Maintain Buy on Ahluwalia Contracts - PINC Event Update

As per media reports, Ahluwalia Contracts has come under scanner for CWG work for dual payment of contract work.

Clarification

ACIL was the main contractor in the Talkatora Swimming pool contract. The project was awarded by CPWD. The initial LoI was awarded at Rs 2.3bn, and due to some increase in scope of work and cost overrun the total project was completed at approximately at Rs2.5bn. An amount of Rs300mn is pending from CPWD, which is including the retention money and work completed but pending certification. The bank guarantee is still with CPWD. As per the management the payments were as per the terms of the contracts and increase in scope of work and cost overrun.

Our View

Firstly it cannot be ascertained from the report that there is a clear case of twice payment, since as per the system of payment twice payment for same work is out of our understanding, also the payment can also be due to over-costing or increase in scope of work. Nevertheless the amount they are contemplating is for Rs50mn, given that an amount of Rs300mn is pending from CPWD it does not seem a difficult situation to rectify the issue, unless the charges are termed serious and a case of penalty arises.

We forecast healthy earnings growth of 25% over FY11-12; there is scope for further improvement as ACIL has guided 25% sales growth in FY11 against our 19.5%. However, earnings growth would still be below the levels recorded in FY07-10. Thus, given the current order book scenario, we do not expect ACIL to return to the premium valuation of FY07-09. Still, we would like to highlight that the company's return parameters are exceptional and well above those of peers, which increases our confidence about likely improvement in valuation from current levels. We assign a P/E of 13x, which is in line with its average valuation since listing. We maintain our 'BUY' recommendation with target price of Rs266.

Source : Equity Bulls

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