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Ahluwalia Contracts – Leading Construction Company in India

Updated: Sep 21, 2023


Company Name – Ahluwalia Contracts (India) Limited (Ahluwalia Contracts)


Current Share Price – INR 519 (April 20, 2023)


Market Cap – INR 3,480 cr


 

1. What is interesting about the stock?


Owning a home was something Sonia had always desired. She finally discovered the perfect home in a quiet community on Mumbai's outskirts after many years of saving. She was pleased to have discovered a gorgeous home that met her requirements and was within her price range.


Her delight quickly gave way to disappointment, though, as she began to identify several flaws in her ideal house. The bathroom's plumbing was broken, the walls were cracked, and the tiles were uneven. Sonia was devastated to learn that the house she had saved money for was not well built.


She attempted to get in touch with the builder, but they were unreachable and refused to accept responsibility for the subpar building. Sonia was shocked and believed the builder had betrayed her. She had spent her entire life savings on a house that wasn't worth what she paid for it.


This isn’t just a story of Sonia but all of us. The quality of construction in India is poor and usually disappoints. However, few companies are known for good construction quality – one of them is Ahluwalia Contracts.


Leading Indian construction and infrastructure development firm Ahluwalia Contracts (India) Limited. Mr. Bikramjit Ahluwalia established the business in 1979, and it has since developed into one of India's most significant players in the construction sector. Ahluwalia Contracts is based in New Delhi and operates throughout several Indian states.


The business began as a small construction company, but it has since grown and diversified to become a multi-disciplinary construction organization with experience in a wide range of industries, including infrastructure projects, and institutional, commercial, industrial, and residential buildings. Ahluwalia Contracts has completed a wide range of large projects in India, including hotels, hospitals, schools, commercial buildings, residential complexes, and more.


The Company has completed several commercial and institutional projects, including, to name a few, the CBI Office Building in BKC, Mumbai, Tata Housing in Gurgaon, the Mumbai Metro Depot in Mumbai Metro One Pvt. Ltd., and the ITC Gardenia Five Star Hotel in Bangalore.


With the current L1 in the CSMT Station renovation project for INR 2,450 cr. excluded, the company's unadjusted order book as of today is above INR 9,500 cr. The next three years' worth of revenue is visible thanks to this strong order book. The government and private sectors make up 82% and 18%, respectively. The order book break-up on a geographical basis is as follows:

  • 42% - East

  • 36% - North

  • 12% - West

  • 5% - South

  • 5% - overseas.

A few of the Company's continuing projects are the AIIMS in Jammu, the Bihar Animal Science University in Patna, Bihar, the LTMG Hospital, the New Medical College and Hospital, Bongaigaon, Assam, Central University of Himachal Pradesh, Kangra, and the Medical College & Hospital in Haryana.


Key clients are:

Why invest in Ahluwalia Contracts?

  • Established Reputation: With more than 40 years of expertise, Ahluwalia Contracts has a well-established reputation in India's construction sector

  • Diversified Portfolio: Company has a varied portfolio and competence in a range of industries, including infrastructure projects and projects in the residential, commercial, industrial, and institutional sectors. This allows the Company to use its expertise across several sectors, giving it a competitive edge

  • Strong project execution capabilities: Ahluwalia Contracts is equipped with a team of professionals with years of expertise and a competent workforce that can carry out challenging construction projects with accuracy and quality.

  • Sector Tailwind – The government’s attention to developing urban infrastructure is evident from the budgetary allocation of INR 76,549 cr (nearly 40% more than that for 2021–2022) to the Ministry of Housing and Urban Affairs (MHUA)

  • Experienced and professional management team - Ahluwalia Contracts is a professionally managed company, headed by Bikramjit Ahluwalia, who has more than five decades of experience in the construction industry. He is supported by a management team who have an extensive background in the infrastructure sector.

2. Key Historical Financials

  • Company revenue and profit have been growing 14% and 13% on a CAGR basis respectively in the last 5 years

  • Revenue increased by 36% in FY22 on a YoY basis after weak FY20 and FY21. But the growth has slowed down in the last 3 quarters

  • EBITDA margin is stable at around 8-10%

  • Cash flow conversion (CFO/EBITDA) was healthy in FY21. However, the ratio has fallen to 26% in FY22 due to a jump in receivables and a decrease in payables

  • ROCE and ROE have improved to 25% and 14% respectively in FY22

3. What is my view on company valuation?


Share price has jumped ~3x over the last 3 years which has been duly supported by an increase in net profit.


The Company trades at EV/EBITDA (TTM) and P/E (TTM) of 11x and 21x. 5-year median P/E of Ahluwalia Contracts is 20x so the current valuation is in line with historical trends.


However, the valuation looks slightly expensive as the Company’s revenue is expected to grow at 15% for the next few years with an EBITDA margin of 10-11%. Long-term investors could evaluate investing at lower levels which provides a margin of safety.


4. What are the risks to the investment analysis?


Risks to the analysis are:

  • Intense Competition: Many businesses are vying for contracts in India's extremely competitive construction sector. Ahluwalia Contracts' market share and pricing power may be impacted by competition from both established competitors and recent market entrants

  • Project Risks: Complex construction projects come with several hazards, including regulatory changes, labor shortages, cost inflation, and unanticipated occurrences like natural disasters

  • Dependence on External Factors: Ahluwalia Contracts are dependent on outside variables such as the availability of trained personnel, raw materials, and subcontractors as well as prompt clearances from government officials. The company's project costs and timetables could be affected by any changes to these external elements.

 

About the Author


I have over 17 years of experience in venture capital, private equity, and investment banking across various sectors in India and the Middle East. I was last working with Majid Al Futtaim Holding (MAF), a leading conglomerate in the Middle East, to look after investments, M&A, and venture capital. I have prior experience in India with Tata Capital (Private Equity), Merrill Lynch (Investment Banking or IB), and Ambit Corporate Finance (IB). I bring the long-term ownership mindset to the analysis.


I graduated from the MBA program of the Indian Institute of Management Lucknow (2005) after completing the Bachelor of Technology program at the Indian Institute of Technology, Kharagpur (2002).


I am an Insignificant Investor in the public market and co-founder of SocInvest.


Disclosure


I have no stock, option, or similar derivative position in any of the companies mentioned in the last 30 days, and shall not initiate any such positions within the next 5 days. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from SocInvest). I have no business relationship with any company whose stock is mentioned in this article.


I am not a SEBI registered advisor. This article is purely for educational purposes and is not to be construed as investment advice. Please consult your financial advisor before acting on it.


I have used publicly available information while writing this article.

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