CCConst Anagram

C & C Construction Ltd

INITIATING COVERAGE

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Date: 16th November 2009

BUY CMP: Rs 244

One of the Fastest Growing Construction

Players

C & C Construction is one of the fastest growing

construction companies which, as per our

estimates, likely to grow at a CAGR of 44% over

2009-2013.

Operating Margins: Amongst the highest in

the Industry

The company has specialized bidding and

executing projects in adverse terrains like Bihar

and Afghanistan in order to secure better margins.

It has consistently reported operating margins of

around 20% for many years as compared to

average industry margins of around 10%-12%.

To build on Colossal Opportunities in Roads &

Highways

Considering the urgency to upgrade the road

network, the government has taken an aggressive

stance for the road development in the country.

The NHAI has plans to award projects worth Rs

3300 bn over the next 3-4 years in order to

construct around 33000 kilometers of roads.

Foray into other High Growth Segments

Having already proved excellence in roads projects

in India and Afghanistan, the company has now

started looking at other high growth verticals like

transmission (power and telecom), water &

sanitation and commercial buildings.

Valuation

We have valued the core construction business of

the company 7 times its FY11E earnings compared

to other construction players like IVRCL, NCC, IRB

Infra, Sadbhav Engineering, HCC and Simplex

Infra which trade 13 to 19 times their FY11E

earnings.

We value company’s construction business at Rs

307.6 per share assigning a multiple of 7 to its

FY11E earnings. The BOT project is valued at Rs

41.9 per share resulting in our one year SOTP

based price target to Rs 349.

Sector: Construction

Analyst: Abhishek Patel

[email protected]

CMP 244.0 Price Target 349.5 Potential Upside 43% 52 week Range Rs 87 - Rs284 No. Shares (Cr.) 1.8 Free Float (%) 29.7 Market Cap (Rs. Cr) 447.4 Avg Daily Volume 21385.0 Sensex Level 17032

Holding Structure

Promoters 70.25 FII 2.09 Corporate 6.14 Institutions 9.34 Govt 0.01 Public 12.18

Price Performance Compared to Sensex

Financials

2009 2010 (E) 2011(E) 2012(E) Net Sales (Rs Cr) 750.1 1205.5 1673.8 2311.9 Growth (%) 40.7 60.7 38.9 38.1 EPS (Rs) 22.6 31.9 43.9 71.0 OPM (%) 20.4 18.9 17.2 17.0 NPM (%) 5.5 4.8 4.8 5.6 Debt/Equity 1.7 1.9 1.8 1.7 ROE (%) 12.6 15.6 18.5 24.8 ROCE (%) 17.1 18.5 19.7 22.7 PE 10.8 7.7 5.6 3.5

Initiating Coverage – C & C Construction Ltd.

16th November 2009

Investment Highlights

One of the Fastest Growing Construction Players

C & C Construction’s strong order book (i.e. > 4 times FY09

revenues), amplifying position in roads & highways and forays in

high growth infrastructure segments like transmission, water

sanitation and sewerage, civil & commercial buildings and

railways will, in our opinion, result in a CAGR of 44% in the top

line over FY09-FY13.

Operating Margins: Amongst the highest in the Industry

C & C Infrastructure has from beginning focused on development

in areas with adverse political or geographical environment like

Afghanistan (14% of the current order book) and Bihar (34% of

the current order book). The competition/ project bidding in

these areas is generally limited to 6-7 players only, enabling the

company to yield higher margins. The entire current order book

of the company is expected to have operating margins in the

range of 18%-20% compared to average industry margins for

similar projects of around 10%-12%.

Order backlog Grew at CAGR of 134% over 4 Years

The order book of the company has grown from Rs 109 Cr in

2005 to Rs 3259 Cr in 2009 - a CAGR of 134% over the last 4

years. The current order book of the company is around 4.35

times its FY09 revenues giving visibility.

To build on Colossal Opportunities in Roads & Highways

Considering the urgency to upgrade the road network, the

government has taken an aggressive stance for the road

development in the country. Under the leadership of new roads

and highways minister Mr Kamal Nath, the NHAI has put up an

ambitious plan of laying 20 km of roads a day from the current

pace of around 4 km.

109

618

1,051

1,747

3,259

0

500

1000

1500

2000

2500

3000

3500

2005 2006 2007 2008 2009

Order Book (Rs Cr)

CAGR of 44% In The Top Line Over FY09-FY13

The Current Orderbook at 4.35 times FY09 Revenues.


16th November 2009

The NHAI has, in a recent conference mentioned that it will be

awarding roads projects for around 33000 km over the next 3-4

years to be completed by 2017. The total value of these projects

is estimated at around Rs 3300 bn. This presents an

unprecedented opportunity in the sector and companies like C &

C construction will immensely benefit from it.

Foray into Other High Growth Segments

In order to capitalize on the upcoming opportunities in other

infrastructure segments like transmission (power and telecom),

water & sanitation and commercial buildings. In power

transmission, Power Grid Corp. alone has massive capital

expenditure plan of creating 60,000 circuit km of transmission

lines and 50 substations during the 12th five year plan. PGCIL

expects to spend around 55000 Cr in the 11th and Rs 85000 Cr in

the 12th five year plan. Similarly, the projected investment under

the 11th plan on water supply and sanitation has increased by

121% to Rs 1437 bn representing a massive upcoming

opportunity.

Exposure to Adverse Terrains, still No Instance of Delay Penalties

The company has demonstrated solid execution & project

management capabilities over the years. Despite of exposure to

some adverse locations, the company has never faced delay

penalties.

Foray into High Growth Segments

like Transmission (Power &

Telecom), Water & Sanitation and Commercial Buildings.


16th November 2009

Concerns

Potential Dilution of Equity

The company’s order book nearly doubled in FY09 from Rs 1747

Cr in FY08. In order to meet growing capital expenditure and

working capital requirements, the company’s debt has increased

almost 125% in FY09 resulting in interest expense shooting up by

122% in FY09. The company had to raise funds at a time (FY09)

when liquidity was scarce and available at a very high cost.

Currently the company pays around 14% on its debt which is

high compared to what other construction companies pay in the

sector.

In our opinion, the management took a wise decision to not to

dilute equity (via QIP etc) at a very low price (as the stock price

had collapsed) and instead took loans to raise funds. Now that

the stock price has gone up significantly from Rs 87 in March 09

to Rs 230 currently, the management has hinted at dilution in

short – medium term. The management has indicated that this

will bring the D/E down from 1.75 currently to 1.25 by 2011.

While the fund raising (via equity root) will bring down the

debt/equity and give the management a much needed flexibility

to speed up execution of the existing projects as well as bid for

further projects, in the short term, EPS might be lower than our

estimates affecting our valuation.

Road BOT Projects Highly Vulnerable to Adverse

Changes in Policies

C & C Construction currently has one BOT project in its kitty and

the management plans to bid for more road BOT projects going

forward. Various policies for these road BOT projects are decided

by the NHAI (for the national highways projects) and by the

various state level authorities for the state highways projects.

Unfavourable changes in these policies related to revision of toll

rates, termination clause in case when traffic exceeds beyond

designed capacity etc can severely damage the valuation of the

existing projects and may even affect company’s growth plans in

this vertical.


16th November 2009

Company Profile

C & C Construction is a Gurgaon based infrastructure developer

providing engineering, procurement and construction services in

India and Afghanistan. While historically the company has

focused on projects in roads and highways, it has lately

diversified into transmission, water & sanitation and commercial

buildings. In Afghanistan the company works for Louis Berger,

United Nations Office for Project Services (UNOPS), the Ministry

of Public Works and other projects funded by USAID, World Bank

and ADB. In India the company mainly works for various state

and central authorities like NHAI, PWD Punjab, AAI etc.

The company is present in all the major high growth areas of

Infrastructure like roads & highways, power and water &

sanitation. The government’s investment in these sectors have

witnessed 117%, 127% and 129% growth respectively in the 11th

five year plan and account for almost 60% of the total outlay.

The company will also bid for projects into transmission for

telecom and power companies.

The company bids for projects on its own as well as with its long

term 50-50 JV partner BSCPL association with which dates back

to 2001. Of the total order book of Rs 3259 Cr, C & C

Construction’s share of the projects in JV is Rs 1361 Cr (i.e 42%)

and the remaining projects are its independent contracts.

A major chunk of the company’s projects are located in politically

or geographically challenging areas like Bihar and Afghanistan

which allows company to earn higher than industry operating

margins.

Business Verticals

Roads and Highways

Roads and Highways have remained C & C Construction’s area of

expertise since beginning. The company has projects worth more

than Rs 2049 Cr in this vertical forming 63% of the total order

book. It has successfully executed various roads, flyovers,

bridges and subways projects under this vertical. Of the total 18

road projects that the company is currently executing, 9 are

located in Bihar, 2 in Himachal Pradesh and 1 is in Afghanistan.

Apart from working for various central and state level

government agencies, the company has also received repeat

orders from companies like J P Associates.

Kurali Kiratpur BOT

From just being a construction player, the company marked its

foray into BOT space in 2007 for 4 laning of 44 km of NH-21 from

Kurali to Kiratpur in Punjab. The project has concession period of

20 years and is in 49:51 JV with BCSPL having total expected

investment of Rs 410 Cr. So far, 60% of the work has been

63%

24%

12%

1%

Order Book Breakup

Roads Buildings Railways Water

34%

14%14%

14%

12%

6%5%

Geographical Break Up of Order Book

Bihar Afghanistan

Haryana Punjab

Utter Pradesh Himachal

Delhi & Others


16th November 2009

completed and the project is expected to start toll collection from

June 2010. The project is expected to have IRR of 18%.

Opportunity

In recent years, Indian road network has been increasingly

scrutinized for its quality and is regarded as severely inadequate

to cater to the fast growing economy.

Of the total road network of 3.3 million kilometres, National

highways form just 2% of the total however, they account for

40% of the country’s traffic. Similarly, state highways and district

highways together account for almost 18% of the total road

network and carry 40% of the total traffic.

Length in km % % of Total Road

Traffic

National Highways 66754.00 2.01 40.00

State Highways 128000.00 3.86 40.00

Major District Roads 470000.00 14.18

Rural and Other Roads 2650000.00 79.95 20.00

Total 3314754.00 100.00 100.00

Source: Crisil, Anagram Research

Over the years, roads and highways have taken major burden of

freight and passenger movement off railways. According to the

latest available data, Roads and Highways accounted for 68%

and 87% for the freight and passenger movement compared to

14% and 29% in 1951 respectively.

Considering the urgency to upgrade the road network, the

government has taken an aggressive stance for the road

development in the country. Under the leadership of new roads

and highways minister Mr Kamal Nath, the NHAI has put up an

ambitious plan of laying 20 km of roads a day from the current

pace of around 4 km. In order to facilitate the project awarding

process and execution, the government has also amended

changes in policies like removing the cap on financial bid a

developer can make, higher portion of land acquisition at the

time of awarding, increasing the threshold limit to 25% in the

conflict of interest clause and 100% upfront viability gap funding.

The NHAI has, in a recent conference mentioned that it will be

awarding roads projects for around 33000 km over the next 3-4

years to be completed by 2017. The total value of these projects

is estimated at around Rs 3300 bn. This presents an

unprecedented opportunity in the sector and companies like C &

C construction will immensely benefit from it.

Road Projects For Around 33000

Kms Worth Rs 3300 bn to Come up

for Awarding in the Next 3 - 4

Years


16th November 2009

Railways

C and C Const is executing a railways project from Dedicated

Freight Corridor Corporation of India Limited (DFCCIL) for

developing a portion of corridor from New Karwadiya to New Ganj

Khwaja in Bihar. The project cost is around Rs 781 Cr is being

executed in partnership with BCSPL. DFCCIL is expected to come

out with further projects worth Rs 9000 Cr in next 3 months and

C and C management has indicated of being serious contender

for these projects. Currently railways project account for 12% of

the total order book.

Opportunity

Historically, Indian Railways has run mixed traffic across its

network. In order to improve customer orientation and meet

market needs more effectively, the Ministry of Indian Railways

under its administrative control floated an SPV i.e. DFCCIL to

plan, develop and mobilize financial resources and construction,

maintenance and operation of dedicated freight corridors. In its

first phase DFCCIL is constructing 2 corridors, Western DFC and

the Eastern DFC spanning a total length of about 2800 route km.

The total investment for the first phase (2800 km) is expected to

be around Rs 37000 Cr. The government of India has recently

signed an agreement with Japan for the first tranche - Rs 133 Cr

– of Rs 17700 Cr loan for the same.

Civil and Commercial Buildings

Under this vertical, the company has 4 different projects worth

Rs 781 Cr of which 1 is in Afghanistan. Going forward, C & C

Construction’s focus will be on projects like hospitals, hotels,

educational institutes, bus terminus and various metro projects

funded by government and semi government agencies. Again

this is a vertical in which the company has forayed recently as

almost all of these projects were won in FY09. The vertical

contributes 24% to the total order backlog.

Mohali Complex

The company in March 09 received an order for development of

Inter State Bus Terminus & Commercial complex at Mohali,

Punjab with total expected investment of around Rs. 532 Cr. The

total built up area for the project is expected to be around 16

lacs square feet (lsf) of which, the bus terminus will comprise 2

lsf and the remaining 14 lsf will be of commercial developments

like offices, mall and hotel. C & C has 1.5 years to build the bus

terminus and 2.5 years for the commercial complex. The bus

terminus has the concession period of 20 years whereas the

commercial space can be leased for 90 years.


16th November 2009

Opportunity

Like most of the other countries in the world, India was badly hit

by the financial crisis that emerged from US in 2008. However,

the country still managed to grow by 6.7% in FY09 and most of

the economists expect it to clock similar growth for the current

fiscal as well. Real estates market, which was one of the most

severely hit sectors in FY09 has shown impressive revival in

H1FY10. Lately, there were also signs of revival in commercial

real estate market. The strong economic performance is expected

to spur public and private investment in commercial and civil

buildings like hospitals, hotels, corporate offices and educational

institutes.

Transmission

The company plans to focus on installation of towers for power

and telecom sectors and has already completed around 10

projects for Bharti Infotel and Tata Teleservices for laying optical

fiber cable. While the company does not have any order on this

front currently, it is actively looking at various opportunities in

this space and also working with Isolux of Spain for potential

orders.

Opportunity

In order to meet the growing power consumption, rapid

industrialization and huge energy deficit, the government of India

has planned to make large capital expenditure in the 11th five

year plan in the power generation, transmission and distribution

segments. The government has set a target of adding about

78000 MW of additional capacity of power generation in the 11th

five year plan and about 82000 MW capacities of power

generation in the 12th five year plan. Power Grid Corp. which has

created 72000 circuit km of transmission lines and 125

substations over the last two decades in the country plans to add

a further 60,000 circuit km and 50 substations during the 12th

five year plan (i.e. 2012-2017). The company has plans to spend

a total of Rs 55000 Cr in 11th and Rs 85000 Cr in 12th five year

plans.

Eastern and North-eastern region in the country will generate

more power than they consume as most coal and hydel based

power plants planned in Eleventh Plan will be located in that

region due to abundant availability of coal in that region. This

regional disparity would warrant the transfer of power from

surplus regions to power deficit southern and western region.

Industry sources point that this will result in transfer of 32000

MW of power between the regions by 2012.

Crisil Research has estimated a total investment of Rs 83,100 Cr

in power transmission (≈80%) and substations (≈20%) in the

eleventh five year plan.

Power Grid Corp plans to spend a

Total of Rs 55000 Cr in 11th and

Rs 85000 Cr in 12th Five Year Plans


16th November 2009

Water Sanitation and Sewerage

This is a space which C & C Construction considering as a growth

opportunity going forward. The company had already made its

entry in the segment in FY07 by bagging a subcontracting order –

though small - worth Rs 73 Cr (C & C share Rs 40 Cr) in a JV.

Opportunity

Due to the growing demand of water owing to increase in

population, urbanization and economic growth, the per capita

availability of water has decreased from 5000 cubic meters in

1947 to about 2000 cubic meters. The projected investment

under the 11th plan on water supply and sanitation has increased

by 121% to Rs 1437 bn representing a massive upcoming

opportunity.


16th November 2009

Valuation Over the years C & C has successfully maintained its operating

margins at around 20% compared to industry average of 10%-

12%. We have valued the core construction business of the

company 7 times its FY11E earnings compared to other

construction players like IVRCL, NCC, IRB Infra, Sadbhav

Engineering, HCC and Simplex Infra which trade 12 to 19 times

their FY11E earnings.

Company M CAP (Rs Cr) CMP FY11 EPS (E) FY11 PE (E)

Hindustan Const 4400.9 148.0 5.5 26.7

IRB Infra 8591.5 265.0 14.0 18.9

IVRCL Infra 5482.2 411.0 26.7 15.4

Madhucon Projects 1028.4 142.6 10.1 14.1

Nagarjuna Construction 4325.4 168.1 11.4 14.7

Sadbhav Engineering 1169.5 960.0 76.4 12.6

Simplex Infra 2535.1 505.0 39.7 12.7

Source: Bloomberg Mean Estimates, Anagram Research

We justify much lower than industry average PE multiples on

account of 1) expected dilution towards the end of FY10 and 2)

the fact that C & C Construction needs to prove its excellence in

the new areas it has planned to foray in like water, sanitation,

power transmission where it has little or no exposure currently.

Though we believe that the ISBT project in Mohali having

exposure to commercial development has potential to

significantly increase the overall valuation, we are not factoring

the same in our valuation as it is yet to achieve financial closure.

Entity Nature Valuation Methodology Total Value

(Rs Cr) Value per Share

to C&C Const

C and C Construction EPC FY11E PE Multiple (7 X) 307.6

C and C Projects (K-K Road Project) BOT Project P/BV multiple (1.5 X) 156.0 41.9

SOTP based Target Price 349

We value company’s construction business at Rs 307.6 per share

based on 7 times FY11E earnings. The BOT project is valued at

Rs 41.9 per share taking our one year SOTP based price target to

Rs 373.

While we will only come to know about the extent of dilution once

the company has taken approval of the same from shareholders

and the transaction is completed, our rough calculations point


16th November 2009

towards dilution of around 27.4% (assuming dilution @ Rs 200 in

the worst case). This will bring the FY11 (E) EPS down to Rs 39 /

share from current expectations of Rs 44 / share and would also

value the BOT subsidiary at Rs 32.9 a share from the current Rs

41.9 a share. However, upon successfully completing the

transaction, the company’s capital structure will look much better

and the company as a whole will attract higher multiple of 8

(from 7 currently) resulting in the target price of Rs 345 (≈ Rs

349).

0

100

200

300

400

500

600

28-Apr-07 14-Nov-07 1-Jun-08 18-Dec-08 6-Jul-09 22-Jan-10

2 x

5 x

8 x

11 x

12 Months Forward PE Band Chart


16th November 2009

Income Statement (Rs Cr) Balance Sheet (Rs Cr)

2008 2009 2010E 2011E 2012E 2008 2009 2010E 2011E 2012E

Net Revenues 533.3 750.1 1205.5 1673.8 2311.9 Cash and Equi. 52.3 85.0 27.6 20.8 3.6

Growth % 61.4 40.7 60.7 38.9 38.1 Receivables 143.0 350.0 495.4 596.2 760.1

COGS 373.7 501.4 825.2 1173.4 1629.9 Inventories 206.0 341.0 544.9 710.8 950.1

Gross Profit 159.6 248.7 380.2 500.5 682.0 Loans and Advances 99.9 219.0 219.0 219.0 219.0

Growth % 34.0 55.9 52.9 31.6 36.3 Investments 52.7 43.0 53.0 53.0 53.0

SG&A Expenses 66.3 96.0 152.1 212.6 289.0 Gross Fixed Assets 252.6 410.0 500.0 645.0 825.7

Core EBITDA 93.2 152.7 228.1 287.9 393.0 Net Fixed Assets 193.4 326.0 381.3 482.5 607.1

Growth % 29.7 63.8 49.4 26.2 36.5 CWIP 29.3 10.0 10.0 10.0 10.0

Other Income 11.7 5.2 5.5 5.8 6.1 Application of Funds 776.6 1374.0 1731.2 2092.4 2602.9

Other Exp. & Adj 0.3 0.0 0.0 0.0 0.0

EBITDA 104.5 158.0 233.6 293.7 399.1

Depreciation 15.5 24.8 34.7 43.7 56.2 Accounts Payable 85.3 187.5 257.5 341.7 439.0

EBIT 89.1 133.2 198.9 250.0 342.9 Other Current Liabilities 94.4 207.5 284.9 378.1 485.8

Growth % 41.9 49.5 49.3 25.7 37.2 Provisions 9.4 5.9 8.3 11.4 18.5

Interest Exp 36.6 76.2 111.8 130.2 149.5 Deferred Tax Liabilities 7.9 15.9 28.2 45.2 72.5

EBT 52.5 56.9 87.0 119.8 193.4 Loan Funds 270.8 609.0 754.0 849.0 1009.0

Tax 11.6 15.7 28.7 39.5 63.8 Reserves and Surplus 290.7 330.0 380.0 448.8 559.9

Net Earnings 40.9 41.2 58.3 80.2 129.6 Equity Capital 18.3 18.3 18.3 18.3 18.3

Growth % 23.3 0.8 41.4 37.6 61.5 Sources of Funds 776.6 1374.0 1731.2 2092.4 2602.9

Cash Flow Statement (Rs Cr) Financial Ratios

2008 2009 2010E 2011E 2012E 2008 2009 2010E 2011E 2012E

EBT Before Extraordinary Items 52.5 56.9 87.0 119.8 193.4 Profitability

Depreciation 15.5 24.8 34.7 43.7 56.2 Core EBITDA margins 17.5 20.4 18.9 17.2 17.0

Other Adjustments 34.7 71.4 106.8 124.9 143.9 Net Profit Margins 7.7 5.5 4.8 4.8 5.6

Changes in WC -

116.6 -245.6 -201.9 -89.3 -198.2 Return

Tax Paid -16.4 -7.3 -16.4 -22.6 -36.5 ROE 14.1 12.6 15.6 18.5 24.8

Cashflow from Operations -30.4 -99.8 10.2 176.4 158.8 ROCE 17.8 17.1 18.5 19.7 22.7

Liquidity and Gearing

Capital Expenditure -83.1 -138.1 -90.0 -145.0 -180.7 Cash Conversion Cycle 167.0 279.3 284.5 271.9 250.4

Investments 40.0 9.6 -10.0 0.0 0.0 Current Ratio 2.8 2.5 2.4 2.1 2.1

Interest/Dividend received 4.6 4.8 5.1 5.3 5.6 Debt/Equity 0.9 1.7 1.9 1.8 1.7

Cashflow from Investments -38.4 -123.6 -94.9 -139.7 -175.1 Interest Cover 2.4 1.7 1.8 1.9 2.3

Per Share

Proceeds from Borrowings 133.4 338.2 145.0 95.0 160.0 EPS 22.4 22.6 31.9 43.9 71.0

Issue of Shares, QIP 0.0 0.0 0.0 0.0 0.0 Operating CashflowPS -16.6 -54.7 5.6 96.6 87.0 Interest/Dividend paid & Other -41.9 -82.1 -117.7 -138.5 -161.0 BVPS 169.2 190.7 218.1 255.8 316.6

Cashflow from Financing 91.5 256.2 27.3 -43.5 -1.0 Valuation

Price/Earning 10.9 10.8 7.7 5.6 3.5

Net Change in Cash 22.7 32.7 -57.4 -6.8 -17.2 Price/BV 1.4 1.3 1.1 1.0 0.8


16th November 2009

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Anagram and the analyst(s), including his dependant family members may have an interest in the securities recommended above. To unsubscribe, send a mail to [email protected] RATING INTERPRETATION BUY Expected to appreciate more than 20% over a 12-month period Accumulate Expected to appreciate up to 20% over a 12-month period

Neutral Expected to remain in a narrow range SELL Expected to depreciate more than 10% over a 12-month period Copyright in this document vests exclusively with Anagram Stock broking Limited

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