Small-cap investing comes with more risks and volatility as compared to large-caps, while at the same time, with scope for better returns as well. One way to look for good opportunities commensurate with the risk you take in the small-cap space is by screening for companies with strong financials, robust growth outlook and, very importantly, a balance sheet that is net-debt free.

Ahluwalia Contracts (India) is one such leading construction player with operations in diverse segments, spread across 16 States, with a strong execution track record and an order book split among varied clientele — Central, State governments and private sector companies.

Investors with a 2-3-year perspective can buy the stock of the company in small quantities at current levels. At ₹810, Ahluwalia Contracts stock trades at 24.5 times its trailing 12 months per share earnings and 20 times its likely per share earnings for FY24. This valuation multiple offers reasonable comfort despite the share running up over 52 per cent in the last six months and about 20 per cent in just the last couple of weeks since its Q2FY23 results were announced. Any corrections in the stock linked to the broader markets can be used to load up on the stock.

In the first half of FY24, the company’s revenues were up 35.1 per cent over the same period in FY23 to ₹1,665.2 crore, while net profits rose 36.5 per cent to ₹105 crore. Over FY19 to FY23 the company’s revenues grew at a compounded annual rate of 13 per cent to ₹2,838.4 crore and the net profits too expanded at 13 per cent to ₹194.2 crore.

The company’s return on capital employed has been in excess of 25 per cent for FY22 and FY23 and for much of the pre-Covid years as well.

Execution across diverse client base

As mentioned earlier, Ahluwalia is into construction. The company builds commercial and residential complexes, hotels, hospitals, education institutions, IT parks and automated car parking lots. It is also into redevelopment projects such as those of railway and metro stations, depots and also builds urban infrastructure. The company has been around for more than 50 years and has a robust execution track record.

Ahluwalia Contracts is an EPC (engineering, procurement and construction) player and hence bids for deals with a reasonable margin profile and those which ensure steady cash flows.

Some of its marquee ongoing projects include redevelopment of Chhatrapati Shivaji Maharaj Terminus at Mumbai (₹2,450 crore), AIIMS Jammu, Bihar Animal Science University, Tata Memorial Centre, The Arbour Project for DLF, Max Super Speciality Hospital and Dharavi Wastewater Treatment Facility, among others.

For most projects, the company bills its clients on a monthly basis and also based on milestones achieved. Usually, as the work progresses towards completion, the margins from the whole project start to improve for the company. It looks to maintain 11 per cent operating margin. The company has ensured double-digit margins barring the Covid-19 disruption period (2020-22), when lockdowns hurt execution.

With raw material prices stabilising, robust execution and ability to generate price hikes should mean that margins remain healthy over the foreseeable future.

Robust order book

Ahluwalia Contracts has a large order book, lending it a considerable revenue and execution runway. As of September 2023, the company has an order book of over ₹12,000 crore, which is over 4x the revenues of FY23. Given the revenue growth rate, there is visibility for at least the next 2-3 years. The company expects some slowdown in tenders in the next few months as State and General elections take centre stage. But the existing pipeline is large enough to keep execution strong.

Over the past year or so, the company has been diversifying its order book to take in more private clients on a selective basis, mostly in geographies where it already has operations.

From an 82 :18 public to private sector order book ratio last year, Ahluwalia’ Contract’s book is now at a 70:30 ratio and is looking to move it towards a 60:40 ratio in the future.

The project base is also diverse: infrastructure (29.7 per cent of order book as of September 2023), hospitals (25.4 per cent), institutional (24.2), residential (12.4 per cent) and others (commercial and hotel-8.3 per cent).

Fixed price contracts are coming down and over the last one year the proportion has reduced from 30 per cent to 24 per cent, as it focuses most on regular project-based ongoing billing.

Ahluwalia Contracts has cash and bank balances totalling to ₹522 crore in its balance sheet as of September 2023 and has a debt of just ₹32 crore.