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Margins show recovery; inflows robust

Ahluwalia Contracts’ (ACIL) Q1FY23 PAT at Rs378m was above estimate of Rs345m due to higher margins and lower interest costs. ACIL’s execution grew 5% YoY to Rs6.1bn (estimate: Rs6.25bn) but declined 17% QoQ due to seasonality and also due to lower revenue in certain projects which are nearing completion. EBITDA margin recovered 120bp QoQ to 9.9% (down 50bps YoY; estimate 9.5%). ACIL is confident of further margin recovery and has guided for 12% margins in FY23. Order inflows at Rs29bn are strong taking the order backlog to Rs82bn (3x TTM revenues). ACIL is L1 in orders worth Rs8bn and targets order inflow of Rs40-50bn 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 13.7x/11.2x FY23/24E EPS. We value ACIL at 14x FY24 EPS and have a PT of Rs560. Maintain BUY

Earnings beats estimate driven by higher margins and lower interest expenses

ACIL’s EBITDA margins recovered 120bps QoQ to 9.9% and was above estimate of 9.5% led by better gross margins. Gross margins expanded sharply by 340bps QoQ to 19.5% (estimate: 18.5%). Interest costs declined 32% YoY to Rs78m and was below estimate of Rs105m. Gross debt stood at Rs119m as on June-22 (vs. Rs220m in June-21).

Backlog improves materially led by strong inflows; targets order inflows of Rs40-50bn

ACIL has received robust order inflows of Rs28.6bn in YTDFY22 taking its order backlog to Rs82bn (3x TTM revenues). Additionally, it is also L1 in two projects: Tata Memorial Hospital of Rs7.2bn in Mumbai (LoA likely by Sept-22) and additional scope of Rs700m in Mandale depot project. Also, bid pipeline for ACIL stands strong at Rs50bn largely driven by Hospitals and Education segments. Given the strong order inflows and robust bid pipeline, ACIL targets order inflows of Rs40-50bn for FY23E. ACIL has guided for revenue growth of 15-20% with EBITDA margins of 12% in FY23E.

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

ACIL indicated that there were some payment delays in Bihar and West Bengal during Q1FY23 but the situation has now improved. There are no slow moving orders in the order backlog. Infact, execution in large projects like AIIMS Jammu, Mandale depot, Gardanibaug, Sion hospital is moving swiftly. Execution on the animal science university project of Rs8.9bn in Bihar (earlier delayed) has commenced now (5% execution completed in Q1FY23). These projects should drive revenue growth ahead.

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

ACIL is consistently delivering on execution and commenced FY23 with an encouraging recovery in margins. We have upgraded FY24E earnings by 9% led by revenue upgrade on the back of strong inflows in YTDFY23.We expect CAGR of 14%/31% in revenue/PAT over FY22-24. ACIL operates an asset-light business, with consistent FCF generation since FY15. Return ratios are on the path to recovery of historical levels of 18-19%. The stock trades at 13.7x/11.2x FY23/24E EPS and valuation have room to improve. We value ACIL at 14x FY24 EPS and have a PT of Rs560. Maintain BUY.

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