We are already in talk with some of these companies, which we are planning to finalise over the next few months," says Bikramjit Ahluwalia, CMD, Ahluwalia Contracts.

Within the infrastructure space, the company is also focusing on build-operate-transfer (BOT) projects and is planning to foray into construction of power plants considering the large opportunities in the power sector. The company is currently in talks with players like Reliance Power, Indiabulls Power and others. If the company manages to procure some projects in this segment, it would be seen in positive light and would lead to higher revenue visibility given that power plant projects are relatively bigger in size (of about Rs 500 crore). As a result of this, the company should over the next two years be able to increase its share of infrastructure projects from 20 per cent currently to 35 per cent.

Robust revenue visibility
The company is currently having an order book of Rs 5,300 crore, which is 4.4 times its 2008-09 revenues and provides growth visibility for the next two years. Notably, the company has already bid for about Rs 2,000 crore of new orders in different segments. Considering its strong order book, the company is expected to grow at about 30 per cent annually over the next two years. Also, if the company is able to procure projects in the road and power segments, the growth rates could be higher. The management believes that as they are getting more enquiries, the company should next year be in position to get some construction orders from the international markets.

REASONABLY PRICED
in Rs crore FY09 FY10E FY11E
Sales 1,191.0 1,520.0 1,975.0
EBITDA margin (%) 12.0 13.0 13.0
Net profit 57.0 95.0 116.0
EPS (Rs) 9.1 15.0 19.0
PE (x) 22.5 13.7 10.8
RoE (%) 37.9 43.0 36.0
RoCE (%) 30.4 32.0 28.0
E: Estimates

Investment rationale
The company’s good track record, strong execution capabilities, diversification into other segments and strong order book makes it one of the good investments in the infrastructure construction space. Also, the company generates high return on equity (RoE) as well as capital employed (RoCE) of over 30 per cent, which is among the best in the industry and is largely on account of the high asset-turnover ratio or efficient use of its assets. More importantly, the company is debt free at the net level.

Meanwhile, for the nine months ended December 2009, the company reported revenues of Rs 1,074 crore, which should help it end the current year with revenues of over Rs 1,500 crore. The next year, too, should see revenues grow by a strong 33 per cent to about Rs 2,000 crore. On the back of this growth in revenues, its 2010-11 earnings per share should rise by about 27 per cent to Rs 18.5.

At the current market price of Rs 205, the stock is currently trading at 10 times its 2010-11 estimated earnings, which is attractive considering the company’s future prospects, robust growth rates and increasing opportunities in the infrastructure sector.

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