Ahluwalia Contracts (India) - Steady growth intact; Buy with a target price of Rs 360.
Following better execution and reduced low-margin orders, Ahluwalia posted a strong set of Q1 FY17 figures. It benefited from the shift in order mix toward government contracts and higher operating leverage, clocking 15.6% yoy revenue growth with a 14% EBITDA margin in Q1. We estimate 28%/37% CAGR in revenue/PAT, over FY17-18 driven by the strong order book. We maintain our Buy with a target of Rs. 360.
Revenue growth picking up pace. Q1 FY17 revenue jumped 15.6% yoy, driven by strong execution and healthy order inflows. Supported by the strong order inflows, management aims at execution picking up significantly in FY17/18 and expects 20-25% yoy revenue growth in the next two years backed by orders from the public sector covered by an escalation clause.
Strong recovery in margins. The EBITDA margin rose 161bps yoy, to 14% with greater operational efficiencies (sub-contract expenses down 8.7% yoy) coupled with depleting low-margin orders and a change in the order mix toward government contracts (60%). We expect the annualised EBITDA margin to be ~13-13.5% following tailwinds from increasing proportion of government orders with better fixed-cost rationalisation.
Healthy order backlog. The order book at Jun'16-end was ~Rs. 37.6bn helped by inflows of Rs. 4.9bn in Q1. For this fiscal, the company is aiming at orders of ~Rs. 16bn-20bn; of this, it has already bagged ~Rs. 9.6bn, taking its order book to ~Rs. 42.3bn (3.3x TTM revenues). Also, it has L1 status for contracts of Rs. 2.5bn.
Valuation. The better operating performance and low gearing have led to better return ratios, up into the higher twenties. We maintain a Buy rating, with a price target of Rs. 360, based on 15x FY18e PE. Risk: Any major liability arising out of litigation.
Shares of AHLUWALIA CONTRACTS (INDIA) LTD. was last trading in BSE at Rs.294.1 as compared to the previous close of Rs. 292.55. The total number of shares traded during the day was 7516 in over 56 trades.
The stock hit an intraday high of Rs. 296.5 and intraday low of 290. The net turnover during the day was Rs. 2217779.