Ahluwalia Contracts Research Report By Stewart & Mackertich

Ahluwalia Contracts have carved a niche in the industry as one of the leading Civil Contractors of the country with specialized experience in the Construction Industry for more than 36 years. The Construction services provided by the company consist of the erection of structures and allied services which include planning and scheduling manpower, equipment, materials and the appointment of sub-contractors required for the timely completion of a project in accordance with the terms, plans and specifications contained in the construction and allied documentation. The Company has had the distinction of being associated with most of the leading Architects and Consultants of the country for building of large Institutional Buildings and Corporate Office Complexes, Industrial Complex Buildings, Multi-Storeyed Housing Complexes, Township Development projects, Hospitals, Medical Colleges and Laboratory Buildings, 5-Star Hotels, Educational and Technical Institutes, Etc.

Strong financials

Company reported decent set of number in 3Q2017 with 12 per cent growth in sales on YoY basis and 19 per cent increase in operating profit on the back of strong execution after seasonal halt. The shift in orders towards government contracts which constitutes 68 per cent led to EBITDA margin rising by 100 bps. With greater operating profits, low finance cost on the back of company’s focus on reducing debt, the PAT for the quarter reported 23 per cent rise YoY. Amid challenging environment of Demonetization, the company performed well on all the parameters. Company debt to equity ratio is continuously decreasing which currently stood at 0.3 ( as of FY16). The company aims to bring debt down to zero by FY19, with the help of equity infusion by the promoters (of INR30-35 crore) and free cash-flow generation from business operations. The current debt of the company stood at INR101 crore as of 31 December 2016.

Revenue visibility driven by Strong Order book

The Company has an Gross order book of INR6943 crores as of 31st Dec 2016 which comprises of 68 per cent public and 32 per cent private. The north region comprises of 63 percent while west and east constitutes 15 per cent and 22 per cent. The company has robust order backlog of INR4013 crores which provides strong revenue visibility over the period. The Company is expecting NBCC to come up with one or two building redevelopment tenders worth INR7-8bn . Company is also expecting order inflow from government post elections.

Government’s focus to boost the sector

Infrastructure spend and various policy initiatives will be likely to positively impact the construction sector which in turn lead to higher revenue growth of the company. Growth in residential construction and commercial industrial construction is another growth driver for the company. The Union Government has allocated INR396135 crore in the Union Budget 2017 -18, which is a clear sign that the sector has a long run towards economic growth. Granting the infrastructure status to the affordable housing segment will help the construction sector in further grabbing order inflows. Roads and smart cities are the two key areas which have lot of potential.

Valuation

Considering strong revenue visibility as current order book of INR4013 crore (3.2x FY16 revenue), high ROE and declining debt-equity ratio, we assign the PE of 18x for FY19 EPS of 22.93 and arrived at the Target price of INR413.00