The Hindu Business Line : C&C Constructions: Invest at cut-off

The initial public offer of C&C Constructions is suitable for investors with a high risk appetite. A comfortable order-book, high-profit margins and consistent financial track record are positives for this construction company that operates mainly in the road and urban infrastructure segments.

Lack of business diversification and dependence on Afghanistan for higher margins are the major risk factors. A two-year investment perspective is necessary for conversion of orders on hand into revenues.

At the price band Rs 270-291, the offer is priced at 12-13 times its earnings for the year-ended June 2006 on the existing equity base. If the current order-book is converted into revenues, as per schedule, the price-earnings multiple would be 9-10 times its likely earnings for the year-ended June 2008 on a post-issue equity base.

Profile

A Delhi-based infrastructure company, C&C Constructions has operations in India and Afghanistan. It plans to raise about Rs 120 crore through this offer. Much of the proceeds are to be used for investment in Build Operate Transfer (BOT) projects in India, towards procurement of capital equipment and for meeting further working-capital requirements.

Comfortable order book

As of December 2006, C&C Constructions had unfinished and new orders adding up to Rs 825 crore. The order book, mainly consisting of road construction (62.5 per cent of orders) and a BOT road project (22.5 per cent), lends visibility to the earnings growth over the next two/two-and-half years.

Until 2005, C&C Constructions had much of its operations in Afghanistan. For instance, for the year-ended June 2005, projects in Afghanistan accounted for 92 per cent of the order-book.

Concentration of business in an area of high political and economic uncertainty raises to the company's business risk profile. However, the company appears to have now shifted its focus, with India accounting for 92 per cent of the order-book as of December 2006. This should mitigate the concentration risk.

Risky, but lucrative

While the company is likely to be focussed on India, we expect it to continue its business in Afghanistan for three reasons — one, the margins are extremely lucrative.

Two, the company has an edge in Afghanistan, having successfully implemented projects in tough terrains with its own logistics and support services, and competed with international players.

Three, the Joint State — USAID (United States Agency For International Development) Plan for 2005-2010 for development of Afghanistan has ensured smooth funding by agencies such as USAID, World Bank and the Asian Development Bank.

A bulk of this funding has been earmarked for roads. Having established its presence in Afghanistan, the company is likely to capitalise on the development work being implemented in the country.

Given Afghanistan's significant contribution to revenues and profits, the risk of order loss remains high. Execution of projects in Afghanistan has technically qualified the company (and its joint venture partner) to bid for projects in India.

This is reflected in the company bagging road and BOT projects (in road and power transmission) locally in quick succession.

The company has implemented most of the projects with its joint venture partner, B. Seenaiah and Company (Projects), a leading contractor for the National Highways Authority of India.

Any move by the latter (B. Seenaiah) to become a competitor may prove detrimental to C&C. Despite being in the road segment, which typically yields low margins, C&C Constructions has managed to maintain operating profit margins (OPMs) which are far superior to margins for players in the road segment. Valecha Engineering, a typical road sector contractor, has OPMs of about 7 per cent.

As against this, C&C Constructions enjoyed 23 per cent for the year-ended June 2006.

However, given the order-book shift, towards India, the margins are unlikely to be sustained. They may, however, remain superior to peers for the next couple of years.

Offer details

The offer is open from February 5-9. Edelweiss Capital is the book running lead manager.

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