Starting The Gems And Jewellery Park Project And AI Investments Will Improve Future Operational Efficiency

Key Takeaways

• A robust order book and strategic balance between private and government projects ensure steady revenue and support growth.
  
• Ongoing digital transformation and AI investments improve efficiency, reduce costs, and potentially enhance net margins.
  
• Regulatory challenges, operational disruptions, rising costs, and project uncertainties create potential risks to revenue, profit margins, and financial projections.

Catalysts

Operates as an engineering, procurement, and construction company in India.

• The company has a healthy net order book of ₹16,258.44 crores to be executed in the next 3 years, which indicates a steady stream of future revenue. This backlog provides revenue visibility and supports anticipated growth in turnover.
  
• Several slow-moving orders and design issues in larger projects, such as CSMT, are expected to be resolved soon, allowing the company to execute these projects more efficiently. This should improve both revenue and margins as these projects contribute more significantly.
  
• New projects, such as the Gems and Jewellery Park, are expected to commence in the next financial year. The commencement of these projects will contribute to revenue growth as they are executed.
  
• The company's strategic focus on maintaining a balanced portfolio between private and government sector orders, with anticipated strong order inflows, helps sustain a healthy revenue pipeline, which in turn could positively impact future earnings.
  
• Ahluwalia's digital transformation efforts and ongoing investment in AI and analytics aim to improve operational efficiency. This should help the company reduce costs and potentially increase net margins over time.

Ahluwalia Contracts (India) Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Ahluwalia Contracts (India)'s revenue will grow by 17.6% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 7.9% today to 5.9% in 3 years time.
• Analysts expect earnings to reach ₹3.9 billion (and earnings per share of ₹58.03) by about March 2028, up from ₹3.2 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ₹4.9 billion in earnings, and the most bearish expecting ₹2.9 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 22.7x on those 2028 earnings, up from 16.3x today. This future PE is greater than the current PE for the IN Construction industry at 19.2x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.24%, as per the Simply Wall St company report.

Ahluwalia Contracts (India) Future Earnings Per Share Growth

Risks

• The company experienced a decline in turnover and profit in Q3 FY '25 compared to Q3 FY '24, with turnover down by 7.26% and PAT by 30.10%. This trend could reflect operational challenges or market conditions impacting revenue and net margins.
  
• The National Green Tribunal (NGT) ban in Delhi adversely affected 33% of the company's order book and disrupted work flow, highlighting regulatory risks that might continue to impact future earnings.
  
• Rising labor costs due to idle labor from the NGT ban, along with a labor shortage, increased operational expenses, potentially squeezing net margins.
  
• There is uncertainty regarding the commencement and execution of large projects, such as the Gems and Jewellery Park, which could delay planned revenue and earnings growth, impacting financial projections.
  
• The company's interest-bearing mobilization advances contribute to higher finance costs, which could erode net profit margins if not managed efficiently.

Valuation

• The analysts have a consensus price target of ₹886.417 for Ahluwalia Contracts (India) based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹1200.0, and the most bearish reporting a price target of just ₹726.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹65.8 billion, earnings will come to ₹3.9 billion, and it would be trading on a PE ratio of 22.7x, assuming you use a discount rate of 14.2%.
• Given the current share price of ₹775.65, the analyst price target of ₹886.42 is 12.5% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.