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Revenues and PAT below estimates
Consolidated Construction’s (CCCL) revenues and PAT for Q3FY11 were below our
estimates. Revenue, at INR 4.9 bn, was higher 10% Y-o-Y and flat Q-o-Q. EBITDA
margins, at 9.7%, improved 70bps Y-o-Y and 190bps Q-o-Q; margins in the last
quarter were impacted by one-off expenditure of INR 81.7 mn. PAT margin was,
however, hurt due to higher interest rates and stretched working capital cycle. PAT
margin declined 130bps Y-o-Y, to 3.4%, but was higher 60bps Q-o-Q.
Strong order inflow boosts order book; infra projects’ execution drags
The company’s order book stood at INR 43.3 bn at Q3FY11 end (INR 45 bn at
Q2FY11 end and INR 36.6 bn at Q3FY10 end). It received ~INR 8 bn of orders in
January 2011 and is L1 in INR 10 bn worth of additional orders. We expect CCCL
to end FY11 with order book of INR 50-54 bn (depending on conversion of L1
orders during the quarter), ~2.3x FY11E revenues, offering strong revenue
visibility.
However, execution on infra projects remained slow. Infra order inflows over the
past four quarters have stood at ~INR 19 bn. Still, revenue contribution from
infra projects YTD in FY11 has been only ~INR 4.7 bn (of which, ~INR 4 bn is
from Chennai airport), showing the lack of progress on new infra orders.
Outlook and valuations: Execution the key; maintain ‘HOLD’
CCCL’s order book is not a concern; however, conversion of orders into revenues
has emerged as a key concern due to worries over land acquisition, financial
closure, environmental clearance and other regulatory approvals. Also, stretched
working capital cycle and higher interest rates, have hurt profitability.
We are calibrating our estimates, keeping in mind the performance during
9mFY11. With order inflow picking up, CCCL has the potential to post strong
growth ahead, contingent on the regulatory issues being sorted out. 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 11x (as
against 13x earlier to account for execution worries) for its FY12E PAT, arriving
at a target price of INR 55/share (as against INR 85/share earlier). We are
positive on the company and maintain our ‘HOLD’ recommendation. On relative
return basis, the stock is rated ‘Sector Performer’
Revenues and PAT below estimates
Revenue, at INR 4.9 bn, was higher 10% Y-o-Y and flat Q-o-Q. EBITDA margins
improved 70bps Y-o-Y and 190bps Q-o-Q, to 9.7%. Margins in the last quarter had been
impacted by one-off expenditure of INR 81.7 mn.
PAT margin was, however, hurt due to higher interest costs (at INR 126 mn, up 87% Yo-
Y and 4% Q-o-Q) owing to rise in interest rates and stretched working capital cycle
(144 days at Q3FY11 end against 145 days at Q2FY11 end, 134 days at Q3FY10 end).
PAT margin (at 3.4%) declined 130bps Y-o-Y. Q-o-Q, it was higher 60bps due to the
one-off item explained above. PAT for the quarter, at INR 167 mn, was lower 21% Y-o-Y,
but increased 21% Q-o-Q.
Execution on infra projects remains slow
The company has won INR 19 bn of infra projects over the past four quarters. However,
execution on these projects has continued to drag due to issues like land acquisition,
financial closure (IND Barath – II power plant, INR 5.25 bn), environmental clearance
and other regulatory approvals (Chennai airport, metro rail projects). As a result, YTD
revenue contribution of infra projects in FY11 has been only ~INR 4.7 bn (of which,
~INR 4 bn is from Chennai airport), showing the lack of progress on new infra orders.
Similarly, the concession agreement for the multi level car parking project in Delhi has
not been signed yet. CCCL expects the same to be done over the next month. It
indicated that fund sources for the projects have been identified.
Working capital cycle remains static
Working capital cycle for the company remained at the same level where it was at the
end of FY10 and Q2FY11. Net working capital cycle (based on TTM revenues) remained
at ~144 days.
Company Description
CCCL is an infrastructure construction company headquartered in Chennai. It was
incorporated in 1997 by four ex-L&T professionals with over 20 years of experience each
in the construction sector. Over the years, it has emerged as a provider of integrated
turn-key construction services in the industrial, commercial, infrastructure, and
residential sectors of the construction industry. In the private sector, CCCL has worked
for clients operating in verticals such as IT/ITeS, hospitals, hospitality, pharmaceuticals,
education, hospitality, manufacturing, retail, malls and multiplexes. In the public sector,
it has worked for the Airport Authority of India, ONGC, Chennai Metro Rail, and public
utility works like power distribution entities and water supply boards.
Investment Theme
CCCL is a reputed player in the contracting space with presence in the infrastructure,
buildings (residential and commercial), and industrial segments. Since incorporation in
1997, the company has made rapid strides, posting revenue CAGR of 45% and PAT
CAGR of 64% between FY05 and FY10. Along with rapid growth, CCCL has also been able
to manage its operations efficiently. Fixed asset turnover ratios are high at ~10x while
working capital cycle, though recently elongated, is still at ~120 days, much lower than
industry average. This has led to impressive return ratios – RoE and ROCE are at 18%
and 22%, respectively in FY10.
Historically, CCCL’s operations have been dominated by the commercial segment and
most orders have come from South India. However, over the past couple of years, the
company has diversified both geographically and segment wise. This diversification will
broaden the scope of its operations, thereby improving growth prospects.
Key Risks
While CCCL’s strong relationships with its clients ensure that it wins repeated orders
from them, it can also lead to concentration risk in the order book w.r.t. high exposure
towards certain geographies. Historically, a majority of the company’s orders have come
from South India.
Building/industrial contracts have a shorter execution cycle compared to typical
infrastructure projects. Since almost half of the company's orders are from these
segments, CCCL has a comparatively shorter execution period compared to industry
standards. Thus, a consistent inflow of new orders is imperative for sustained growth.
Increase in the share of infra projects, which are typically longer gestation, is likely to
lead to an extension of the company’s overall execution cycle. Also, increase in the share
of government projects is likely to lead to deterioration in working capital cycle. The
company’s ability to efficiently manage its working capital cycle needs to be watched.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Revenues and PAT below estimates
Consolidated Construction’s (CCCL) revenues and PAT for Q3FY11 were below our
estimates. Revenue, at INR 4.9 bn, was higher 10% Y-o-Y and flat Q-o-Q. EBITDA
margins, at 9.7%, improved 70bps Y-o-Y and 190bps Q-o-Q; margins in the last
quarter were impacted by one-off expenditure of INR 81.7 mn. PAT margin was,
however, hurt due to higher interest rates and stretched working capital cycle. PAT
margin declined 130bps Y-o-Y, to 3.4%, but was higher 60bps Q-o-Q.
Strong order inflow boosts order book; infra projects’ execution drags
The company’s order book stood at INR 43.3 bn at Q3FY11 end (INR 45 bn at
Q2FY11 end and INR 36.6 bn at Q3FY10 end). It received ~INR 8 bn of orders in
January 2011 and is L1 in INR 10 bn worth of additional orders. We expect CCCL
to end FY11 with order book of INR 50-54 bn (depending on conversion of L1
orders during the quarter), ~2.3x FY11E revenues, offering strong revenue
visibility.
However, execution on infra projects remained slow. Infra order inflows over the
past four quarters have stood at ~INR 19 bn. Still, revenue contribution from
infra projects YTD in FY11 has been only ~INR 4.7 bn (of which, ~INR 4 bn is
from Chennai airport), showing the lack of progress on new infra orders.
Outlook and valuations: Execution the key; maintain ‘HOLD’
CCCL’s order book is not a concern; however, conversion of orders into revenues
has emerged as a key concern due to worries over land acquisition, financial
closure, environmental clearance and other regulatory approvals. Also, stretched
working capital cycle and higher interest rates, have hurt profitability.
We are calibrating our estimates, keeping in mind the performance during
9mFY11. With order inflow picking up, CCCL has the potential to post strong
growth ahead, contingent on the regulatory issues being sorted out. 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 11x (as
against 13x earlier to account for execution worries) for its FY12E PAT, arriving
at a target price of INR 55/share (as against INR 85/share earlier). We are
positive on the company and maintain our ‘HOLD’ recommendation. On relative
return basis, the stock is rated ‘Sector Performer’
Revenues and PAT below estimates
Revenue, at INR 4.9 bn, was higher 10% Y-o-Y and flat Q-o-Q. EBITDA margins
improved 70bps Y-o-Y and 190bps Q-o-Q, to 9.7%. Margins in the last quarter had been
impacted by one-off expenditure of INR 81.7 mn.
PAT margin was, however, hurt due to higher interest costs (at INR 126 mn, up 87% Yo-
Y and 4% Q-o-Q) owing to rise in interest rates and stretched working capital cycle
(144 days at Q3FY11 end against 145 days at Q2FY11 end, 134 days at Q3FY10 end).
PAT margin (at 3.4%) declined 130bps Y-o-Y. Q-o-Q, it was higher 60bps due to the
one-off item explained above. PAT for the quarter, at INR 167 mn, was lower 21% Y-o-Y,
but increased 21% Q-o-Q.
Execution on infra projects remains slow
The company has won INR 19 bn of infra projects over the past four quarters. However,
execution on these projects has continued to drag due to issues like land acquisition,
financial closure (IND Barath – II power plant, INR 5.25 bn), environmental clearance
and other regulatory approvals (Chennai airport, metro rail projects). As a result, YTD
revenue contribution of infra projects in FY11 has been only ~INR 4.7 bn (of which,
~INR 4 bn is from Chennai airport), showing the lack of progress on new infra orders.
Similarly, the concession agreement for the multi level car parking project in Delhi has
not been signed yet. CCCL expects the same to be done over the next month. It
indicated that fund sources for the projects have been identified.
Working capital cycle remains static
Working capital cycle for the company remained at the same level where it was at the
end of FY10 and Q2FY11. Net working capital cycle (based on TTM revenues) remained
at ~144 days.
Company Description
CCCL is an infrastructure construction company headquartered in Chennai. It was
incorporated in 1997 by four ex-L&T professionals with over 20 years of experience each
in the construction sector. Over the years, it has emerged as a provider of integrated
turn-key construction services in the industrial, commercial, infrastructure, and
residential sectors of the construction industry. In the private sector, CCCL has worked
for clients operating in verticals such as IT/ITeS, hospitals, hospitality, pharmaceuticals,
education, hospitality, manufacturing, retail, malls and multiplexes. In the public sector,
it has worked for the Airport Authority of India, ONGC, Chennai Metro Rail, and public
utility works like power distribution entities and water supply boards.
Investment Theme
CCCL is a reputed player in the contracting space with presence in the infrastructure,
buildings (residential and commercial), and industrial segments. Since incorporation in
1997, the company has made rapid strides, posting revenue CAGR of 45% and PAT
CAGR of 64% between FY05 and FY10. Along with rapid growth, CCCL has also been able
to manage its operations efficiently. Fixed asset turnover ratios are high at ~10x while
working capital cycle, though recently elongated, is still at ~120 days, much lower than
industry average. This has led to impressive return ratios – RoE and ROCE are at 18%
and 22%, respectively in FY10.
Historically, CCCL’s operations have been dominated by the commercial segment and
most orders have come from South India. However, over the past couple of years, the
company has diversified both geographically and segment wise. This diversification will
broaden the scope of its operations, thereby improving growth prospects.
Key Risks
While CCCL’s strong relationships with its clients ensure that it wins repeated orders
from them, it can also lead to concentration risk in the order book w.r.t. high exposure
towards certain geographies. Historically, a majority of the company’s orders have come
from South India.
Building/industrial contracts have a shorter execution cycle compared to typical
infrastructure projects. Since almost half of the company's orders are from these
segments, CCCL has a comparatively shorter execution period compared to industry
standards. Thus, a consistent inflow of new orders is imperative for sustained growth.
Increase in the share of infra projects, which are typically longer gestation, is likely to
lead to an extension of the company’s overall execution cycle. Also, increase in the share
of government projects is likely to lead to deterioration in working capital cycle. The
company’s ability to efficiently manage its working capital cycle needs to be watched.
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