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Stock pick of the week: Why analysts feel Ahluwalia Contracts is a worthy bet

Due to a significant correction in the recent past, the company’s valuation is also reasonable compared to other mid-cap construction companies.

, ET Bureau|
Aug 28, 2017, 06.30 AM IST
real estate
Order book of Rs 3,040 crore and the likelihood of increased order inflows in the future has made Ahluwalia Contracts analysts’ favourite.
Construction company Ahluwalia Contracts beat the Street expectations in the first quarter of 2017-18. In addition to strong execution, speedy certification by some private clients—to close projects ahead of the GST roll out—helped Ahluwalia Contracts report 65% year-on-year (y-o-y) growth in revenue.

Private clients contributed around 32% to its order book, while the remaining 68% came from government contracts. Revenue growth has been impressive, even if one adjusts for GST-related additional revenue of around Rs 40 crore in the first quarter. Net profit for the quarter also jumped 37% y-o-y. GST has also had a negative impact on Ahluwalia Contracts’ order inflow in the short term.

Since other companies were waiting to get clarity on the new tax regime, new orders were very low in the first quarter and the order book came down by Rs 500 crore to Rs 3,040 crore. However, the order book is still comfortably placed at 1.9-times its past 12-month revenue. Analysts are hopeful that the order inflow will pick up once GST-related issues settle and the company should be able to report a 15-20% order book growth from 2018-19 onwards. To speed up its growth rates, Ahluwalia Contracts is upgrading its technological systems as well.

It is collaborating with a Russian entity to build structures using patented precast construction technology. Since this technology will speed up construction and reduce cost, it will help Ahluwalia Contracts increase its capabilities in the low-cost mass housing segment. Due to its exceptionally good execution capability, cash flow situation is also robust at Ahluwalia Contracts. Its free cash flow during 2016-17 was Rs 85 crore. Low gearing in balance sheet is another positive factor. Ahluwalia reduced its debt by Rs 9 crore in the first quarter and plans to become debt-free by 2018-19.

The company is taking over some constructed real estate from its clients who are facing financial difficulties—the total such inventory is worth Rs 47 crore. Ahluwalia Contracts is planning to liquidate it in the next 2-3 years. Due to a significant correction in the recent past (see Relative Performance chart, the company’s valuation is also reasonable compared to other mid-cap construction companies (see Valuation table). So, investors with long-term holding capacity can consider this counter now.

Selection Methodology
We pick the stock that has shown the maximum increase in ‘consensus analyst rating’ in the past one month. Consensus rating is arrived at by averaging all analyst recommendations after attributing weights to each of them (5 for strong buy, 4 for buy, 3 for hold, 2 for sell and 1 for strong sell) and any improvement in consensus analyst rating indicates that the analysts are getting more bullish on the stock. To make sure that we pick only companies with decent analyst coverage, this search is restricted to stocks that are covered by at least 10 analysts. You can see similar consensus analyst rating changes during the past week in the ETW 50 table.
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