Ahluwalia Contracts (India): Book Profits

Reliance on the tepid real-estate market and slow execution of projects may constrain revenues for a few quarters.



Skewed as its order book is towards real-estate projects, Ahluwalia Contracts' pace of execution slowed in late 2010 . At Rs 123, the stock trades at 11 times its trailing 12-month earnings, a slight premium to peers such as Man Infraconstruction.

Investors can book profits on their holdings in the stock of Ahluwalia Contracts. An order book reliant on the tepid real-estate market and slow execution may constrain revenues and earnings growth for a few quarters while diversification into the infrastructure space is fairly nascent. The current order-book of Rs 5,500 crore is also just a shade higher than the Rs 5,300 crore at end-March 2010.

Investors who bought the stock on our ‘buy' recommendation in May 2009 stand to make an absolute return of 96 per cent.

Order-book composition

As of November 2010, about 36 per cent of the Rs 3,130 crore order book came from residential contracts. Commercial real estate, including hospitals and hotels, totalled a further 37 per cent of the order book, leaving the company vulnerable to the ongoing sluggishness of the real-estate market.

Slow execution in real estate contracts led to a mere 0.6 per cent revenue growth for the nine months ending December '10. Near-term revenue growth is likely to be subdued as the real-estate market itself is not in the healthy growth mode. To broad-base operations, the company diversified into infrastructure. Accounting for just about 18 per cent of the order book, the segment is unlikely to compensate for real-estate. Besides, in the infrastructure space as well, players have been grappling with slower execution even as order inflows are healthy.

While the segment does sport a few large-size contracts , there are a large number of smaller-size contracts. This, and its being more of a contractor than a developer, indicates that significant margin expansion is unlikely in the near term. The company may also require consortiums to bid for larger-sized development projects. Industrial projects make up 9 per cent of the order book.

Financials

Revenues and net profits clocked a compounded three-year growth of 33 per cent and 40 per cent to Rs 1,568 crore and Rs 82 crore in FY-10. In the December '10 quarter, revenues declined 16 per cent compared to the same period last year.

With an 18 and 13 per cent increase in operating and employee costs besides an increased interest outgo, net profits in the quarter tumbled 47 per cent. The September quarter had already seen flat revenues and a 12 per cent profit decline.

Operating margins had slipped to 11 per cent in FY-10 from the 13 per cent in the two previous years, also on higher operating costs. With prices of key raw materials on the rise, margins may remain under pressure. Net margins stood at 5 per cent for FY-10, and 5.3 per cent for the nine months ending December '10.

However, working capital turnover dropped to seven times in FY-10 from the 17 times in FY-08 while inventory turnover reduced from 14 to 11 times. With the company looking to increase order book size, working capital requirement and cycles may further increase. The slower execution it is currently facing may also lengthen cycles.

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