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�� Results below expectations; EBITDA margins dip significantly
Consolidated Construction’s (CCCL) Q4FY11 revenue and PAT were below our
expectations. Revenue, at INR 6.4 bn, was up 30% Q-o-Q and flat Y-o-Y. EBITDA
margin dipped significantly at 3.5% (11.4% in Q4FY10 and 9.7% in Q3FY11). The
decline was due to rise in commodity prices (on fixed price contracts) and higher
revenue contribution from low-margin contracts (36% of revenue in Q4FY11) won
during the downturn. As a result, PAT for the quarter was a minuscule INR 15 mn.
�� Strong order inflow boosts order book, but execution concerns persist
The company’s order book stood at INR 49.7 bn at FY11 end (INR 43.3 bn at
Q3FY11 end and INR 33.9 bn at FY10 end). It has won additional orders worth
~INR 14.5 bn in April 2011. Current order backlog stands at INR 64 bn, >3x
FY11 revenue, offering strong revenue visibility.
However, robust order book has not translated into revenue, as is evident in the
tepid 9.6% revenue growth in FY11. Problems in land acquisition, financial
closure, and other clearances have meant that 70% of infra orders and 40% of
commercial orders are not progressing as per schedule. The company has guided
for a 10-15% topline growth in FY12.
�� Outlook and valuations: Tough times; downgrade to ‘REDUCE’
While CCCL’s order book is not a concern, revenue growth has been
disappointing. Further, margins are expected to be under pressure for the next
year as well. This, along with stretched working capital cycle and higher interest
rates, are likely to keep profitability under pressure.
We are calibrating our estimates keeping in mind the execution challenges and
concerns on profitability. We are revising our revenue estimates for FY12 and
FY13 down 5% and 7%, respectively. The decline in EBITDA margin means that
the hit on PAT is much higher—37% and 28% in FY12E and FY13E, respectively.
We believe the stock may see some correction in the near term with lingering
worries on execution and profitability. At CMP of INR 47, the stock is available at
a P/E of 15.1x and 10.0x FY12E and FY13E, respectively. Hence, we downgrade
our recommendation to ‘REDUCE’ from ‘HOLD’ and rate it ‘Sector
Underperformer' on relative return basis.
�� 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, the company has emerged as a provider of
integrated turnkey construction services in the industrial, commercial, infrastructure, and
residential sectors of the construction industry. In the private sector, it 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
Building/industrial contracts have a shorter execution cycle compared to typical
infrastructure projects. Since almost 40% 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.
Execution on infra projects is susceptible to challenges in the form of land acquisition,
environmental concerns and other regulatory clearances.
�� Key Risks
Higher–than-expected order inflows can improve revenue visibility for the company. The
IT/ITeS segment is a key client for the company and revival in this segment can help the
company boost its order book.
Increase in commercial/industrial orders can also improve the working capital cycle for
the company since these projects are mostly from the private sector and have better
payment terms than government orders.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
�� Results below expectations; EBITDA margins dip significantly
Consolidated Construction’s (CCCL) Q4FY11 revenue and PAT were below our
expectations. Revenue, at INR 6.4 bn, was up 30% Q-o-Q and flat Y-o-Y. EBITDA
margin dipped significantly at 3.5% (11.4% in Q4FY10 and 9.7% in Q3FY11). The
decline was due to rise in commodity prices (on fixed price contracts) and higher
revenue contribution from low-margin contracts (36% of revenue in Q4FY11) won
during the downturn. As a result, PAT for the quarter was a minuscule INR 15 mn.
�� Strong order inflow boosts order book, but execution concerns persist
The company’s order book stood at INR 49.7 bn at FY11 end (INR 43.3 bn at
Q3FY11 end and INR 33.9 bn at FY10 end). It has won additional orders worth
~INR 14.5 bn in April 2011. Current order backlog stands at INR 64 bn, >3x
FY11 revenue, offering strong revenue visibility.
However, robust order book has not translated into revenue, as is evident in the
tepid 9.6% revenue growth in FY11. Problems in land acquisition, financial
closure, and other clearances have meant that 70% of infra orders and 40% of
commercial orders are not progressing as per schedule. The company has guided
for a 10-15% topline growth in FY12.
�� Outlook and valuations: Tough times; downgrade to ‘REDUCE’
While CCCL’s order book is not a concern, revenue growth has been
disappointing. Further, margins are expected to be under pressure for the next
year as well. This, along with stretched working capital cycle and higher interest
rates, are likely to keep profitability under pressure.
We are calibrating our estimates keeping in mind the execution challenges and
concerns on profitability. We are revising our revenue estimates for FY12 and
FY13 down 5% and 7%, respectively. The decline in EBITDA margin means that
the hit on PAT is much higher—37% and 28% in FY12E and FY13E, respectively.
We believe the stock may see some correction in the near term with lingering
worries on execution and profitability. At CMP of INR 47, the stock is available at
a P/E of 15.1x and 10.0x FY12E and FY13E, respectively. Hence, we downgrade
our recommendation to ‘REDUCE’ from ‘HOLD’ and rate it ‘Sector
Underperformer' on relative return basis.
�� 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, the company has emerged as a provider of
integrated turnkey construction services in the industrial, commercial, infrastructure, and
residential sectors of the construction industry. In the private sector, it 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
Building/industrial contracts have a shorter execution cycle compared to typical
infrastructure projects. Since almost 40% 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.
Execution on infra projects is susceptible to challenges in the form of land acquisition,
environmental concerns and other regulatory clearances.
�� Key Risks
Higher–than-expected order inflows can improve revenue visibility for the company. The
IT/ITeS segment is a key client for the company and revival in this segment can help the
company boost its order book.
Increase in commercial/industrial orders can also improve the working capital cycle for
the company since these projects are mostly from the private sector and have better
payment terms than government orders.
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