EQUITY RESEARCH: Ahluwalia Contracts (India) Limited (ACIL)

Ahluwalia Contracts (India) Ltd is a primarily India-based integrated construction company. The Company's task portfolio comprises projects across residential and commercial complexes, lodges, institutional homes, hospitals and corporate offices, IT parks and business complexes, metro stations and depots, power plants and automated car parking zones, amongst others. The Company's initiatives consist of resort tasks, along with Hotel Renaissance and ITC Gardenia Five Star Hotel; medical institution projects, together with BPS Mahila Vishwavidyalaya, Tata Medical Centre and Fortis Super Specialities Hospital; commercial/workplace tasks, along with District Court Complex, Caparo International Centre and The Republic of Singapore High Commission; residential initiatives, consisting of Lotus Boulevard Group Housing, Pearl Housing and 795 Mass Housing, and educational institutions, which includes Indian Institute of Corporate Affairs, Indraprastha Institute of Information Technology and IIT Campus Mandi.

Ahluwalia Contracts (India) Ltd

ABOUT:

SHAREHOLDING PATTERN:

KEY UPDATES:

Healthy and diversified order book position to provide medium to long-term revenue visibility

• ACIL's order intake and execution have been solid during the last six to seven quarters. As of June 30, 2023, the company's net order book stood at Rs 11,780 crore, with orders to be fulfilled in the next 2.5 to 3 years. In FY23, total order inflow was Rs 5057 crore.
• Order inflows totaled Rs 5260 crore for the current fiscal year. During Q2FY24, the business was the sole bidder on a Rs 2800 crore private project for the construction of the International Jewellery Park in Mumbai, and it also received orders worth Rs 832.4 crore from Max Group.
• As of June 30, 2023, the company's order book was made up of commercial, infrastructure, institutional, residential, hospital, and hotel projects, with 75% coming from the government sector and 25% coming from the private sector.
• As of June 30, 2023, the western area has the biggest share at 38%, followed by the north region at 31%, the east at 25%, the south at 3%, and overseas at 3%.

INDUSTRY OVERVIEW:

• By 2025, it is anticipated that India's construction industry will contribute 13% of the nation's GDP. Currently, 9% of India's GDP comes from the construction industry.
• In order to reach Rs 45,907 bn in 2023, the Indian construction sector is predicted to develop by 12.0%. The medium- to long-term economic story in India is still intact, notwithstanding short-term difficulties in several construction industries. Over the years 2023–2027, the growth pace is anticipated to continue, recording a CAGR of 9.9%. By 2027, the production of construction is projected to be Rs 66,954.8 billion.
• Over the past six years, from 2015 to 2021, the total amount spent on urban development has increased eightfold, from Rs 1.57 lakh crore in 2004 to Rs 11.83 lakh crore in 2014.
• Commercial space is in increasing demand, with the development of office buildings, hotels, shops, and entertainment facilities. Despite global challenges, the net lease of office space increased 5% to 10.37 million square feet in July–September 2023 across seven locations, according to JLL India.
• More than 40% of the population is predicted to reside in urban areas by 2030 (33% do so currently), creating a need for 25 MN more mid-range and cheap units.
• Under the National Infrastructure Pipeline, India has a US$ 1.4 trillion infrastructure investment budget, with 24% going towards renewable energy, 18% going towards roads and highways, 17% going towards urban infrastructure, and 12% going towards railroads.
• Better order flows are anticipated in the future as a result of the government's increased attention on the building sector. Over the next three to four years, it is anticipated that investment on these projects would continue to support the expansion of India's entire construction industry. Building Projects, Irrigation and Water Supply, Special Buildings, Industrial Plants, Transportation, and Building Projects are just a few of the numerous segments that ACIL develops and implements technically demanding, high-value civil engineering projects across.

FINANCIALS:

• Over the past seven years, ACIL has reported revenue growth at a CAGR of 12%, and during that same time, the company has experienced a healthy increase in profitability at a CAGR of 13%. We anticipate a 14% CAGR in revenue growth from FY23 to FY25E, and a 31% CAGR in PAT growth during the same period.
•  7.8% in FY21 marked a six-year low for its EBITDA margin, which rose to 9.5% in FY22 and 10.7% in FY23. In FY23, the net profit margin increased from 5.8% in FY22 to 6.8%. We believe there is a compelling argument for continuing to achieve double-digit EBITDA margin in the future. For FY24E and FY25E, we forecast an EBITDA margin in the 11.5–12.5% range.
• The capital structure of ACIL is sound, with a strong net worth basis that, as of March 31, 2023, was worth Rs 1228 crore and no debt (other than lease liabilities). The debt-to-equity ratio is extremely small.
•  Instead of giving its shareholders dividends, ACIL prefers to increase its net worth. In FY23, the business recommended to shareholders a dividend per share of Rs 0.70, with a dividend yield of 0.1%.
• Future return ratios could be improved with higher profitability growth; RoE could increase to 18.8% and 20.4% in FY24E and FY25E, respectively.
• Indicating a solid balance between having adequate inventory on hand and not needing to place orders too frequently, the inventory turnover ratio as of March 31, 2023, has decreased compared to March 31, 2022, and is within the industry-recommended range. As of March 31, 2023, inventory days had decreased from 33 days on that day to 31 days. Debtor's days decreased from 69 days on March 31, 2022, to 60 days as of that day.

• Q1FY24 Result Update

  • ACL achieved strong results in the first quarter of fiscal year 24. Its consolidated revenue was Rs 763 crore in Q1FY24 compared to Rs 609 crore in Q1FY23, representing a 25.3% YoY increase.
  • The company's EBITDA was Rs 82 crore compared to Rs 61 crore in Q1FY23, representing a 36% YoY increase. In Q1FY24, the EBITDA margin was 10.8%, up from 9.9% in Q1FY23.
  • In Q1FY24, the company's net profit increased by 30.8% year on year to Rs 49 crore. In Q1FY24, the net profit margin was 6.5%, up from 6.2% in Q1FY23

KEY CONCERNS:

• The construction sector and/or real estate market may be impacted by the economic recession and changes in the regulatory environment. This could have a negative impact on the company's operations and execution time periods.
• Contractual duties for quality, timeliness, confidential information protection, and other special terms and conditions are critical for EPC orders.
• ACIL does business with significant industrial enterprises, corporations, organizations, and government agencies. These clients expect tight commitment to timeliness, quality, and cost. If customer expectations are not satisfied, the company's brand will suffer and repeat orders will be less likely.
• ACIL has a history of not paying dividends to its shareholders on a regular basis; the corporation recommended a dividend of Rs 0.30 per share to shareholders in FY23.
• Because the company is heavily reliant on government orders, any delay in getting payment could have an impact on its operations. A decrease in government spending could also have an impact on order inflow and revenue.
• The promoters have pledged 5.4% of their 55.32% interest as of September 30, 2023. An increase in the promoter's pledged shares could influence investor sentiment towards the stock.

VALUATION:

Ahluwalia Contracts (India) Limited (ACIL) is a significant infrastructure firm. ACIL specializes in civil construction and turnkey project implementation. It is actively involved in the construction of institutional and industrial buildings, corporate office complexes, multi-story housing complexes, township development projects, hospitals, medical colleges, hotels, educational and technical institutes, schools, and other facilities. Gymnasiums and sports complexes are examples of these structures. Mr Bikramjit Ahluwalia, a construction industry veteran, is a significant booster in the company and has almost five decades of experience in India. In the past, the company has been conservative in its order inflow guidance, and it has been choosy in bagging projects. The company's order inflow was Rs 5057 crore, compared to an estimate of Rs 3500-4000 crore for FY23. As of September 30, 2023, the company reported a net order inflow of Rs 5260 crores during the current fiscal year. For the remainder of FY24, the company expects to get orders between Rs 2000-2500 crore. Given the government's initiatives in the infrastructure sector, we anticipate that the company will continue to enjoy considerable order inflow prospects. We anticipate that the momentum of order inflow will continue until the code of conduct goes into effect. We anticipate that revenue will increase by 20% and 25% in FY24E and FY25E, respectively.

Apart from government buildings, ACIL continues to see strong order flow possibilities in healthcare, data centers, and industrial structures. The level of competition remains high, but ACIL remains very selective in its project bidding. Despite near-term challenges from high input costs, margins are likely to recover in FY24E due to commodity price softening, a narrower gap between indices and input prices, slightly lower competition intensity, and new projects bid at elevated input price assumptions. The promoter family is still very much active in the firm, with clearly defined responsibilities and a clear vision of future roles. Over the next two to three quarters, we believe the stock's Bull case fair value is Rs. 821.

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