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CONSTRUCTION
Construction sector performance during 9MFY11 had been impacted by
lower than expected order inflows as well as lower than expected
execution during H1FY11. Order inflow was expected to ramp up from
beginning of H2FY11, but due to delays in award activity from NHAI, state
governments as well as from private sector, order inflows so far have
lagged our estimates. However, construction company managements are
quite confident of significant ramp up during Q4FY11 in terms of order
inflow. Along with this, several other issues such as cancellation of
environmental clearance, income tax raids, bribery or corporate governance
issues have impacted few construction companies' stock performance.
We expect excellent revenue growth for companies during Q3FY11 on both
sequential as well as yearly basis due to improved execution. Operating
margins may continue to remain a mixed bag depending on project mix
with companies likely to maintain full year margins due to variable pricing
clauses. Net profit growth is expected to be impacted by higher interest
outgo due to liquidity crunch and hike in interest rates.
We continue to remain positive on the sector based on revenue visibility,
strong order book as well as stable operating margin scenario. Our top
picks in the sector would be IRB Infra, BGR Energy, Pratibha Industries,
Unity Infra etc Key risks to our recommendations would come from lower
than expected revenue execution and further delay in order inflows.
Key highlights during Q3FY11
Order inflow lower than our expectations
Order inflow continued to remain slow during Q3FY11 due to lack of significant
project awards. However, we expect inflows to be robust in the coming quarters
particularly from the road segment with award of large sized BOT projects. Current
order books of the companies provide revenue visibility for next 2 years. Though we
expect the order inflow to witness improvement going ahead, any further delay
may result in slippage of inflows to FY12 and may correspondingly impact the revenue
growth.
Revenue growth to be led by ramp up in execution
Revenue growth during Q3FY11 is likely to be led by ramp up in execution after
witnessing lull in H1FY11 due to client related delays or extended monsoons. Going
forward, revenue growth is expected to remain strong with healthy order books as
well as with expected order inflows.
Operating margins to remain a mixed bag
Operating margins of the companies for Q3FY11 are expected to be a mixed bag
depending upon the contracts executed in the current quarter. However we expect
full year FY11 operating margins to be similar to FY10 levels despite upward movement
in commodity prices since companies have escalation clauses in most of their
projects. Companies having higher proportion of fixed price contracts may witness
some margin contraction due to hike in commodity prices.
Higher interest cost coupled with increase in working capital requirements
may impact net profit growth
Net profit growth of the companies is expected to be led by healthy revenue
growth as well as stable to improved operating margins. However higher interest
outgo may impact the net profit growth. Interest costs have witnessed an increase
in past few quarters and with high working capital requirements of the construction
sector, we expect interest outgo to remain high for the companies.
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