CCCL: Margins hit by extraordinary expenses: Edelweiss

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􀂄 Revenue ahead of estimates; margins hit by extraordinary expenses
Consolidated Construction’s (CCCL) revenues for Q2FY11 were higher than our
estimates; however, margins declined, both at the EBITDA and PAT levels.
Revenues, at INR 4.9 bn, were higher 8.5% Y-o-Y and lower 3.6% Q-o-Q.
Revenue growth was impacted due to heavy rains in some parts of India.
EBITDA margin, at 7.8%, was lower 110bps Y-o-Y and 50bps Q-o-Q. CCCL
booked an extraordinary loss of INR 81.7 mn (explained below); adjusting for
the same, EBITDA margins stood at strong 9.5%. Interest cost for the quarter
stood at INR 121 mn, higher 91% and 15%, Y-o-Y and Q-o-Q, respectively. This
increase, which happened due to many projects being in the mobilisation stage,
adversely affected PAT margins. PAT margins, at 2.8%, were lower 190bps Y-o-Y
and 90bps, Q-o-Q.
􀂄 Order book remains robust at ~INR 45 bn
The company’s order book at the end of the quarter stood at INR 44.9 bn
(against INR 45.2 bn at the end of Q1FY11 and INR 33.9 bn at FY10 end).
Current order book is 2.2x TTM (trailing twelve month) sales and provides
revenue visibility for the future.
􀂄 Outlook and valuations: Margin recovery the key; maintain ‘HOLD’
CCCL’s order book and revenue growth is not a concern; however, margins have
declined both at the operating and PAT levels. The company has indicated that it
has initiated a whole lot of steps to return to higher profitability; this includes
individual project-wise monitoring to look for improvement in working capital
cycle and other operating parameters. The company’s success in arresting its
margin decline is going to be the key going ahead.
We are calibrating our estimates, keeping in mind the performance during
H1FY11. We believe CCCL is likely to post robust growth, driven by improvement
in the macro economic scenario and its expansion into new verticals in the infra
space. Despite a temporary setback, the company remains an excellent bet with
healthy return ratios and a quality management. We value the company using
P/E of 13x for its FY12E PAT, arriving at a target price of INR 85/share. We are
positive on the company and maintain our ‘HOLD’ recommendation. On relative
return basis, the stock is rated ‘Sector Performer’