Ahluwalia Contracts (India) Limited (532811) Earnings Call Transcript & Summary

Good afternoon, everyone, and I welcome you all on behalf of AMBIT to Ahluwalia Contracts 3Q FY '21 Earnings Conference Call. Today, we have from the management Mr. Shobhit Uppal, Deputy Managing Director; Mr. Satbeer Singh, CFO; Mr. Rohit Patni, Senior Manager, Investor Relations; and Mr. Vikasji. In terms of the flow of the call, Mr. Shobhit will give his opening remarks. And post that, we will open the floor to Q&A. Sir, over to you.

Thanks, Varun. Good afternoon, everybody. Thank you for joining in. So Ahluwalia Contracts (India) Limited has announced its financial results for Q3 FY '21. During this quarter, the company has achieved a turnover of INR 536.13 crores and a PAT of INR 14.73 crores in comparison to a turnover of INR 498 crores and a PAT of INR 21.14 crores in Q3 of FY '20. EPS of the company for Q3 FY '21 is INR 2.2 as compared to INR 3.16 in the corresponding quarter of the last financial year. During Q3 FY '21, the company's EBITDA margin is 5.91% as compared to 8.75%, and a PAT margin of 2.72% as compared to 4.22% in the corresponding period of the last financial year. During the 9 months of FY '21, the company has achieved a turnover of INR 1,220.49 crores and a PAT of INR 40.17 crores in comparison to a turnover of INR 1,335.71 crores and a PAT of INR 58.33 crores in the 9 months of the last financial year. EPS of the company for 9 months of FY '21 is INR 6 as compared to INR 8.71 in 9 months of the last financial year. During 9 months of FY '21, the company's EBITDA margin is 6.91% as compared to 9.74% and PAT margin of 3.24% as compared to 4.34% in the corresponding period of the last financial year. Net order book of the company as on 31st December 2021 stands at INR 8,172 crores. Thank you. Over to you for questions.

[Operator Instructions]

Hello, Malika. Hello?

Yes, sir.

Yes. I'll go ahead and ask a question in the meanwhile as the question queue assembles. Sir, if you can throw some light on the margin deterioration that we saw in 3Q. What are the drivers behind that? And when can we see margins going back to our stated guidance or where we want to reach, at least 11% to 12-odd percent? So how do you see that trajectory evolving? And what are the drivers behind the miss in this particular quarter?

Yes. That's an expected question, but I'm sure it's -- the decrease in margin must be -- I haven't had a chance to look at a peer comparison, but I'm sure it's the same with other companies. Also, part of the reason -- one major reason in this quarter is that we are now back to paying full salaries to our staff, right? Not only that. Gearing up for the execution or the healthy order book that we have and gearing up for execution, which is now, basically, we are back to pre-COVID levels now in terms of our resources, mainly labor. So gearing up for the challenges ahead, we've ramped up our staff deployment. We've even gone ahead and recruited further. So that has added to our staff costs. Another reason is that December, we've been hit by increase in commodity prices, primarily steel and related metal products, prices have really skyrocketed in December. That has also contributed to a hit on the margins. To answer the next part of this question, which you asked, I feel that in the next financial year, we should get back to the projected levels of double-digit margins as far as EBITDA is concerned.

Okay. So this quarter again the margins will be hit by higher commodity prices?

Yes.

In terms of your order book, sir, how much is fixed price contracts and how much are variable price? Like, what part of your order book is completely passed through for these prices?

So I think most of -- 85% of our order book, it's pass-through. I wouldn't say completely pass-through. There is a built-in escalation clause. Now -- but the increase in commodity prices are not directly -- especially in government contracts, the reimbursement of escalation is based on indices. So we are yet to work out. The fresh indices has yet not been released, especially for the last quarter. So yet to work out whether it'll be a complete pass-through or only some portion of the increase will be reimbursed to us.

The next question is from the line of Nikhil (sic) [ Nitin ] Arora from Axis Mutual Fund.

I just joined the call a little late. Sir -- so I was just hearing your comment on the margin pass-through. But sir, generally, what we understood from you earlier is that 70%, 80%, any which ways the order book is a pass-through.

Yes.

And -- so then why -- just want to understand why the client base -- it's more of a timing delay, which has happened because of a steep cost increase? And how we should look at it? Because we've never seen such low margins by a company like Ahluwalia. So if you just clear up how we should build in such escalations.

So yes, as you yourself said [Foreign Language] this is based on the [Foreign Language] steel price increase [Foreign Language] that is based on the index, which the client or the state government or the central government or CPWD releases, that has yet not been released. It is generally -- there is a lag of about 1.5 months or 2 months. So we are yet not clear as to what percentage of this increase will be compensated to us. As things stand today, in the last quarter, there is no compensation or no reimbursement for this increase, as things stands. Secondly, I mentioned about the staff cost increase, which you must have heard. I don't know whether you joined the call -- you had joined the call by then or not. So that's -- that is an impact. And there have been some write-offs also to the tune of about INR 8-odd crores, which has also impacted our margins.

Fair enough. So sir, generally, when you look at your -- this escalation part, and I understand they have not passed through, but the hit would be the tune of INR 10 crores, INR 15 crores in that case because of this raw material pressure, and that, eventually, someone should build in 50% recovery and then 80% then 100% directionally? Or you think in 1 quarter, they should come back and margins should normalize, just on a direction side, sir, that would be useful.

No. As I said, next quarter also, we will continue to see an impact. Because in November and December, just to give you guys an idea, we must have procured about 10,000 tonnes of steel. And in October, the procurement price was, say, INR 36. By December end, this has gone -- this had gone up to nearly INR 60. So even if you take an average of about INR 15 increase, on 10,000 tonnes of steel, this tantamounts to nearly INR 15 crores.

Because, sir, generally, when we look at your last 10, 11 years, commodity cycle would have gone up and down, but the fluctuation was not that...

Not so much. The kind of increase that we've seen in the last couple of months, this -- at least in my 33 years, I've not seen anything like this. So though the prices now seem to be coming down, especially for long products, reinforcement steel that is, they have dropped by about INR 4 to INR 5. I think the government has also taken steps to prevent cartelization. Let's see. We are hoping that this will continue going downwards.

And sir, with respect to execution now, things quarter-on-quarter are improving on the execution side. But how one should look at it? I mean in the current backlog, do you think now everything is in the full swing and we should see improvement -- much better improvement going ahead? Or you think there are still a start-stop situation in the backlog?

So as I mentioned, we are back to the pre-COVID levels. It is reflected in our top line also. We are almost -- we've touched where we were last year. We were at INR 1,300 crores. We've done about INR 1,220 crores in the 9 months this year. So we should -- we are hopeful that we will match the top line of last year. And going forward, in the next year, we should grow at about 15%, at least.

Got it. And sir, just lastly, on a long-term guidance side because we've been always been a leader in margins, especially in the segment in which you operate. But generally, on a longer-term basis, if I exclude the Q4 and all, for FY '22 and '23, do you see a quite risk to the double-digit EBITDA margin which we are doing? Or you think 11%, 12%, what we used to do on an average is something still doable, nothing to get worried about on that part? That's my last question.

I think the double-digit margins in the next financial year, as I mentioned, is doable.

The next question is from the line of Rita Tahilramani from Invesco Mutual Fund.

Again, harping a little deeper on the margin side itself. So just a clarification needed, this INR 8.5 crores is provisions or is it write-offs?

This is provisions.

It's provisions. Okay. So -- but if you see the last 3 quarters, if I could say, from Q4 '20 till date, there has been element of provisions for write-off. So how long is this going to continue? Or where do you think -- on the provision side, I'm not talking about the commodity pressure which you've taken. That is across the industry. But especially on this element, could you provide some clarity?

Just in the year, we have basically made provision of INR 13.67 crore during this year and write-off INR 5.75 crore. And due to basically dragging court cases also, we were at -- provision as per the accounting standard expected credit losses, so that has to be made. And that's why we are expecting basically this quarter also approximately INR 5 to INR 6 crore provision would be there.

Also again, continuing in Q4 '21?

Yes. INR 4 crores to INR 5 crores, INR 5 crores to INR 6 crores this last quarter also will be there.

If I hear it right, it is INR 13.7 crores already provided and another INR 6 crores to come out in Q4?

Exactly.

And incrementally in FY '22 also you see this element coming into picture? Why am I asking you this question because this element of provision is -- while commodity is across the board, but element of provision is specifically to the -- our company and it has not been observed much across other players in this space. So I really wanted to understand what particularly is this element.

As I had mentioned in our -- during my last investor interaction that we are cleaning up our balance sheet. And more importantly, with developers where these outstandings have been pending for a long time, as per the revised accounting standards, our auditors have advised us that these provisions have to be made. So we are going ahead and doing it.

So what could be the particular quantum, which is further expected?

So by the end of this financial year, we'll be mostly cleaned up.

The next question is from the line of Rajat Setiya from VRDDHI CAPITAL.

Sir, regarding the raw material price increases, so if we -- if price -- raw material prices remain at elevated levels for next few more quarters, so what will -- can we come back to double-digit margins, even in that scenario, in the next financial year?

Yes. As I mentioned, we are quite sure that double-digit margins should be there because a majority of our contracts, the escalation clause -- about 85% of the contracts, the escalation clause is there. In private -- in all private contracts, the actual increase is compensated. In government contracts, the compensation is based on indices, which are published by various government departments. So in the past, we've seen that quite a bit of this increase is generally compensated to us. And then we -- as I also did mention, the pricing has already started coming down.

Sure. So we will be hurt in a rising price scenario quarter after quarter because the indices will only reflect the past and the prices again go back -- go to higher levels in the next quarter, then again we'll be hurt, right?

Yes. But then -- no. It's not that the impact or the hurt is permanent. Because the billing also -- the escalation is generally paid quarter-after-quarter, right? It's not paid with every monthly bill. And there is a lag -- when the index comes out, the escalation is paid for that particular quarter only. It's not that we have to absorb the -- but it's just paid at a time -- with a time delay or a time lag.

Sure. So that's what I'm saying...

That inflow is recognized when it is paid.

Right. So if prices go up the next quarter once again, so indices will have to reflect the same next quarter. But till that time, we will be -- I mean, because it happens with the lag, so we might have to take some bit of hit, just like we did in the last quarter, right?

As they say in cricket, it generally balances out in a year.

Sure. Sure. And I think when prices start falling like you are saying right now maybe or maybe in the coming quarters, so when prices fall, so we will still be operating on the last agreed on indices and that way we will be getting more than, let's say, what we -- I mean, prices have fallen and we will be getting the higher price, right?

Yes.

Sure. The other question was related to the cost overruns maybe because of COVID. I mean, is anything like that is something that we are witnessing in our business? Like because of COVID, we have to take extra precautions or anything like that?

Yes. That I had mentioned in my last interaction. That is there. The productivity has taken a hit because of all the precautions that we have to build in into our working processes. So that is there, yes.

So -- but...

That's why I said next by -- the incidence of COVID seems to be on the wane. Hopefully, in a month or 2, we should be back down to normal productivity.

Sure. And sir, the other question was related to the collection issues that we may be witnessing in some of our projects. So if you can talk about them? I think in West Bengal in one of the projects you had mentioned in quarter 1. So how is that project doing in terms of collections? And what is the status on the other projects? Are we regular in terms of collections there? Or is there any slowdown?

So by and large, it is regular. West Bengal, what we had talked, I think, if memory serves me right, 2 quarters ago, this auditorium project had slowed down. This -- in the last interaction, I had mentioned that it's picked up speed. In fact, we are looking to complete that project in October this year -- this calendar year. But yes, there is a bit of an impact in Bengal on the couple of government projects that we are doing on account of the elections, which are around the corner. The pace of the project is all right. It's the inflows have been hit, but not totally. They've slowed down.

And outside West Bengal also, there is no issue?

No.

In general, -- I mean, if you look at -- because we have almost 80%, 85% orders from government, and government budgets would be in the stress because of, I mean, corona and the other things. So are we seeing any issues? Or do we expect any issues in terms of payments in the coming future?

So see, almost half of our order book is -- comprises of hospitals. So on those projects, health care projects, we are seeing no payment issues. We are doing this 1 project, which is a precursor to the Central Vista, no payment issues. Payments are coming in time. Bihar also, post-election, the payment cycle seems to be stabilizing now.

Sorry to interrupt, Mr. Setiya. Sir, I would request you to rejoin the queue for follow-up questions as there are other participants waiting for their turn. The next question is from the line of Mr. Charanjit Singh from DSP Mutual Fund.

Hello? Yes. Can you hear me? Hello?

Yes. We can. We can.

Yes, sir. One, you've talked about, if I heard it correct, 15% growth in the top line next year?

Yes.

So see, we have a strong order backlog of more than INR 8,000 crores. We are coming out of a low base year. So what is making us be very conservative still on the top line growth with this kind of a strong order backlog with the higher proportion of hospitals as a segment? Can you elaborate on that?

Charanjit, it's conservative. You yourself have answered.

Yes. But are there any projects where you are seeing that the things are not moving fast or...

No slowdown. But generally, why we've always been conservative in our guidelines is -- guidance is that there are factors like pollution, NGT, this, that which come up. So prices keep coming up. But otherwise, no slow-moving projects now.

Okay. So this entire order backlog is properly moving in terms of the approvals and everything?

Yes. In fact, a couple of private projects that we have, they have also picked up speed.

Okay. And sir, on those provisions, if you can just give us color in terms of the nature of the projects where we have these provisions and the quantum? And going forward, how confident we are that we'll -- there'll not be further cleanup on the balance sheet, even in FY '22?

This -- basically that provision has been made according to the standards -- accounting standards. Because of whatever -- we are basically having various private outstandings with the real estate projects also and Commonwealth also. There is various -- our balances are lying in the court also. So that's why it's prudent to make a provision quarter-to-quarter. And we are expecting next quarter also approximately INR 6 crores to INR 7 crores. That's -- I think that would be -- meet our provisions up to date.

So fourth quarter provision will be the end of this overall provisioning, which we are expected to do to clean up regarding these all legacy projects. Is that correct understanding?

Yes, yes. We are expecting this quarter also.

Sorry to interrupt, Mr. Singh. Sir, there is a slight disturbance coming from your line from the background, sir.

Hello?

Yes.

Can you hear me better? Hello?

Yes. We can hear you.

Yes. So you were saying that there'll be no further provisioning post the Q4 provisioning. Is that correct understanding?

Charanjit, as I mentioned in an answer to an earlier question, most of our cleanup would be complete in this financial year.

The next question is from the line of [ Seetharaman ] from Spark Capital.

Sir, can you tell about the -- on the bidding pipeline and the opportunities that is present across segments, please?

Yes. So there continues to be a robust bidding pipeline. We -- as on date, the tenders that we have on which we have bid or are bidding are about INR 2,100 crores.

How much, sir?

Yes, INR 2,100 crores.

Okay. Bidded. Okay.

And we are -- the hospital -- there is a -- [ SSCPs ] are signed with state government of Rajasthan to upgrade their medical colleges and hospitals. I think that's INR 1,800 crore -- across various locations. So that's -- so one sees a lot of activity as far as hospitals are concerned. Then one is seeing an uptick in commercial real estate also. So we are seeing inquiries from Pune, from Bombay, even from Gurgaon.

Okay. Hello?

Yes, yes. Anything else specifically that you want to know?

Yes. Can you give the order book split, please, across segments that you have? And across segments as well as the public/private?

Yes. Satbeer will give that.

That government's 81% and private is 19%. And regarding segment-wise, this is hospital 52%, infrastructure 11%, institutional 17% and...

Sir, can you come again? Can you be a bit clear? Hospitals?

Hospital 52% and commercial is 5%.

Okay. Hospital 52%, commercial 5% and then?

And the infrastructure 11%.

Okay.

Institutional 17%.

Institutional 17%. Okay.

Residential is 14%.

Which -- what is 40%?

14%. 1-4.

Which one, sir? I'm not able to get it. Sir?

Hello? That is the split I think so segment wise.

What is the last one you told, 14%?

Residential.

Residential.

Okay. Residential. Okay. Okay. Okay. And the total order book size is?

That is INR 8,172 crores.

INR 8,172 crores, okay.

The next question is from the line of Shravan Shah from Dolat Capital.

Yes. Sir, you've already mentioned in terms of the fourth quarter also, again, we see the impact on the margin.

Sorry to interrupt, Mr. Shah. Sir, I would request you to come a little closer to the phone and speak.

Is it fine now?

Yes.

Yes, yes. It's okay.

Yes. Yes. Sir, I was saying that you mentioned that we can see the impact on the EBITDA margin in the fourth quarter by INR 6 crore, INR 7 crore in terms of the provision and also the higher input prices, particularly steel that you have talked about. So the fourth quarter also, can we see this 6% kind of a margin? Or it can be even a 4% margin also?

No. It will be -- it will not be lesser than what it is. For last quarter, generally, the performance is the best.

Okay. And secondly, in terms of -- last time, I think we talked about 15%, 20% revenue growth for FY '22 and a 13% margin. And now we are saying -- though, we are saying on the conservative side that 15%, and then also at the same time, in the fourth quarter, we are expecting a uptick. So the way you said that the flattish top line for this year means kind of a 21% growth in the fourth quarter. That is a INR 660 crore kind of a revenue in the fourth quarter. If I just multiply that then the FY '22 should be a significant 25%-plus growth. Am I missing anything? Or we will be still doing 15% revenue growth in the next year?

Yes. In next year, 15% revenue growth, yes, will be good.

No, no. So I'm trying to understand that the way we talk about that this...

We're trying to put a number, right? What I'm saying -- what I said earlier, we will almost get to a top line figure where we were last year, okay? We were at about INR 1,800-odd crores. We should get there. And beyond that, we should grow at about 15% in the next financial year. To give you a specific figure, we were at about INR 1,880 crores last year. So as things stand today, we are at INR 1,220 crores. So we should -- we are confident of hitting about INR 1,800 crores by the end of this financial year.

Okay. And on the margin front, though these commodity prices will continue maybe in the -- though it has started slightly slowing down, but may continue in the first quarter also. So maybe the full year margin that last time we talked about around 13%, it can be around 11% or...

Yes, yes. Double-digit margins, I'm confident that we will.

Okay. And sir, I need some couple of data points on the balance sheet front in terms of the unbilled revenue, debtors, inventory, creditors, mobilization advance, retention money.

Yes. Satbeer will give that.

This is the -- debtors against bills, which is INR 508 crores, including current and noncurrent. And retention is INR 178 crores. Debtors is total INR 686 crores, including retention. And mobilization was INR 295 crores. Creditors figures is INR 536 crores. And unbilled revenue was INR 243 crores. And including unbilled revenue, if you ask, inventory is INR 451 crores.

INR 451 crores. And cash and debt?

This is the cash and bank balances are there. Hold on a minute, please. This is at INR 201 crores.

INR 98 crores?

INR 201 crores, cash and bank balances.

INR 201 crore. Okay. And debt?

And what? Debt? Debt is -- borrowing is INR 32 crores.