RESULTS REVIEW 4QFY17 31 MAY 2017 Ahluwalia Contracts BUY INDUSTRY INFRASTRUCTURE CMP (as on 31 May 2017) Rs 350 Target Price Rs 393 Nifty 9,621 Sensex 31,146 KEY STOCK DATA Bloomberg AHLU IN No. of Shares (mn) 67 MCap (Rs bn) / ($ mn) 23/363 6m avg traded value (Rs mn) 23 STOCK PERFORMANCE (%) 52 Week high / low Rs 410/235 3M 6M 12M Absolute (%) 9.9 42.3 28.2 Relative (%) 1.5 25.4 11.5 SHAREHOLDING PATTERN (%) Promoters 59.56 FIs & Local MFs 14.56 FPIs 19.45 Public & Others 6.43 Source : BSE Parikshit D Kandpal parikshitd.kandpal@hdfcsec.com +91-22-6171-7317 Cautious optimism AHLU s standalone 4QFY17 revenue/ebidta/apat grew 23/(19.3)/(23.8)% respectively. EBIDTA margin contracted 478bps YoY to 9.1% (8-quarter low). This was on account of 939bps expansion in other exp. AHLU has taken Rs 45mn of provisions for lease rental straight lining (non-cash) pertaining to KOTA BOT project. Besides the company had to incur elevated labour /subtracting charges post-demonet to meet the execution schedule. B/S is healthy, with standalone gross debt at Rs 890mn (net cash at Rs 310mn). AHLU expects to retire entire debt by FY19E. Order intake for FY17 stood at Rs 14bn, and AHLU has guided Rs 15bn inflow for FY18E as competitive intensity remains high. Order backlog stands at Rs 35.5bn. AHLU expects 12-15% revenue /EBIDTA growth respectively during FY18E. We rate AHLU as BUY with an SOTP of Rs 393/sh (Standalone EPC segment at 18x Mar-19E EPS, Kota BOT 1x P/BV). Highlights of the quarter Challenging quarter, pain not to last long: AHLU s 4QFY17 financial performance was impacted by Rs 45mn of provisioning for lease rental straight lining (non-cash) in other expenses for Kota BOT. Besides, company incurred higher labour/subtracting costs post demonetisation to meet the execution schedule. The pain is expected to remain during 1QFY18, as labour supply gets normalised and demonet impact wears off. Debt-free status by FY19E: AHLU has guided that the company will be debt-free by FY19E. This would be achieved through the use of cash flows from operation and promoters funds infusion (subject to approvals). AHLU will start paying dividend from FY19E. Near-term outlook: AHLU is going slow on new order bids, as it remains cautious on high competitive intensity in the building segment. The bid pipeline remains strong, and hence new order wins will lead to re-rating. We remain constructive on the stock. Financial Summary (Standalone) Y/E Mar (Rs mn) 4QFY17 4QFY16 YoY (%) 3QFY17 QoQ (%) FY16 FY17E FY18E FY19E Net Revenues 4,718 3,837 23.0 3,581 31.8 12,496 14,265 16,141 18,482 EBITDA 431 534 (19.3) 472 (8.8) 1,608 1,730 2,016 2,327 APAT 204 267 (23.8) 244 (16.8) 844 860 1,102 1,413 Diluted EPS (Rs) 1.4 1.9 (23.8) 1.7 (16.8) 12.6 12.8 16.5 21.1 P/E (x) 27.8 27.3 21.3 16.6 EV / EBITDA (x) 14.9 13.4 11.2 9.2 RoE (%) 22.2 18.5 19.6 20.5 HDFC securities Institutional Research is also available on Bloomberg HSLB <GO>& Thomson Reuters
AHLU s standalone 4QFY17 revenue/ebidta/apat grew 23/(19.3)/(23.8)% EBIDTA margins contracted by 478bps YoY to 9.1% (8 quarters low) This was on account of 939bps increase in other expenses. AHLU has taken Rs 45mn of provision for lease rental straight lining (non-cash) in other expenses. Besides labour/subtracting costs increased post demonetisation owing to shortage Weak EBIDTA margins may continue in 1QFY18E before improving in 2QFY18E as demonetisation effects wear off and labour supply improves Standalone Quarterly Financial Particulars (Rs mn) 4QFY17 4QFY16 YoY (%) 3QFY17 QoQ (%) FY17 FY16 YoY (%) Net Sales 4,718 3,837 23.0 3,581 31.8 14,265 12,496 14.2 Material Expenses (2,502) (2,061) 21.4 (1,888) 32.5 (7,262) (6,069) 19.7 Employee Expenses (332) (421) (21.1) (377) (11.9) (1,091) (935) 16.7 Other Operating Expenses (1,453) (822) 76.9 (843) 72.3 (4,181) (3,883) 7.7 EBITDA 431 534 (19.3) 472 (8.8) 1,730 1,608 7.6 Interest Cost (73) (120) (39.4) (60) 22.7 (267) (352) (24.0) Depreciation (67) (52) 27.4 (61) 9.0 (241) (201) 20.3 Other Income (Incl. EO Items) 21 45 (52.2) 12 78.6 84 136 (37.9) PBT 312 406 (23.0) 364 (14.1) 1,306 1,192 9.6 Tax (109) (138) (21.4) (119) (8.6) (446) (347) RPAT 204 267 (23.8) 244 (16.8) 860 844 1.9 Margin Analysis 4QFY17 4QFY16 YoY (bps) 3QFY17 QoQ (bps) FY17 FY16 YoY (bps) Material Expenses % Net Sales 53.0 53.7 (68) 52.7 30 50.9 48.6 234 Employee Expenses % Net Sales 7.0 11.0 (393) 10.5 (349) 7.6 7.5 16 Other Ope Expenses % Net Sales 30.8 21.4 939 23.6 725 29.3 31.1 (176) EBITDA Margin (%) 9.1 13.9 (478) 13.2 (406) 12.1 12.9 (74) Tax Rate (%) 34.8 34.1 70 32.7 209 34.1 29.2 499 APAT Margin (%) 4.3 7.0 (265) 6.8 (251) 6.0 6.8 (73) Kota project Rs 60mn/yr provisioning will continue FY17 order intake stands at Rs14bn and order backlog is Rs 35.5bn Page 2
We expect EBIDTA margins in the 12-13% range over FY17-19E Well-diversified order book segmentation Order book dominated by the government EBIDTA Margins To Remain In 12-13% Over FY17-19E 20,000 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 Revenues (Rs mn) FY11 FY12 FY13 FY14 FY15 EBIDTA Margins (%) - RHS FY16 FY17 FY18E FY19E 14.0 12.0 10.0 8.0 6.0 4.0 2.0 - (2.0) (4.0) Well Diversified Order Mix (%) Institutional 29 Infra 12 Hotels 1 Hospital 21 Residential (Pvt) 24 Residential (Gov) 8 Commercial 5 Only 3% of the order backlog is fixed price in nature Client Mix (%):Government Dominated Large Part Of Order Book Is With Escalation (%) Private 31 Fixed project 3 Govt 69 Variable project 97 Page 3
We expect muted growth in order backlog. Management cautious commentary on high competitive intensity in new bids is key reason for slow order intake FY17-19E revenue CAGR 13.8%, EBIDTA CAGR 16% Interest expense to reduce as AHLU deleverages balance sheet. High cash levels to result in higher other income FY17-19E RPAT CAGR of 28.2% AHLU to generate strong FCF Key Assumptions And Estimates STANDALONE FY17E FY18E FY19E Comments Closing order book 35,530 34,389 35,907 We expect muted order book CAGR as AHLU is cautiously approaching new bids owing to high competitive intensity Order book growth (%) (1.5) (3.2) 4.4 New order booking 13,722 15,000 20,000 In line with Rs 15-20bn/yr order intake guidance Book to bill ratio 2.5 2.1 1.9 Total Revenue 14,265 16,141 18,482 FY17-19E Revenue CAGR of 13.8% vs 12-15% guidance Growth (%) 14.2 13.2 14.5 EBIDTA 1,730 2,016 2,327 FY17-19E EBIDTA CAGR of 16% EBIDTA margin (%) 12.1 12.5 12.6 Margins to remain in 12-13% range Depreciation 241 260 261 Financial Charges 267 219 118 To reduce as AHLU expects to be debt free by FY19E PBT 1,306 1,645 2,109 FY17-19E PBT CAGR of 27.1% on back of deleveraging and higher other income PBT margin (%) 9.2 10.2 11.4 Tax 445.9 543.0 696.1 Tax rate (%) 34.1 33.0 33.0 RPAT 860 1,102 1,413 FY17-19E APAT CAGR of 28.2% Net margin (%) 6.0 6.8 7.6 Gross Block Turnover 4.2 4.0 4.0 To remain stable Debtor days 132 135 135 CFO - a 1,827 857 1,303 CFI - b (500) (234) (183) FCF - a+b 1,327 623 1,120 AHLU to generate strong FCF CFF - c (983) (220) (14) Total change in cash - a+b+c 343 403 1,106 Source: HDFC sec Inst Research Page 4
We value the standalone Building business at Rs 380/share (18x one-year forward Mar-19E EPS) Kota BOT at Rs 13/share (DCF Valuation, implied 0.96x P/BV of equity invested) Outlook and valuation TP of Rs 393/sh Valuation methodology We have valued AHLU s EPC business at 18x one-year forward earlier. Our rationale behind this is (1) Superior earnings quality vs peers, (2) Robust order backlog of Rs 35.5bn (2.5x FY17 revenue), (2) Near debt-free status by FY19E and (4) Limited BOT capex (Kota BOT equity of Rs 900mn already invested). Investments in the building segment would remain robust on the back of NBCC, CPWD and Private Capex in the segment. AHLU, with its strong execution skills, is likely to benefit from the pick-up in order activity. We rate AHLU as BUY with an SOTP-based target price of Rs 393/share. We value the (1) Standalone EPC business at Rs 380/share (18x one-year forward Mar-19E EPS), (2) Kota BOT at Rs 13/share (DCF valuation, implied 0.96x P/BV of equity invested). Our SOTP target price is Rs 393/share SOTP Valuation Particulars Segments Value Value per share (Rsmn) (Rs) Rationale AHLU Standalone Building business 25,438 380 At 18x Mar-19E EPS Kota BOT Project Lease rental 866 13 DCF Valuation, implied P/BV (x) 0.96x Total 26,304 393 Source: HDFC sec Inst Research Page 5
Income Statement (Standalone) Year ending March (Rs mn) FY15 FY16 FY17 FY18E FY19E Net Revenues 10,599 12,496 14,265 16,141 18,482 Growth (%) 10.4 17.9 14.2 13.2 14.5 Material Expenses 5,412 6,069 7,262 8,094 9,360 Employee Expenses 1,501 1,588 1,536 1,738 1,990 Other Operating Expenses 2,537 3,230 3,737 4,294 4,805 EBIDTA 1,149 1,608 1,730 2,016 2,327 EBIDTA (%) 10.8 12.9 12.1 12.5 12.6 EBIDTA Growth (%) 175.4 40.0 7.6 16.5 15.4 Depreciation 212 201 241 260 261 EBIT 937 1,408 1,489 1,756 2,066 Other Income (Incl. EO Items) 117 136 84 108 161 Interest 386 352 267 219 118 PBT 668 1,192 1,306 1,645 2,109 Tax 26 347 446 543 696 RPAT 641 844 860 1,102 1,413 APAT 641 844 860 1,102 1,413 APAT Growth (%) 194.9 31.6 1.9 28.2 28.2 EPS 9.6 12.6 12.8 16.5 21.1 EPS Growth (%) 176.3 31.6 1.9 28.2 28.2 Balance Sheet (Standalone) Year ending March (Rs mn) FY15 FY16 FY17E FY18E FY19E SOURCES OF FUNDS Share Capital 134 134 134 134 134 Reserves 3,243 4,087 4,947 6,049 7,462 Total Shareholders Funds 3,377 4,221 5,081 6,183 7,596 Minority Interest - - - - - Long Term Debt 90 1 - - - Short Term Debt 1,641 1,418 900 848 727 Total Debt 1,731 1,419 900 848 727 Deferred Taxes (153) (148) (134) (134) (134) Long Term Provisions & Others - - - - - TOTAL SOURCES OF FUNDS 4,955 5,493 5,847 6,897 8,190 APPLICATION OF FUNDS Net Block 1,948 1,965 1,925 1,966 2,005 CWIP 1 2 3 3 3 Goodwill - - - - - Investments, LT Loans & Advances 63 63 63 63 63 Total Non-current Assets 2,012 2,030 1,992 2,032 2,071 Inventories 1,665 2,047 2,008 2,432 2,785 Debtors 4,168 4,997 5,141 5,970 6,836 Cash & Equivalents 765 882 1,226 1,629 2,735 ST Loans & Advances, Others 1,661 1,464 1,857 1,935 2,017 Total Current Assets 8,259 9,391 10,231 11,966 14,373 Creditors 2,693 2,946 3,522 4,096 4,523 Other Current Liabilities & Provns 2,623 2,983 2,853 3,005 3,732 Total Current Liabilities 5,316 5,928 6,375 7,101 8,255 Net Current Assets 2,943 3,462 3,855 4,865 6,118 TOTAL APPLICATION OF FUNDS 4,955 5,493 5,847 6,897 8,190 Page 6
Cash Flow (Standalone) Year ending March (Rs mn) FY15 FY16 FY17E FY18E FY19E PBT 668 1,192 1,306 1,645 2,109 Non-operating & EO items (117) (136) (84) (108) (161) Interest expenses 386 352 267 219 118 Depreciation 212 201 241 260 261 Working Capital Change 17 (892) 528 (616) (328) Tax paid (17) (343) (432) (543) (696) OPERATING CASH FLOW ( a ) 1,149 373 1,827 857 1,303 Capex (176) (219) (203) (300) (300) Free cash flow (FCF) 973 154 1,624 557 1,003 Investments 13 267 (297) 66 118 INVESTING CASH FLOW ( b ) (163) 48 (500) (234) (183) Share capital Issuance 474 0 (0) - 0 Debt Issuance (655) (311) (520) (52) (121) Interest expenses (386) (352) (267) (219) (118) Dividend - - - - - Others (199) 360 (196) 51 225 FINANCING CASH FLOW ( c ) (766) (303) (983) (220) (14) NET CASH FLOW (a+b+c) 220 117 343 403 1,106 Opening cash balance 546 765 882 1,226 1,629 Closing Cash & Equivalents 766 882 1,226 1,629 2,735 Key Ratios (Standalone) FY15 FY16 FY17E FY18E FY19E PROFITABILITY (%) GPM 48.9 51.4 49.1 49.9 49.4 EBITDA Margin 10.8 12.9 12.1 12.5 12.6 EBIT Margin 8.8 11.3 10.4 10.9 11.2 APAT Margin 6.1 6.8 6.0 6.8 7.6 RoE 22.7 22.2 18.5 19.6 20.5 Core RoCE 21.8 21.9 21.5 22.6 25.7 RoCE 20.4 19.9 17.7 18.1 18.2 EFFICIENCY Tax Rate (%) 3.9 29.2 34.1 33.0 33.0 Asset Turnover (x) 2.2 2.3 2.5 2.4 2.3 Inventory (days) 57 60 51 55 55 Debtors (days) 144 146 132 135 135 Payables (days) 93 86 90 93 89 Cash Conversion Cycle (days) 108 120 93 97 101 Other Current Assets (days) 57 43 48 44 40 Other Current Liab (days) 90 87 73 68 74 Net Working Capital Cycle (Days) 75 75 67 73 67 Debt/EBITDA (x) 1.5 0.9 0.5 0.4 0.3 Net D/E 0.29 0.13 (0.06) (0.13) (0.3) Interest Coverage 2.4 4.0 5.6 8.0 17.5 PER SHARE DATA EPS (Rs/sh) 9.6 12.6 12.8 16.5 21.1 CEPS (Rs/sh) 12.7 15.6 16.4 20.3 25.0 DPS (Rs/sh) - - - - - BV (Rs/sh) 50 63 76 92 113 VALUATION P/E 36.6 27.8 27.3 21.3 16.6 P/BV 6.9 5.6 4.6 3.8 3.1 EV/EBITDA 21.3 14.9 13.4 11.2 9.2 OCF/EV (%) 4.7 1.6 7.9 3.8 6.1 FCF/EV (%) 4.0 0.6 7.0 2.5 4.7 FCFE/Market Cap (%) (0.3) (2.2) 3.6 1.2 3.3 Page 7
RECOMMENDATION HISTORY 450 Ahluwalia TP Date CMP Reco Target 31-May-17 350 BUY 393 400 350 300 250 200 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Rating Definitions BUY : Where the stock is expected to deliver more than 10% returns over the next 12 month period NEUTRAL : Where the stock is expected to deliver (-)10% to 10% returns over the next 12 month period SELL : Where the stock is expected to deliver less than (-)10% returns over the next 12 month period Page 8
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