[T.S.R:16453] Consolidated Construction: Sinking Money Into A Hole; The Worst Sector To Invest

Slowing growth, prolonged working-capital cycles, margin pressure and delays in projects suggest a tepid few quarters ahead of construction contractor, Consolidated Construction Consortium. Considering this together with premium valuations relative to peers, investors can book profits in their holdings in the stock.

The company's prospects could improve, once execution picks up and margins get better, since the strengths include its diversified order book, reputation for quality construction and high repeat orders, besides opportunities inherent in the sectors in which it operates.

CCCL designs and executes projects. Its order book is made up of a myriad segments — commercial buildings such as hospitals and hotels, residential buildings, industrial structures and infrastructure projects such as metro rail projects. It recently floated a subsidiary to undertake power projects in joint ventures.

At Rs 65.6, the stock trades at 14 times the trailing four-quarter earnings per share. This is at a premium to peers such as Ahluwalia Contracts and Unity Infraprojects, while being on a par with larger players such as Simplex Infrastructure.

CCCL has borne the brunt of prolonged monsoons, besides project delays and cost-overruns. High interest outgo and increased manpower costs have weighed on already erratic margins while resulting in net profit declines for the first half of FY-11. Increased working-capital cycles, calling for higher funding, have contributed to higher interest costs. Order book growth as well has been muted.

At Rs 4,491 crore at the end of September 2010, the order book has grown just 8 per cent over the figure at end-September 2009. On a sequential basis, growth has been flat, with the June '10 order book at Rs 4,526 crore. With an average order execution period of 18 months, the order book growth is not suggestive of superior revenue and profit growth. The order book stands at 2.3 times FY-10 revenues.

The company has also put on hold further development of its food processing Special Economic Zone at Tuticorin, citing poor response due to lack of clarity on taxation norms. Revenue flows from this project are, therefore, unlikely in the near term. Development of the SEZ would also require funds, which could push up interest costs. Of the proposed 432 acres for the SEZ, only 298 acres has been formally approved.

Margin pressures

For the quarter ended June 2010, CCCL posted a 23 per cent revenue growth. Manpower and administration costs saw hefty increases tempered by almost flat growth in construction costs.

Operating margins fell to 7.7 per cent and net margins to 2.8 per cent (9 per cent and 4.7 per cent in the same period in 2009).

Revenues clocked a compounded annual growth of 32 per cent to Rs 1,950 crore over the past three years, while net profits grew 27 per cent in the same period to Rs 93.6 crore. FY-10, however, saw a revenue growth of just 11 per cent. Lower raw material costs largely aided the 35 per cent growth in net profits. Going forward, increase in input costs such as steel could tell on margins. CCCL has a little under half its order book vulnerable to price escalations.

Working capital cycle stood at 145 days in FY-10, up from the 98-105 days in the two years before. CCCL had faced delays in projects such as the Chennai airport as well as cost-overruns in its Delhi multi-level car park, which would have served to further prolong working-capital cycles and increase funding requirements.

Even if the company does cut down length of the cycle, near-term interest outgo and requirement is unlikely to reduce.

However, on the funding front, a debt:equity ratio of 0.6 times as of March 2010 leaves the company in a comfortable position. The company has indicated that it has introduced steps to improve working-capital cycle and boost profitability. If successful, CCCL's prospects may improve.

 

Safe Harbor Statement:

Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.

 

Nothing in this article is, or should be construed as, investment advice.

 

 

 

 

 

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