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Committed to deliver profitable growth

We met the management of Ahluwalia Contracts (ACIL) to understand the  currentbusiness environment and get an update on key issues. ACIL continues to see robust prospects in healthcare,  data centers,industrial structures apart from government buildings and metros. Competitive intensity remains elevated and ACIL remains very selective in bidding for projects. While there are near term headwinds of high inputcosts,ACIL  expects  to  maintain 15‐20%  growth  levels  with  margins  recouping  to historical  levels  of  12‐12.5%  (85%  of  the  backlog  has  PVC).The promoter  family remains closely involved in  the business with well‐defined  responsibilities and clear understanding of future roles. Maintain Buy with price target of Rs550.

Opportunities remain robust across verticals; diversifying into adjoining areas

ACIL  plans  to  expand  its  presence  in  adjoining  verticals  like  airports,  data  centers,industrial and metros (stations/depots). Current opportunities include data centers for Adani  &  Techno  Electric,  expansion  at  Vedanta’s  Jharsuguda  facility,  STP  project  in Mumbai  and  airports  at  Imphal  and  Gwalior.  Among  existing  verticals,  it sees strong opportunities in healthcare (4 hospitals in Haryana of Rs33bn) and several large ordersfor government buildings (including Central Vistas tender of Rs13bn).Redevelopment of AIIMS Delhi could be another big opportunity for ACIL.

Competitive intensity remains elevated; ACIL committed to profitable growth

While competitive intensity remains elevated authorities are looking to tighten technical qualification  requirement which would  rein in competition  from weaker players. ACIL remains  committed  to  profitable  growth  while  preserving  its  balance  sheet.  It  has maintained medium term revenue growth guidance of 15‐20% with EBITDA margins of 12‐12.5%.That said,  there is likely  to be some near  term pressure on margins due  tosharp rise in input costs. Currently, 85% of the backlog has PVC. There are no material receivables/exposures to be written off (Rs953m written off during FY20 & FY21)

Promoter family has well‐defined responsibilities with clarity on future roles

ACIL’s  promoter  family  remains  completely  involved  and  committed  to  the  business.Their present responsibilities are well defined with clarity also on future roles.Promoter pledges  towards ACIL’s  funding limits  reduced  from 15.9m shares in Dec‐20  to 10.6m shares (28.6% of promoter holding of 55.3%) in Dec‐21 and ACIL targets further pledge reduction of 5m shares in coming months. ACIL is also actively working with its banks to get better terms in financing (lower margin money requirement and commission costs). 

Sustained execution delivery; margin pick‐up to follow; maintain BUY

We believe the management’s inflow guidance of Rs25bn for FY23E is conservative and is likely to be exceeded given the strong opportunities. We expect CAGR of 16%/29% in revenue/PAT  over  FY22‐24.  The  high‐priority  healthcare  sector  comprises  44%  ACIL’s backlog of Rs67bn (2.4x TTM revenue) and is likely to be a key driver of both fresh inflowsand execution in FY23/24E. ACIL operates an asset‐light business, with consistent FCFgeneration since FY15. Stock trades at 11.8x/10x FY23E/FY24E EPS and has potential to re‐rate. We value ACIL at 15x average FY23/24 EPS with a PT of Rs550. Maintain BUY.
 

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