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Construction & Infrastructure
ƒ Execution improvement to lead revenue growth
After the two quarters of execution blues by infrastructure companies,
we expect the construction and infrastructure sector coverage
universe to post a healthy revenue growth of ~21% YoY in Q3FY11.
This will be on the back of execution pick-up post heavy monsoon
season with JAL and PEL expected to lead the revenue growth with
26.5% and 24.4% YoY growth, respectively.
ƒ Rising commodity prices pose risk to margin
There has been a rise in key raw material prices such as cement (15-
20% hike in the southern market) and steel (3-5% hike in long
products). Hence, we have modelled a 10-40 bps decline in OPM
despite a price escalation clause in the contract as they may find it
difficult to pass on the entire hike in raw material prices. Going ahead,
rising commodity prices may also pose a risk to our earning
estimates.
ƒ High interest cost to hurt bottomline growth
Given the rise in interest rate and higher debt level led by rising
working capital, interest expenses as percentage of revenues is
expected to rise 60 bps YoY to 4% in Q3FY10. Hence, we expect our
construction coverage universe bottomline to grow at a slower pace
(~8% YoY) than topline growth (~21% YoY).
ƒ Order inflows remain subdued, order book to bill ratio healthy
Order inflows remained subdued as the road segment order awarding
continued to get delayed due to administrative delays and lack of
clarity on the NHAI chairman’s appointment. However, construction
companies have strong order book to bill ratio (2.3-3x on TTM basis)
providing revenue visibility. Additionally, media reports indicate that
NHAI is looking to award 25 projects aggregating | 36,000 crore in
Q4FY11.
ƒ Telangana deadlock continues
The lack of clarity on the pending deadlock over the Telangana issue
has continued post the release of the Srikrishna report in January in
which no clear decision was taken. Our coverage universe has an
exposure ranging from 0-19% in Andhra Pradesh.
Simplex Infra Order inflows are again expected to be healthy and over | 2100 crore. SIL
also bagged order of | 300 crore in power transmission in consortium with
PEL and BS Transcomm for Krishnapatnam UMPP. Key monitorable:
Execution rate, interest cost and working capital position & OPM given the
rise in key commodity prices
Unity Infra Unity has received orders to the tune of ~| 492 crore during Q3FY11,
which implies outstanding order book of | 3640 crore (TTM order book to
bill ratio of 2.2x). The revenue is expected to grow at 22.4 % YoY on the
back of execution pick-up. Key monitorable: management commentary on
order inflow
Nagarjuna Construction NCC is expected to report a healthy topline growth of 21.8% YoY in
Q3FY11E on the back of improved execution post heavy monsoon. While
we expect NCC's revenues guidance of | 5800 crore to be achievable, we
would watch out for management commentary on order inflow guidance (it
has bagged orders worth | 4670 crore vs. its guidance of | 10,000 crore)
and the OPM given the sharp rise in key commodity prices
IVRCL Infrastructure After a disappointing H1FY11, we expect improved execution from IVRCL
and strong revenue growth of 22.7% YoY in Q3FY11. Nonetheless, IVRCL
would downgrade its revenues guidance again to | 5800- 6000 crore from
| 6500 crore. At the net income level, we expect net income to remain
muted due to lower OPM on account of higher revenue contribution from
low margin captive orders and rising commodity prices and higher interest
outgo led by rising working capital
Patel Engineering We expect strong revenue growth of 24.4% YoY in Q3FY11 for PEL. The
order inflow, however, remains a concern as the company has failed to
announce any major order inflow in the last few quarters. Key monitorable:
order inflow, interest cost & clarity on tax raid
JP Associate The cement volume for JAL grew 37% YoY to 3.92 million MT in Q3FY11.
On the topline front, we expect JAL to report a YoY growth of 26% on the
back of the strong revenue growth from the construction segment post the
heavy monsoon & cement division
GMR Infra GMR is expected to report revenue growth of ~12% YoY in Q3FY11 led by
increased revenue from the airport segment. However, the bottomline will
continue to be hurt by higher depreciation and interest charges for Delhi T-
3 terminal. We expect net loss of | 58.9 crore in Q3FY11. Key monitorable:
Hike in UDF for DIAL
GVK Power We expect a flattish bottomline sequentially. Key monitorable:
management commentary on land bank monetisation and clarity on the
court ruling over merchant power sale
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