Ahluwalia Contracts - Robust Industry Outlook, Supported By Momentum In Order Inflows: HDFC Securities

HDFC Securities Retail Research

Ahluwalia Contracts India Ltd. continues to see robust order flow prospects in healthcare, data centres, industrial structures apart from government buildings.

Competitive intensity remains elevated but Ahluwalia Contracts remains very selective in bidding for projects.

Despite near term headwinds of high input costs, margin is expected to improve from FY24E with softening of commodity prices, a narrower gap of indices with input prices, slightly lesser competitive intensity and new projects bid at elevated input price assumption.

The promoter family remains closely involved in the business with well-defined responsibilities and clear understanding of future roles.

Ahluwalia Contracts’ robust and diversified order book, strong bidding pipeline, timely execution could help to bring more orders going forward.

Investors can buy the stock in the Rs 690-704 band and add more on dips to Rs 615-629 (12.5 times FY25E earnings per share).

We feel the base case fair value of the stock is Rs 771 (15.5 times FY25E EPS) and the bull case fair value is Rs 821 (16.5 times FY25E EPS) over the next two to three quarters.

Key triggers

• Healthy and diversified order book position to provide medium to long term revenue visibility.

• Expectation to regain its margins to 11-12% going forward.

• Robust industry outlook, supported by momentum in order tendering and awarding.

• Sound fundamentals led by comfortable capital structure and strong debt coverage indicators.

What could go wrong?

• Economic slowdown and changes in regulatory environment may impact the construction industry and/or real estate market. This could adversely affect the company’s operations and execution time periods.

• Contractual obligations for quality, timeliness, protection of confidential information and other specific terms and conditions are crucial for engineering, procurement and construction orders.

• Ahluwalia Contracts is engaged in business with large industrial houses, corporates, institutions and Government authorities. These clientele demand strict adherence to timely delivery, quality and costs. If their expectations are not met with, it may damage the company’s brand and prevent repeat orders.

• Ahluwalia Contracts has a track record of not paying dividend frequently to its shareholders, the company recommended dividend at Rs 0.30 per share in FY23 to the shareholders.

• The company largely depends on Government orders, any delay in receiving payment could impact its operations. Also slowdown in Government spend could impact its order inflow and revenues.

• The promoters have pledged its shares, which is 5.4% of its 55.32% stake, as on September 30, 2023. Further rise in pledged shares by promoter could impact investors sentiment towards the stock.

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