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

INR 500 crores. Okay. So -- and then full year, what we guided in terms of inflow, INR 8,000 crores, so that remains intact?

No. To be frank, we are no longer very aggressive. That should come down because this volatility, both in terms of material prices as well as labor prices, we are looking for this to stabilize. And as it is, our order book is INR 20,000 crores plus. So we are being conservative as far as the rest of this year is concerned in our approach towards picking up new orders.

So maybe INR 4,000 crores, INR 5,000 crores for full year [indiscernible].

It's not [indiscernible].

Okay. Got it. And currently, in terms of the bid pipeline that will also will be now reduced, should be INR 5,000 crores, INR 6,000 crores.

Yes. What I'm saying is our bid pipeline, the visibility is there. We will bid only and we will factor in -- we'll not be very aggressive. We'll factor in the ground realities and these fluctuations and then bid. We will not bid very aggressively.

Okay. Okay. Got it. And currently, from the total order book, INR 20,000 crores plus, 11%, 12% would be the fixed price contract?

Yes. 10.34%.

10.34%. Okay. Okay. And then CapEx in Q1, how much we have done and for full year, we are looking at INR 300 crores. So there also any slowdown in terms of the CapEx?

Yes. We are looking to reduce the CapEx for the -- this quarter was INR 60 crores. So full year, we will reduce it to anywhere between INR 220 crores to INR 250 crores.

Okay. But overall, in terms of the -- at working capital level, so there -- from here on, do we see some further pressure will be there or it will remain here or can improve by year-end?

We are expecting this quarter to be reduced from the existing level. [indiscernible] 119 days because we are getting money from the Assam [indiscernible] we are expecting that to be at previous quarters level.

The next question is from the line of Parvesh Qazi from Nuvama Group.

So I mean the external environment is challenging. There is no doubt about it, both on execution and on the cost front. So the first question is, I mean, you have a relatively lower proportion of fixed price contracts at about 10-odd percent. But in general, how have -- or how has commodity price volatility been over the last, let's say, 5-odd months since the Iran war started? And what are -- I mean, on the ground, how difficult or easy has it been to navigate through these challenges?

So as I mentioned earlier, we are facing the brunt both on account of materials and labor, right? While labor, I've answered in detail as the questions have been asked since the call began. As far as the material is concerned, it's impacted on 2 counts. One is the price increase. And second is the supply chain getting impacted in terms of the delivery getting impacted because of the war. That has also led to, say, let me give you an example. Now we buy a lot of panels, which run into many, many crores, right? The switchgear is not available. So delivery, which used to take 4 to 6 weeks is now taking 3 to 4 months. That is impacting our performance on the ground also. So while in between whenever there was a call for cease fire or news or cease fire happening, the prices used to stabilize. But the impact, it's been up and down. So yes, this quarter has been impacted by that also. Coming back to some of our large contracts and labor specifically, say, for instance, DLF, there have been changes in design at Dalia, which is one of our largest projects. That has also contributed to lesser work being done in this quarter on that project. Our IDC costs have also impacted our margins there, right? So these are some things which have sort of hit us as far as this quarter is concerned. Having said that, it's -- geographically, these projects are in NCR. NCR seems to have borne the brunt as far as supply chain issues are concerned also and labor price increase is concerned also. Hopefully, going forward, I think now that these projects have started in real earnest, we are targeting a billing of, as I said, nearly INR 30 crores, INR 35 crores every month from Dalia. We are targeting a billing of close to INR 60 crores from Central Vista. We are targeting a billing of INR 25 crores, INR 30 crores from DLF downtown, where design issues also seem to be a thing of the past. So I think the increased turnover from these projects should sort of help us in sort of getting back to the margins that we had -- we were showing over the past couple of years.

Sure. Secondly, in terms of payments, et cetera, how are things today vis-a-vis, let's say, what they were 6 months back, specifically with regards to central government, state government, et cetera?

Central government projects, payments are not an issue. Central Vista just started. We are doing Varanasi, Darbhanga [indiscernible] Airports Authority of India projects. There is a project that we are doing, which is a Central University in Himachal, where we haven't been paid for the last 5 months because the project has gone over budget. Our bills are lying certified, but the payments are not coming through. Other than that, one project, central government projects, we're not having any issue. State government, as Satbeer mentioned, Assam due to elections, our bills were not getting signed off and payments were not coming. But as of 15 days ago, that process also seems to be getting streamlined and we started receiving major chunks of our outstanding dues.

Sure. And lastly, I mean, we look at the business over the last 3, 4 years, in general, one would say volatility has increased in terms of -- I mean, labor is a perpetual problem, but whether it is NGT, whether it's supply chain issue or even approvals, et cetera, those have become difficult and it is impacting everyone. So how are we kind of incorporating it in our risk management framework, especially when bidding for newer projects so that we can at least contain the impact of some of these issues in future projects?

So one thing, the more obvious thing that our experience over the last 1.5 years, whatever the impact on our bottom line we've seen the empirical data shows, we are actually now putting that as a part of our costing while bidding for future tenders. Let's say, for instance, we know there is a huge shortage of carpenters, bar binders. As I mentioned earlier, our bid prices are now incorporating this. We have virtually doubled our shuttering prices or steel prices and other similar items where labor is in extreme short supply. Secondly, we are seeing that staff costs, now this has become the new normal. Our project staff cost used to be about 3.5%, 4%, 4.5%. Now with increased focus on -- extreme increased focus on safety measures, especially with large developers and even government clients. Our safety budget, we've increased from about 1 percentage point to nearly 3 percentage points. Our staff costs, we've now started taking in excess of 5%. So all this is being incorporated in our bids going forward. And we feel that this is something that all large construction companies have begun doing. And this is how we feel going forward in our newer jobs, getting these higher rates, quoting and getting these higher rates will help us get back to our historical high margins.

The next question is from the line of [indiscernible].

Sir, my question is on the AIIMS Jammu part. So of course, INR 29 crores has not been recognized into the revenue. Do we have anything in terms of unbilled revenue or inventory or any other asset item related to this income that you were talking about?

In Jammu? For Jammu per se?

Yes. No.

No. The project is now closed.

Okay. So we have booked everything in the expense, but this INR 29 crores has not been recognized into the revenue because of [indiscernible]?

So I think what you seem to be asking is, is there a potential for any further hit? No.

The next question is from the line of Parth Thakkar from JM Financial.

Depreciation was higher in the first quarter. So can we expect this to be recurring in nature or it was just a onetime thing?

Yes, that would be recurring because the higher capital expenditure in the last 2, 3 years, now that could be recurring.

Okay. And can we expect the margins to be double digit in FY '28?

In FY?

'28 financial year?

As I said, we aspire to get there. And we are -- hopefully, whatever our empirical data has shown us over the last year, 1.5 years, we are trying to factor that in our costing and and bidding. So your guess is as good as mine. But as Pervez said and Shravan also said, this is becoming a number of issues which keep cropping up like the NGT or labor shortage for that matter. So elections around the year in some part of the country or the other. So there are a number of headwinds, which sort of 2, 3 years ago, these used to be occurring only 1 or 2 months in a year. Now something or the other happens every other month. So it's very difficult to give a projection or prediction.

The next question is from the line of Mahesh Patel from ICICI Securities.

Most of my questions have been answered. Just one query. I think last call, we discussed that 89% of our order book has escalation clause for the materials, right? In terms of labor, can we quantify how much percentage of our order book value do we have this clause and for the remaining, we have to kind of get it done, especially for NCR?

We don't have that data as of now, but we can reach out to Satbeer, we will get back to you on that.

The next question is from the line of Shubham Harne from Purnartha Investment Advisers.

My first question is how many months of increased labor cost impact is in numbers?

Sorry, I don't understand your question. Could you clarify?

So labor cost increase is in mid of the quarter, let's say, for 1 month or 1.5 months, we got impacted by increased labor cost. So it is a 1 month or 2 month time period or for the whole quarter, labor cost has been?

No, no, whole quarter and going forward, the labor cost, once the labor price gets increased, it doesn't come back down.

No, no. That's clear to me. But in the current quarter, for the whole 3 months increased labor cost is there Okay. So this would be a new base?

Yes.

Got it. Second on NGT impact. So in last con call, you have said that since Central Vista will start, so NGT impact would be minimum for the current year.

Yes. On that particular project -- on that particular project, the impact -- that work will go on there. The impact will only be limited to, if at all, because we are trying to get special permissions will be limited to raw material coming in from other parts of the country.

Okay. So earlier also was there, correct?

Yes, yes. Central Vista, the work per se on the ground has not stopped.

And can you move labor from other projects in NCR to Central Vista?

Which we will definitely do that.

Got it. And my last question is on EBITDA margin. So 2.6% impact is roughly due to J&K -- sorry, [indiscernible] issue, 2.6%, while the rest is of raw material and increased labor cost, correct? There is nothing else.

And increased staffing cost also.

Okay. So increased staffing and labor cost will continue and material price will vary basically?

Yes. And as material-wise will vary and a lot of material costs or volatile material cost is a pass-through like cement, steel, that's a pass-through. So the major impact, which is what I've been stressing from the beginning of the call is on account of labor.

Got it. So when could we -- since this labor cost -- material cost -- increased material cost, what is the time lag between increased cost and what usually our customers will give that increased labor cost to us?

I think I did say earlier that it would take over the next 2 quarters for us to sort of -- for the client to agree or get the client to agree to compensate us.

No, material cost, already client has agreed, correct? What is the timeline [indiscernible] pass through?

So there are 2 formula for this. On the private sector side, there is a base price for cement and steel. Any increase on that -- from that base price is compensated to us with every bill. So the lag is about 30 days, right? And as regards the government contracts, the escalation is based on wholesale price index, which is released every quarter. So every quarter, an escalation bill is preferred and based on the index published and that the government paid.

The next question is from the line of Vaibhav Shah from JM Financial.

Sir, just one thing you mentioned initially in the call that you are in talks with the clients regarding this higher labor cost. So it is for the 90% of the book where -- which is not -- which is variable price in nature?

So primarily, we are in talks with our clients in NCR, a few of our large where the impact has been sizable. And we are sort of talking to them to showing them what the actual costs are and telling them that it will be very difficult for us to continue to work on old pricing.

If they don't agree, so it is not necessary they may comply to this, right? So in the clause.

I agree with you. It's not contractually strictly going by the contract, they may not.

Okay. So sir, so we know that the labor rates are here to say you mentioned that you don't expect it to come back down once they are increased now. So in that case, for the NCR book, there could be a sizable impact on the margins from where we had bidded when you won the project?

So we are -- wherever the impact is sizable, we've already told the client that -- so there are 2 parts to this compensation. One is the job already executed in this quarter, where the impact has already been felt by us. The other is going forward and the potential for the impact on the balance contract. So we are telling the client either we are giving them various options that one is the impact till now. They are within their rights to say no. Going forward, we are telling them that either they agree to supply the labor, there are various options that we are discussing with them. And all I can say at this stage is that the clients are looking at what we are saying favorably because they have realized that today, their contracts today, one major thing which can make or a project is labor. And labor is an extreme, especially skilled labor is an extreme short supply.

The next question is from the line of Madhur Rathi from Counter Cyclic Investments.

Sir, I'm trying to understand due to one reason or the other, if we look at our numbers till FY '24, the growth was really strong. Sir, but after that, even though our order book has -- unexecuted order book has doubled over the last 2 years, but somehow the execution is just not moving due to either labor or this or that, sir. But basically, labor is a core this thing. It's a part of our business. So I mean if there is a shortage and everything NGT and so on, sir, I mean, these are all routine matters. Now sir, the concern is I hope it is not the case that we will have to pay some penalty to our customers for not executing the projects on time.

So till date, Ahluwalia has not paid any penalty to any customer. If you were to go through, we would be more than happy to share historical data, especially over the last 2 years or 3 years, where projects have been delayed, but it's been amply proven and accepted by the client that they've been delayed for no fault of all. And it's not only Ahluwalia contract. If you were to do a deep dive into the historical project completion date of all our peers, you will see that the extreme -- there are a number of factors leading to headwinds as far as project execution is concerned. Labor is one thing. And this labor shortage has been building up over the last 4, 5, 6, 7 years. Projects have become more and more complex. Projects have increased in scale. There are changes happening as we move along executing a project on a month-to-month basis from the client side, which clients are recognizing. That is why extension of time is granted on projects, be it on private projects or government sector projects. So if you've been covering this sector, you would know all this is a part and parcel of this industry. While when we bid for a project, we factor in some delays. But as I said, there have been a few black swan events over the last 2 to 3 years, which are part of the historical data. The impact has been -- that has been felt on our bottom line has been more than we could have predicted. And it's not only us. If you do a peer-to-peer comparison, I think we've been showing better numbers than some of our peers.

Now sir, if we compare [indiscernible], which is operating in our geography is a fraction of our size, has balance sheet nowhere compared to us. Browning and debt, they have grown in the first quarter, their margins -- their EBITDA actually has also grown. So I'm not able to understand [indiscernible].

What I'm trying to tell you is you do a comparison, which is spread over a larger tract of time, you do a comparison with, say, if you want to do [indiscernible], compare the results for the last 2 years at least. Base is very small. When we were at that, our margins were -- some of your peers would tell you our margins were 12%, 13%.

Sir, in fact, that was my -- another question that I remember that a few years back when I had asked that why our margins have declined from low teens to single digits. So you had said that once the private sector orders become the majority of our order book, then our margins will expand to the previous levels of low teens. Sir, but now our private sector is 62% of our order book, but still our margins have actually declined to single digits.

As I said, there are a number of factors or newer factors, which have cropped up in the last 2, 3, 4 years, labor shortage being one. And as I said, increased -- the projects have become much more complex, increased staffing costs and other IDC costs. These are some things which have hit our margins, which are leading us to -- going forward, when we are bidding for large projects, we are factoring this in.

Sir, now lastly, sir, if we look at our stock price since 2008 till now, the stock -- then the stock price was INR 350 today it is INR 795. So the stock price has grown at less than 5% CAGR and there have been no dividends also. Sir, so after such a huge underperformance also, we have a cash-rich balance sheet. The stock price has [indiscernible].

We are a dividend paying company. I think we've been paying dividend for the last 3 to 4 years.

[indiscernible] % dividend yield, it is practically irrelevant. My point is different, sir. My point is that when our stock price has grown at sub 5% CAGR for the past 18 years and we have surplus cash on balance sheet, then why aren't we doing share buybacks?

I think I had answered this question during the last comment. This sector is facing extreme volatility, right? Our focus is on growing our business. We don't want to use our war shares to buy back our share. At the moment, we want to -- going forward, as we are at an inflection point. We are growing rapidly. We have a healthy order book. We want to digitize. We want to become more efficient. We want to invest in machinery to counter or offset the labor paucity. So all that share buyback is not really on the annual for us. It's not a part of our plan. I did explain this in detail last time around.

The next question is from the line of Parikshit Kandpal from HDFC Securities.

My question is more on industry and generic question. So just on the NCR market, it is 50% of our order book. So just wanted to understand how much of our labor cost or how many labor is deployed in that market? And are all these lab currently at minimum wages because there is -- you said that there is a demand supply issue also. So I would understand that there would be a certain portion of the labor, which will be above the minimum wages. So if you can help us understand like the quantification in terms of how many would be under -- just about the minimum wages, how many above that? And what was the total quantifiable impact in terms of crores on the profitability or the EBITDA in this quarter because of labor [indiscernible].

Okay. So just to put a number, this may not be extremely accurate, but it will be there and thereabouts. We would have close to about 10,000 to 12,000 people working for us, which I would categorize as labor, both unskilled and skilled. Now 70% of this labor would be skilled, which would constitute bar binders, carpenters, mason, electricians, numbers and so on and so forth. While the unskilled labor would be at the threshold of the minimum wage, the skilled labor would be in excess of that, excess of the skilled wage declared by the government. It is the skilled labor, which is an extreme short supply, demand and supply conundrum that I mentioned. impact on our projects in NCR per se would vary on our total top line. I'm talking about the impact, again, detailed figures, Satbeer can get back to you on if you're right to him, but it could vary from 2% on some projects to about 5% of the turnover where the material is pre-issue by the client.

So you think in this quarter, particularly in this quarter, what is the quantifiable impact on EBITDA because of the labor increase [indiscernible]?

So at a company level, it is about 1.5%. 1.5%.

So this is a permanent -- now this is permanent in nature. So we start off if there is no escalation given on this account on the customer. So we have a 150 basis point hit on the NCR order book because of the labor issues as of now. Is it the right assumption?

There will be a hit if there is no escalation given, but it would be to the tune of about 1% because in some of these contracts, escalation is a pass-through and some of the contracts, the escalation kicks in after a certain amount of time has elapsed on a particular project, which varies from 6 months to a year.

Damage is about 100 basis points if the client doesn't give us any escalation. So we have a hit of about 100 basis points. So I think -- I mean, I think we took a lot of time debating this. I think if this was quantified, it would have been helpful earlier. So -- and how do you intend to cover up this, right productivity cost savings, other measures? So how much do you think if the client doesn't give us any escalation? So any outlays, any growth which will come in? Do you think you can cover a part of this damage?

Again, it's very -- what is happening, as I said earlier, client is recognizing this. So what client is doing, even if they are -- while we feel on some of the projects, some of our larger clients will look at this favorably. But even if they don't, what they've already started doing, the Godrails of this world, the DLFs of this world, the Signature Global of this world, they've started announcing incentives, which are linked to progress or stage-wise timely completion. You cast a certain number of slabs in a month, they give incentive, right? So which, to some extent, may offset some of these higher costs.

5 So you gain part of it through the productivity gains or at the site level, which would be ahead of...

Exactly.

Yes. So part of that...

That's why a lot of you, as I mentioned earlier, should we'd be more than open to share -- you should do a deep dive. This labor problem is a huge problem, right? Some of us -- so I'm sure you would have -- you cover this sector and you've been doing it for a number of years. We would be more than happy to take you to project sites and show you how we are being impacted. Some of our peers may have recognized that impact this quarter, they will also feel it going forward [indiscernible] geographies are facing at different times.

The bigger question one was what was the motivation of the Haryana government to do this? And if others start doing it, then it becomes a broader level issue on the entire order book, so which can exacerbate our overall margin impact. So if you can help us understand why this happened first. And then also earlier in the call, you said 70% of the labor is skilled. I assume that the hit would not have been there, it would be at the labor, which is at the border line level, right? So if you can help us understand whether -- what was the motivation behind this? And why could this -- why was the hit so high if it was only to the part of the [indiscernible]

[indiscernible] Sorry, go ahead. Sorry.

Yes, I'm saying it was out of the 100 labor, you said 70 is skilled where anyways it's a market determined pricing. So I assume it will be push and pull, which will determine their wages, not the government mandated minimum wages. It will be more like where the part was exposed to the minimum level of wages where you had to align with the government policy had given escalation. So what was the motivation of the Haryana government and secondly, whether other states can also [indiscernible]?

So your first question, what was the motivation of the government? The Haryana government over the past one month has cracked down on RMC manufacturing plants. And today, 90% of the plants are shut down in Haryana, right? What is the motivation behind it? Who can say, right? With governments, it's very difficult to say. Similarly, they have at such a time, increased the labor pricing. It's very -- while the developer lobbies are talking to the government, they may agree to sort of reopen some of these plants, but I don't think there's going to be a rollback on the labor pricing, which never happens. It's a very sensitive political issue. So it's very difficult for us to comment. Second thing is a push and pull on the skilled labor is right. But it's -- as I said, it's demand and supply. There is a huge shortage of skilled manpower and whatever skilled manpower is there, the skill levels are down. The buildings are becoming more and more complex, right? So it's the productivity that leads to low productivity on the project. So this -- that's why the cost -- our costs are rising. That's why I'm saying that you guys should -- maybe it would be prudent for you guys to -- we would be more than happy to take you to our project type and show you how it's very difficult to sort of explain all this on an investor call. But at ground zero, we can show to you how the impact is happening.

5 Just last question. Can you replace -- I mean, is it only for the labor domiciled in Haryana state? Or if you can say pull out labor from AP or some other states, you still pay them minimum wages? So how does it work?

This is all migrant labor. Labor, which works in a particular state. This labor is coming in from Bihar or Bengal or Odisha or Madhya Pradesh. It's not Haryana labor.

[indiscernible], but anyway I'll take it offline.

Ladies and gentlemen, due to time constraints, we will take that as the last question for the day. And I would now like to hand the conference over to the management for closing comments.

Thank you so much, everybody. As I said, any further queries, please reach out to us, and we'd be more than happy to explain the ground realities to some of you, even if you want to sort of visit our project site to get more clarity. Thank you so much. See you on the next call.

Thank you. On behalf of AMBIT Capital Private Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.