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Execution to recover in H2; margin outlook intact 

Ahluwalia Contracts’ (ACIL) Q2FY23 PAT at Rs392m missed estimate of Rs471m due to  lower execution/margins. Execution was impacted due to heavy monsoon. Revenue declined 11% YoY to Rs6.2bn (estimate: Rs7.3bn). EBITDA margins remained flat QoQ (up 90 bps YoY) at 9.9% (estimate: 10.5%). ACIL targets exit EBITDA margins for FY23  at ~12%. Order inflows at Rs32bn in YTD are strong taking the order backlog to Rs76bn  (2.9x TTM  revenues). ACIL is L1 in orders worth Rs11bn and  targets order inflow of ~Rs40bn in  FY23.  Revenue  growth  guidance  has  been maintained at  15?20%  YoY in  FY23. ACIL operates an asset?light business, with consistent FCF generation since FY15.  Valuations are attractive at 10.1x/8.7x FY24/25E EPS. Maintain BUY with PT of Rs560.

Earnings missed estimate due to lower revenue and margins 

Revenue declined 11% YoY to Rs6.2bn and was below estimate of Rs7.3bn as execution  was impacted due to extended and heavy monsoon. ACIL’s EBITDA margins remained  flat QoQ (up 90bps YoY as base included debtor provisions of Rs55m) to 9.9% and was  below  estimate  of  10.5%.  Gross  margins  declined  by  60bps  QoQ  to  18.9%  (in?line).  Interest costs declined sharply by 39% YoY  to Rs71m  (estimate: Rs90m) due  to lower  debt and mobilization advances. Gross debt stood at Rs2m (vs. Rs261m in Sept21)

Strong inflows YTD boost backlog and improves revenue visibility  

ACIL has received robust order inflows of Rs31.8bn in YTDFY23 taking its order backlog to Rs76bn (2.9x TTM revenues), providing strong revenue visibility. Additionally, it is also L1  in  three  projects  worth  ~Rs11bn:  Tata  Memorial  Hospital  of  ~Rs7bn  in  Mumbai, convention centre in Guwahati of Rs2.6bn and memorial in Assam of Rs1.75bn. Also, bid pipeline  for  ACIL  stands  strong  at  Rs50bn.  Given  the  strong  inflows  and  robust  bid pipeline,  ACIL  targets  inflows  of  ~Rs40bn  for  FY23E.  ACIL  has maintained  its  revenue growth guidance of 15?20% (implies 32% growth in H2 to meet lower end of guidance). It is confident of exiting the year with EBITDA margins of ~12% (including other income).

Pockets of delays but payments largely stable; strong execution in big ticket projects 

ACIL witnessed payment delays in Bihar. OCF was (?) Rs102m in H1FY23 vs. Rs658m in FY22. NWC at 63 days in Sept?22 is normalizing  from very low levels of 40?45 days in FY21/22 (vs. historical levels of 65?70 days). There are no slow moving orders in backlog. Infact, execution in large projects like AIIMS Jammu, Bennett university, Max hospital etc is  moving  swiftly.  Execution  on  animal  science  university  project  of  Rs8.9bn  in  Bihar (earlier delayed) has commenced. These projects should drive revenue growth ahead.

Execution moving out of the sluggish era; margins picking up; Maintain BUY 

ACIL  has  scaled  up  significantly  over  the  past  two  years  with  revenue  increasing  to Rs27bn levels in FY22 from 5 year average execution levels of Rs17bn. Having said that, execution in Q2FY23 was impacted due to heavy monsoon but ACIL has maintained its annual  revenue  growth  guidance  implying  strong  pick?up  in  H2FY23.  We  expect revenue/PAT CAGR of 14%/26% over FY22?25. Return ratios are on the path to recovery to historical levels of 18?19%. Valuations of 10.1x/8.7x FY24/25E EPS are attractive and have room to improve. Maintain BUY with price target of Rs560.

Valuations

ACIL  has  scaled  up  significantly  over  the  past  two  years  with  revenue  increasing  to Rs27bn levels in FY22  from  5 year average execution levels of  Rs17bn. Having  said  that, execution  in Q2FY23  was  impacted  due to  heavy  monsoon  but  ACIL  has  maintained  its  annual  revenue  growth  guidance  implying strong pick?up in H2FY23. We expect revenue/PAT CAGR of 14%/26%  over FY22?25. Return ratios are on the path to recovery to historical levels of  18?19%. Valuations of 10.1x/8.7x FY24/25E EPS are attractive and have room  to improve. We value ACIL at 14x FY24 EPS to arrive at target price of Rs560.  Maintain BUY. 

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