CRISIL assigns valuation grade of 5/5 to C&C Constructions

C&C Construction Ltd’s (C&C’s) Q1FY12 (June year-ending) consolidated results were below CRISIL Research’s expectations. Revenue registered muted growth of 1% y-o-y, below our expectation, due to some projects facing execution hurdles and some in limbo due to regulatory issues. However, EBITDA margin expanded by 356 bps y-o-y to 22%, which has come as a positive surprise. Working capital of the company remains stretched, leading to high debt and high interest cost. Accordingly, PAT decreased by 8% y-o-y, which is below expectation. C&C’s current order book is worth ~Rs 54 bn (4.2x FY11 revenue), providing revenue visibility for ~three years. We maintain our earnings estimates and fundamental grade of 2/5.

Q1FY12 result analysis
• C&C’s consolidated Q1FY12 revenues registered muted growth of 1.1% y-oy to Rs 2,540 mn due to some projects facing execution hurdles and some in limbo due to regulatory issues.

• EBITDA margin increased by 356 bps y-o-y to 22.0% due to increased contribution from high-margin projects at Bihar and Afghanistan.

• Working capital of the company remains stretched and increased further during the quarter due to high inventory on account of execution hurdles in few projects. This has resulted in high debt and high interest cost. Accordingly, PAT decreased by 8% y-o-y.

Key developments
• Order inflow during the quarter was healthy as the company has received orders worth ~Rs 20 bn.

• In October 2011, the company allotted 2.06 mn shares at Rs 233.19 per share to IL&FS on conversion of 50 mn compulsory convertible preference shares.

Valuations: Current market price has strong upside
We continue to value C&C based on the sum-of-the-parts method. We have assigned a multiple of 4x to the contracting business EPS of Rs 22 and valued the BOT business on a discounted cash flow basis at Rs 55 per share. Our fair value is Rs 144 per share. Based on the current market price, our valuation grade is 5/5.

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