Ahluwalia Contracts (India) Ltd (Ahluwalia), a company with an extensive experience spanning over four decades, belongs to an exclusive group of contractors that possess the requisite qualifications to undertake large-scale building projects in India. It has demonstrated the ability to adapt to changing circumstances and has emerged successful during various economic cycles. At present, the company is benefiting from the favourable ongoing infrastructural development and has experienced strong inflows resulting into highest-ever order backlog of Rs120.8bn at Q2 FY24-end. Taking into account the L1 position, the backlog is further strengthened and provides industry leading >4.5x assurance. Further, it is well-placed to secure incremental opportunities with its diversified presence and expected continuation of industry-wide awards. Thus, with robust backlog and growing in-house construction capabilities, we anticipate a healthy 24.1% revenue CAGR over FY23-26E. Margins are moving northwards and likely to reach 11.5% (by FY26E), with the efficient operations, better cost control, and the acquisition of new projects at advantageous margins. No major provisions/write-offs ahead and price-escalation clauses in majority of contracts protects downside. At the net level, we expect 26.7% CAGR in PAT over FY23-26E. Cash surplus position to get maintained with no-further incremental exposure to asset heavy business. Healthy working capital days and strong return ratios are added positives. Given the promising outlook, we initiate coverage with a Target Price of Rs958/share, representing 22% potential upside. BUY
Strong track record with exceptional execution proficiency offers distinct advantage
Ahluwalia prides itself on an impressive track record of achievements, having successfully completed over 100 projects and currently overseeing more than 50 ongoing projects in various sub-segments of the construction industry. These projects have been acquired largely through good management touchpoints, longstanding collaborations with distinguished architects and consultants, as well as a robust network of channel partners. Further, the execution of such projects is aided by highly skilled internal execution teams, in-house architects, and owned machineries and equipment backed by continuous investments in upgrading technology, systems, and processes. This strategic approach grants an advantage in maintaining control over project execution and costs and achieving better margins.
Bulging opportunities, and nationwide presence propelled order backlog to all-time high
Ahluwalia, following two years of lower-than-expected inflows, has witnessed a surge in order additions in FY23 (Rs50.6bn) and YTD FY24 (Rs52.6bn) largely attributed to the government’s emphasis on the healthcare and education sectors, as well as the reconstruction of prominent government structures. Most projects typically range within Rs1-5bn, while the largest contract being the station redevelopment in Mumbai, valued at Rs24.5bn. The strong inflows have contributed to the order backlog reaching a record all-time high of Rs120.8bn at Q2 FY24-end (assurance: ~3.7x). Furthermore, the assurance strengthens to >4.5x at present considering the L1 status in a project. The government contracts account for ~70% of overall backlog. Ahead, it is aiming to add ~Rs10bn more in the rest of FY24, to hedge against a slowdown as ordering generally slows closer to elections. Medium term opportunities also remain healthy. Based on this, we project inflows of ~Rs87bn in FY24, ~Rs55bn in FY25, and ~Rs68bn in FY26. The revival of capex from the private sector would contribute to clientele diversification strategy.
Revenue to improve at 24.1% CAGR, operating margin likely to reach 11.5% by FY26E
Ahluwalia’s revenue growth has experienced volatility in recent years due to several factors, including disruptions caused by Covid’19 pandemic, reduced labour availability, and lower executable order backlogs. However, it regained the lost momentum in H1FY24, achieving a healthy 35.1% y/y growth in topline. Ahead, we project a 24.1% CAGR during FY23-26E, expected to be bolstered by a robust order book position, healthy inflows, and upped execution pace. Further, the operating margins have been trending upwards and have shown improvement to 10.4% in H1FY24, up from the low of 7.8% in FY21. We expect the company to post 10.9% in FY24, 11.2% in FY25, and 11.5% in FY26, driven by the execution of better margin projects and the efficient absorption of operating overheads. At the net level, we expect PAT to improve at 26.7% CAGR, supported by robust revenue growth, and margin expansion.
Cash surplus position to strengthen; working capital days to increase slightly
Increased emphasis on projects undertaken by public sector entities, careful selection of private clients’ projects, and effective management of collections have contributed to Ahluwalia’s reduced reliance on external debts. Additionally, it meets the working capital requirements partly through mobilisation advances. Consequently, it maintained a net cash surplus position of ~Rs4.9bn (with merely Rs320mn gross debt) at Q2 FY24-end. We expect better OCF in the future, which will help strengthen cash and cash equivalents, while also meeting capex requirements. Net working capital (incl. retention and unbilled revenue) considered to hover at ~92-95 days over FY24-26E, higher than 83 days at FY23-end, due to the extended debtor and inventory days resulting from the execution of larger government projects.
View: We initiate coverage with a BUY recommendation based on its strong fundamentals. We have assigned 16x P/E for FY26E construction earnings, while the Kota asset is assumed at its book value of Rs15 a share, to arrive at TP of Rs958. Risks: Delays in execution, and funding issues at clients-end.
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