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CONSTRUCTION SECTOR REVIEW: POST Q3FY11
Construction sector companies have posted mixed set of numbers for
Q3FY11 with revenues falling largely inline with our estimates with stable
to improved operating margins but net profit growth fell short of
expectation due to higher interest outgo. Order inflow continued to remain
a key concern for the sector as a whole. Inflow was impacted due to change
in key ministries at the state as well as centre level coupled with
environmental issues. Hardening of interest rates as well as liquidity
constraints increased interest outgo for the companies during Q3FY11
owing to working capital intensive nature of the sector. Thus, post Q3FY11
results, we revised our estimates for order inflow for the companies as well
as incorporate higher interest rates going ahead. Sector had also witnessed
de-rating of valuation multiples primarily on account of concerns related to
order inflow, environmental issues as well as higher interest rates.
Post factoring in these concerns, we believe that current order books
continue to provide visibility for next 1.5-2 years and valuations of stocks
have also come down to very attractive levels. We thus continue to remain
positive on the sector and expect inflow momentum to ramp up
significantly from FY12 onwards. Our top picks would be IRB Infra, IVRCL,
Pratibha Industries, Unity Infraprojects and BGR Energy.
Key highlights of the sector during Q3FY11
Order inflow remained lower than expectations
Order inflow for the companies remained lower than our expectations due to issues
such as land acquisition, environment clearance delays or cancellations, change in
guard at key ministry levels or at NHAI, income tax raids as well as corporate governance
issues. Thus, despite companies being able to execute large sized orders, order
inflow remained sluggish.
We thus reduced our order inflow estimates for the companies for FY11 and expect
it to ramp up in FY12. We would continuously watch out for order inflow during
H1FY12 and any delays further may adversely impact future revenue growth for the
companies.
Revenue growth inline or missed marginally
Revenue growth of the companies during Q3FY11 remained largely inline with our
expectations leaving a few companies such as JKIL, Patel Eng and Punj Lloyd where
performance was impacted by lack of order inflows or torrential rains. However, to
factor in lower order inflow received during 9MFY11, we tweaked our revenue estimates
marginally downwards for FY11 while FY12 estimates remain largely unchanged.
Key risks to our estimates would come from shortfall in execution during
Q4FY11.
Operating margins continued to stay strong
Operating margins of the companies continued to remain strong despite sharp increase
seen in commodity prices. This was due to diverse business mix as well as
with variable pricing clauses in larger portion of order book. On a sequential basis,
decline in margins for some companies is on account of change in the revenue mix
such as higher proportion of road EPC construction vs BOT revenues (for IRB), higher
EPC revenues vs BOP revenues (for BGR) or larger share of fixed price contracts (for
NCC). Our estimates already factor in decline in margins by 50 bps in FY12 to take
into account higher commodity prices.
Interest costs hit the profitability
Borrowings for the sector continued to remain high. Hence, hardening of interest
rates as well as liquidity constraints increased interest outgo for the companies during
Q3FY11 owing to working capital intensive nature of the sector. We believe that
interest rates will continue to remain high for next 3-4 quarters and hence incorporated
higher interest outgo in our estimates.
Valuations revised but near term issues seem to be getting addressed
going ahead
Revision in our future estimates for the companies came primarily from lower than
expected order inflow in FY11 which resulted in downward revision in our revenue
estimates. Along with this, profit estimates are revised downwards after incorporating
higher interest rates. Sector has also witnessed de-rating of valuation multiples
primarily on account of concerns related to order inflow, environmental issues as
well as higher interest rates. However, apart from these concerns, some companies
have taken steps to address near term issues by FY12 which are impacting the valuation
parameters such as -
n Funding concerns for road BOT project in IVRCL - For meeting pending equity
investments worth Rs 9.5 bn for its BOT projects, company plans to go for
raising nearly Rs 2.5 bn through compulsarily convertible debentures. Along with
this, company plans to sell stake in its existing operational projects which may
help the company raise funds of nearly Rs 3-3.5 bn. Thus, going ahead, company
would have to invest only Rs 3.5 bn from its own books.
n Cancellation of environmental clearance for Srikakulam power project for
NCC - NCC is required to supply 400 MW to AP government by 2015 through its
planned power projects. So for supply of this power to AP government, company
started work on Srikakulam power project. Stock got de-rated due to cancellation
of environmental clearance of this project. However, now NCC has acquired
55% equity stake of M/s. Nelcast Energy Corporation Limited (NECL), which is
developing a 1320 MW Thermal Power Project at KrishnaPatnam, Nellore Dist,
Andhra Pradesh. This project has got requisite clearances as well as land. Thus,
with acquisition of stake in this project, these concerns are allayed down.
n Lack of order inflow for BGR - Company expected an order inflow of nearly Rs
150 bn for FY11 primarily coming from NTPC bulk tendering for super critical
boilers and 2X660MW EPC project from RRUVNL. However, we believe that in
the event of award of these projects to its competitors or further delays in award
of these projects, order inflow in FY12 would largely come from other state electricity
boards as well as several IPP projects. We believe that FY12 is expected to
a better year in terms of order inflow for BGR energy.
n Execution concerns for Simplex Infrastructure - Company has continued to
report lower than industry revenue growth primarily because of muted growth in
order inflows seen in FY10. Simplex may miss FY11 revenue guidance also but
with excellent order inflows received in FY11 (ahead of all construction peers),
we expect company to come back to healthy revenue growth trajectory from
FY12 onwards.
n Lack of order inflow from NHAI for IRB - Order inflow from NHAI has lagged
in FY11 due to land acquisition related issues, corruption as well as lack of Chairman
at NHAI. With change in the key ministry levels, we do expect increased
activity from NHAI going ahead in FY12.
Recommendation
We thus continue to remain positive on the sector based on strong order books,
execution capability, hedged business models as well as attractive valuations. Stocks
have corrected significantly in past few months due to concerns related to order inflow
and interest rate hikes. These issues may keep the stocks range bound in the
near term but we believe that going ahead, order inflow is expected to be much
better than FY11 while higher interest rates are already factored in current valuations.
We thus remain positive on the sector and our top picks would be IRB Infra, IVRCL,
Pratibha Industries, Unity Infraprojects and BGR Energy.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
CONSTRUCTION SECTOR REVIEW: POST Q3FY11
Construction sector companies have posted mixed set of numbers for
Q3FY11 with revenues falling largely inline with our estimates with stable
to improved operating margins but net profit growth fell short of
expectation due to higher interest outgo. Order inflow continued to remain
a key concern for the sector as a whole. Inflow was impacted due to change
in key ministries at the state as well as centre level coupled with
environmental issues. Hardening of interest rates as well as liquidity
constraints increased interest outgo for the companies during Q3FY11
owing to working capital intensive nature of the sector. Thus, post Q3FY11
results, we revised our estimates for order inflow for the companies as well
as incorporate higher interest rates going ahead. Sector had also witnessed
de-rating of valuation multiples primarily on account of concerns related to
order inflow, environmental issues as well as higher interest rates.
Post factoring in these concerns, we believe that current order books
continue to provide visibility for next 1.5-2 years and valuations of stocks
have also come down to very attractive levels. We thus continue to remain
positive on the sector and expect inflow momentum to ramp up
significantly from FY12 onwards. Our top picks would be IRB Infra, IVRCL,
Pratibha Industries, Unity Infraprojects and BGR Energy.
Key highlights of the sector during Q3FY11
Order inflow remained lower than expectations
Order inflow for the companies remained lower than our expectations due to issues
such as land acquisition, environment clearance delays or cancellations, change in
guard at key ministry levels or at NHAI, income tax raids as well as corporate governance
issues. Thus, despite companies being able to execute large sized orders, order
inflow remained sluggish.
We thus reduced our order inflow estimates for the companies for FY11 and expect
it to ramp up in FY12. We would continuously watch out for order inflow during
H1FY12 and any delays further may adversely impact future revenue growth for the
companies.
Revenue growth inline or missed marginally
Revenue growth of the companies during Q3FY11 remained largely inline with our
expectations leaving a few companies such as JKIL, Patel Eng and Punj Lloyd where
performance was impacted by lack of order inflows or torrential rains. However, to
factor in lower order inflow received during 9MFY11, we tweaked our revenue estimates
marginally downwards for FY11 while FY12 estimates remain largely unchanged.
Key risks to our estimates would come from shortfall in execution during
Q4FY11.
Operating margins continued to stay strong
Operating margins of the companies continued to remain strong despite sharp increase
seen in commodity prices. This was due to diverse business mix as well as
with variable pricing clauses in larger portion of order book. On a sequential basis,
decline in margins for some companies is on account of change in the revenue mix
such as higher proportion of road EPC construction vs BOT revenues (for IRB), higher
EPC revenues vs BOP revenues (for BGR) or larger share of fixed price contracts (for
NCC). Our estimates already factor in decline in margins by 50 bps in FY12 to take
into account higher commodity prices.
Interest costs hit the profitability
Borrowings for the sector continued to remain high. Hence, hardening of interest
rates as well as liquidity constraints increased interest outgo for the companies during
Q3FY11 owing to working capital intensive nature of the sector. We believe that
interest rates will continue to remain high for next 3-4 quarters and hence incorporated
higher interest outgo in our estimates.
Valuations revised but near term issues seem to be getting addressed
going ahead
Revision in our future estimates for the companies came primarily from lower than
expected order inflow in FY11 which resulted in downward revision in our revenue
estimates. Along with this, profit estimates are revised downwards after incorporating
higher interest rates. Sector has also witnessed de-rating of valuation multiples
primarily on account of concerns related to order inflow, environmental issues as
well as higher interest rates. However, apart from these concerns, some companies
have taken steps to address near term issues by FY12 which are impacting the valuation
parameters such as -
n Funding concerns for road BOT project in IVRCL - For meeting pending equity
investments worth Rs 9.5 bn for its BOT projects, company plans to go for
raising nearly Rs 2.5 bn through compulsarily convertible debentures. Along with
this, company plans to sell stake in its existing operational projects which may
help the company raise funds of nearly Rs 3-3.5 bn. Thus, going ahead, company
would have to invest only Rs 3.5 bn from its own books.
n Cancellation of environmental clearance for Srikakulam power project for
NCC - NCC is required to supply 400 MW to AP government by 2015 through its
planned power projects. So for supply of this power to AP government, company
started work on Srikakulam power project. Stock got de-rated due to cancellation
of environmental clearance of this project. However, now NCC has acquired
55% equity stake of M/s. Nelcast Energy Corporation Limited (NECL), which is
developing a 1320 MW Thermal Power Project at KrishnaPatnam, Nellore Dist,
Andhra Pradesh. This project has got requisite clearances as well as land. Thus,
with acquisition of stake in this project, these concerns are allayed down.
n Lack of order inflow for BGR - Company expected an order inflow of nearly Rs
150 bn for FY11 primarily coming from NTPC bulk tendering for super critical
boilers and 2X660MW EPC project from RRUVNL. However, we believe that in
the event of award of these projects to its competitors or further delays in award
of these projects, order inflow in FY12 would largely come from other state electricity
boards as well as several IPP projects. We believe that FY12 is expected to
a better year in terms of order inflow for BGR energy.
n Execution concerns for Simplex Infrastructure - Company has continued to
report lower than industry revenue growth primarily because of muted growth in
order inflows seen in FY10. Simplex may miss FY11 revenue guidance also but
with excellent order inflows received in FY11 (ahead of all construction peers),
we expect company to come back to healthy revenue growth trajectory from
FY12 onwards.
n Lack of order inflow from NHAI for IRB - Order inflow from NHAI has lagged
in FY11 due to land acquisition related issues, corruption as well as lack of Chairman
at NHAI. With change in the key ministry levels, we do expect increased
activity from NHAI going ahead in FY12.
Recommendation
We thus continue to remain positive on the sector based on strong order books,
execution capability, hedged business models as well as attractive valuations. Stocks
have corrected significantly in past few months due to concerns related to order inflow
and interest rate hikes. These issues may keep the stocks range bound in the
near term but we believe that going ahead, order inflow is expected to be much
better than FY11 while higher interest rates are already factored in current valuations.
We thus remain positive on the sector and our top picks would be IRB Infra, IVRCL,
Pratibha Industries, Unity Infraprojects and BGR Energy.
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