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For 4QFY2011, we expect our coverage universe to post average
growth of ~20.0% on the top-line front, mainly on account of
healthy order book.
However, earnings are expected to be subdued primarily on
account of increased debt levels and hardening of interest rates.
We believe order inflow guidance by many companies for
FY2011 is bound to see some slippages and result in
disappointment for the markets
4QFY2011 expectations
Larsen and Toubro (L&T)
We expect L&T to record revenue of `16,344cr, a decent jump
of 20.3% yoy. We believe the original order inflow guidance of
25% for the year will witness some slippages. On the EBITDA
front, we expect margins to be lower at 13.3% as against 15.1%
in 4QFY2010 to factor in higher commodity prices during the
quarter. We project net profit at `1,365cr, an increase of 0.4% yoy.
IVRCL Infra (IVRCL)
We expect IVRCL Infra to post robust revenue growth of 28.7%
yoy for 4QFY2011 to `2,432cr, primarily on the back of
a pick-up in the execution of road projects. We expect a decline
in EBITDA margins at 9.4% (10.5%), owing to commodity price
pressures. On the earnings front, we expect growth of 13.8%
for the quarter to `97.0cr.
Nagarjuna Construction (NCC)
We project NCC to post decent revenue growth of 14.4% yoy
for 4QFY2011 to `1,742cr. Management had earlier guided
for revenue growth of ~20.0% for FY2011 (standalone) to
`5,750cr, which is unlikely to be met due to subdued 3QFY2011
numbers as acknowledged by the management. We project
stable EBITDA margins of 10.0% for the quarter. However, on
the net profit front, we are expecting disappointment mainly on
account of higher interest cost (`46.0cr, a yoy jump of 32.2%)
and additional tax provision of `7.0cr (resulting in an effective
tax rate of ~40.0%). Therefore, we are penciling in a net profit
decline of 33.7% to `68.1cr for the quarter.
Hindustan Construction Company (HCC)
For HCC, we project modest ~12.2% yoy revenue growth to
`1,217cr for 4QFY2011 on account of its high exposure to
longer-gestation period orders. We project healthy EBITDA
margins at 12.0%, but expect the company’s net profit to decline
by 44.7% to `23.8cr primarily due to higher interest costs.
IRB Infra
We expect 70.0% and 8.0% yoy revenue growth for the
construction and BOT segments, respectively, leading to
consolidated revenue growth of 49.0% yoy to `748cr for
4QFY2011. EBITDA margins are expected to decline to 41.0%
(46.0%), given the higher revenue contribution from the
low-margin construction segment. We project net profit before
tax and after tax at `171.6cr and `124.9cr, respectively,
assuming a tax rate of 27.0% for the quarter.
Simplex Infra
We project decent 14.5% yoy revenue growth to `1,434cr for
the quarter. We expect EBITDA margins to remain stable at
10.2%, in line with the management’s guidance. However,
top-line growth is expected to be negated by increased interest
cost, resulting in flat net profit at `45.4cr for the quarter.
CCCL
We expect CCCL to post mere 6.1% yoy top-line growth, owing
to the slowdown being witnessed in order booking and shift in
the order book mix towards longer-gestation orders (read
infrastructure). On the operating front, we expect CCCL to face
some pressures and post margins of 9.9% (11.4%). Hence, the
bottom line is expected to be under pressure due to lower OPM
and profit sharing with the JV partner. We expect CCCL to report
net profit of `29.4cr (`33.6cr) for the quarter.
Sadbhav Engineering (SEL)
We expect SEL to post robust 32.0% yoy growth in the top line
to `604cr, led by pick-up in the execution of captive road BOT
projects. EBITDA margins are expected to remain flat at 11.5%
(11.9%). On the earnings front, in spite of higher interest costs,
the company is expected to post substantial 110.0% yoy growth,
mainly on account of the low base of last year.
Madhucon Projects (MPL)
During 4QFY2010, MPL had recorded heavy subcontracting
in the power segment (mainly for equipment), resulting in
its top line surging by 49.2%, but operating margins coming in
at an abysmal 6.4%. For 4QFY2011, we expect MPL to post
normalised 19.0% yoy top-line growth to `578.8cr due to a
strong order book. Margins are expected to improve to 9.0%.
Hence, the bottom line is likely to come in at healthy `15.3cr
(`6.9cr), post factoring in the interest cost of `17.7cr (`7.8cr).
Jaiprakash Associates (JAL)
We expect JAL to post subdued top-line numbers, at `3,397cr
(yoy jump of mere 1.5%), for the quarter, primarily due to the
decline (~24.3%) in C&EPC revenue at `1,497cr. On the cement
front, we expect JAL to post volume growth of 38.6% to 4.1mt
and realisations of `3,450/tonne, resulting in revenue of
`1,406cr for the quarter. On the EBITDA front, we expect better
performance from both the segments as compared to
3QFY2011. Overall, we expect the company to post EBITDA
margins of 26.9% for the quarter. Due to higher debt and capex,
depreciation and interest costs are expected to rise for the
quarter. Hence, the bottom line is likely to post flat growth of
3.9% to `253.5cr, despite improved operating margins.
Budget FY2012 – Positive for sector
The Union Budget 2011-12 continued to lay stress on
infrastructure development, with the allocation for the sector
increasing by 23.3% yoy to `2,14,000cr, constituting 48.5% of
the planned expenditure. Announcements made for the sector
focused on increasing the avenues to meet the long-term fund
requirements of the sector, including attracting foreign funds,
and within the country through issuance of tax-free bonds and
extension of tax incentives.
Poor show on order inflow front to persist in the short term
The sector has been witnessing muted order inflow since
4QFY2010, primarily due to the considerable slowdown in the
decision-making process concerning infrastructure policies and
sluggishness in spending by various government bodies.
This has been a negative for companies in our coverage universe
as government orders constitute a major portion of their overall
order inflows.
The road sector (which contributes significanty to the order book
of construction companies) in particular has seen a substantial
slowdown in award activity, as no major orders were awarded
by NHAI in the last two quarters owing to various issues such
as lack of stability at the top level, changes in bidding norms
and corruption charges.
Moreover, the credit offtake for road construction further
corroborates the fact that the sector has slackened substantially
in the recent months.
Slowdown in order awarding has also been observed in other
segments such as power generation and transmission and
distribution (T&D) due to environmental issues, land acquisition
problems, uncertainty in fuel supply and poor health of
State Electricity Boards (SEB).
Thus, overall we expect the order inflow guidance by most
companies in our universe to witness some slippages for FY2011.
Moreover, owing to the recent scams, corruption cases,
upcoming state elections (Kerala, Tamil Nadu, Assam, West
Bengal and Pondicherry) and slowdown in private capex, order
inflow for construction companies would remain muted (barring
the road sector, which is overdue for some action) for the next
few quarters.
FY2012 expectations curtailed
Against this backdrop, we have factored in lower order inflows
for the first half of FY2012. There has been some upward
movement in key commodity prices (read steel). Normally,
construction companies have the escalation clause in place,
which helps them in maintaining margins. However, given the
increasing proportion of fixed price contracts in order books,
some volatility cannot be ruled out.
We believe with the recent tightening on the liquidity front and
anticipated continuation of the same (at least in the near to
medium term) will lead to the further hardening of interest rates.
To factor in the same, we have increased our interest rate
assumptions across the board for our universe. Consequently,
we have downgraded our earnings estimates for construction
companies to reflect lower revenue growth and higher interest
outgo (refer Exhibit 6).
Prevailing environment hazy, long-term prospects
promising
Poor decision-making by the government and an uncertain
policy environment, which is unlikely to improve in the near
future, are impacting infrastructure spending and, hence, the
sector's order intake. Incorporating the same, we pencil in lower
growth for FY2012. However, we believe India's infrastructure is
a multi-decade story and the current underperformance should
be bought into with a long-term perspective.
In this report, we introduce our FY2013 numbers, which factor
in 10-22% earnings growth by most companies in our coverage
during the year. Our estimates are primarily based on the
following assumptions: 1) revival in order inflow, driven by the
government and private outlay; 2) respite in interest rates owing
to lower inflation; and 3) relaxation on the working capital
front, given the increasing share of captive orders.
Construction stocks under our coverage have corrected by
6-35% YTD (except SEL) vs. the 5% decline registered by the
Sensex. On adjusted P/E basis, stocks on which we have a Buy
recommendation are trading at 6-9x FY2012E and 4-8x
FY2013E (except L&T and JAL). These valuations are attractive
on a long-term basis. Nonetheless, we adopt a stock-specific
approach and prefer companies with a relatively strong balance
sheet and visibility on the execution front. L&T, IVRCL and NCC
continue to be our top picks in the sector.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
For 4QFY2011, we expect our coverage universe to post average
growth of ~20.0% on the top-line front, mainly on account of
healthy order book.
However, earnings are expected to be subdued primarily on
account of increased debt levels and hardening of interest rates.
We believe order inflow guidance by many companies for
FY2011 is bound to see some slippages and result in
disappointment for the markets
4QFY2011 expectations
Larsen and Toubro (L&T)
We expect L&T to record revenue of `16,344cr, a decent jump
of 20.3% yoy. We believe the original order inflow guidance of
25% for the year will witness some slippages. On the EBITDA
front, we expect margins to be lower at 13.3% as against 15.1%
in 4QFY2010 to factor in higher commodity prices during the
quarter. We project net profit at `1,365cr, an increase of 0.4% yoy.
IVRCL Infra (IVRCL)
We expect IVRCL Infra to post robust revenue growth of 28.7%
yoy for 4QFY2011 to `2,432cr, primarily on the back of
a pick-up in the execution of road projects. We expect a decline
in EBITDA margins at 9.4% (10.5%), owing to commodity price
pressures. On the earnings front, we expect growth of 13.8%
for the quarter to `97.0cr.
Nagarjuna Construction (NCC)
We project NCC to post decent revenue growth of 14.4% yoy
for 4QFY2011 to `1,742cr. Management had earlier guided
for revenue growth of ~20.0% for FY2011 (standalone) to
`5,750cr, which is unlikely to be met due to subdued 3QFY2011
numbers as acknowledged by the management. We project
stable EBITDA margins of 10.0% for the quarter. However, on
the net profit front, we are expecting disappointment mainly on
account of higher interest cost (`46.0cr, a yoy jump of 32.2%)
and additional tax provision of `7.0cr (resulting in an effective
tax rate of ~40.0%). Therefore, we are penciling in a net profit
decline of 33.7% to `68.1cr for the quarter.
Hindustan Construction Company (HCC)
For HCC, we project modest ~12.2% yoy revenue growth to
`1,217cr for 4QFY2011 on account of its high exposure to
longer-gestation period orders. We project healthy EBITDA
margins at 12.0%, but expect the company’s net profit to decline
by 44.7% to `23.8cr primarily due to higher interest costs.
IRB Infra
We expect 70.0% and 8.0% yoy revenue growth for the
construction and BOT segments, respectively, leading to
consolidated revenue growth of 49.0% yoy to `748cr for
4QFY2011. EBITDA margins are expected to decline to 41.0%
(46.0%), given the higher revenue contribution from the
low-margin construction segment. We project net profit before
tax and after tax at `171.6cr and `124.9cr, respectively,
assuming a tax rate of 27.0% for the quarter.
Simplex Infra
We project decent 14.5% yoy revenue growth to `1,434cr for
the quarter. We expect EBITDA margins to remain stable at
10.2%, in line with the management’s guidance. However,
top-line growth is expected to be negated by increased interest
cost, resulting in flat net profit at `45.4cr for the quarter.
CCCL
We expect CCCL to post mere 6.1% yoy top-line growth, owing
to the slowdown being witnessed in order booking and shift in
the order book mix towards longer-gestation orders (read
infrastructure). On the operating front, we expect CCCL to face
some pressures and post margins of 9.9% (11.4%). Hence, the
bottom line is expected to be under pressure due to lower OPM
and profit sharing with the JV partner. We expect CCCL to report
net profit of `29.4cr (`33.6cr) for the quarter.
Sadbhav Engineering (SEL)
We expect SEL to post robust 32.0% yoy growth in the top line
to `604cr, led by pick-up in the execution of captive road BOT
projects. EBITDA margins are expected to remain flat at 11.5%
(11.9%). On the earnings front, in spite of higher interest costs,
the company is expected to post substantial 110.0% yoy growth,
mainly on account of the low base of last year.
Madhucon Projects (MPL)
During 4QFY2010, MPL had recorded heavy subcontracting
in the power segment (mainly for equipment), resulting in
its top line surging by 49.2%, but operating margins coming in
at an abysmal 6.4%. For 4QFY2011, we expect MPL to post
normalised 19.0% yoy top-line growth to `578.8cr due to a
strong order book. Margins are expected to improve to 9.0%.
Hence, the bottom line is likely to come in at healthy `15.3cr
(`6.9cr), post factoring in the interest cost of `17.7cr (`7.8cr).
Jaiprakash Associates (JAL)
We expect JAL to post subdued top-line numbers, at `3,397cr
(yoy jump of mere 1.5%), for the quarter, primarily due to the
decline (~24.3%) in C&EPC revenue at `1,497cr. On the cement
front, we expect JAL to post volume growth of 38.6% to 4.1mt
and realisations of `3,450/tonne, resulting in revenue of
`1,406cr for the quarter. On the EBITDA front, we expect better
performance from both the segments as compared to
3QFY2011. Overall, we expect the company to post EBITDA
margins of 26.9% for the quarter. Due to higher debt and capex,
depreciation and interest costs are expected to rise for the
quarter. Hence, the bottom line is likely to post flat growth of
3.9% to `253.5cr, despite improved operating margins.
Budget FY2012 – Positive for sector
The Union Budget 2011-12 continued to lay stress on
infrastructure development, with the allocation for the sector
increasing by 23.3% yoy to `2,14,000cr, constituting 48.5% of
the planned expenditure. Announcements made for the sector
focused on increasing the avenues to meet the long-term fund
requirements of the sector, including attracting foreign funds,
and within the country through issuance of tax-free bonds and
extension of tax incentives.
Poor show on order inflow front to persist in the short term
The sector has been witnessing muted order inflow since
4QFY2010, primarily due to the considerable slowdown in the
decision-making process concerning infrastructure policies and
sluggishness in spending by various government bodies.
This has been a negative for companies in our coverage universe
as government orders constitute a major portion of their overall
order inflows.
The road sector (which contributes significanty to the order book
of construction companies) in particular has seen a substantial
slowdown in award activity, as no major orders were awarded
by NHAI in the last two quarters owing to various issues such
as lack of stability at the top level, changes in bidding norms
and corruption charges.
Moreover, the credit offtake for road construction further
corroborates the fact that the sector has slackened substantially
in the recent months.
Slowdown in order awarding has also been observed in other
segments such as power generation and transmission and
distribution (T&D) due to environmental issues, land acquisition
problems, uncertainty in fuel supply and poor health of
State Electricity Boards (SEB).
Thus, overall we expect the order inflow guidance by most
companies in our universe to witness some slippages for FY2011.
Moreover, owing to the recent scams, corruption cases,
upcoming state elections (Kerala, Tamil Nadu, Assam, West
Bengal and Pondicherry) and slowdown in private capex, order
inflow for construction companies would remain muted (barring
the road sector, which is overdue for some action) for the next
few quarters.
FY2012 expectations curtailed
Against this backdrop, we have factored in lower order inflows
for the first half of FY2012. There has been some upward
movement in key commodity prices (read steel). Normally,
construction companies have the escalation clause in place,
which helps them in maintaining margins. However, given the
increasing proportion of fixed price contracts in order books,
some volatility cannot be ruled out.
We believe with the recent tightening on the liquidity front and
anticipated continuation of the same (at least in the near to
medium term) will lead to the further hardening of interest rates.
To factor in the same, we have increased our interest rate
assumptions across the board for our universe. Consequently,
we have downgraded our earnings estimates for construction
companies to reflect lower revenue growth and higher interest
outgo (refer Exhibit 6).
Prevailing environment hazy, long-term prospects
promising
Poor decision-making by the government and an uncertain
policy environment, which is unlikely to improve in the near
future, are impacting infrastructure spending and, hence, the
sector's order intake. Incorporating the same, we pencil in lower
growth for FY2012. However, we believe India's infrastructure is
a multi-decade story and the current underperformance should
be bought into with a long-term perspective.
In this report, we introduce our FY2013 numbers, which factor
in 10-22% earnings growth by most companies in our coverage
during the year. Our estimates are primarily based on the
following assumptions: 1) revival in order inflow, driven by the
government and private outlay; 2) respite in interest rates owing
to lower inflation; and 3) relaxation on the working capital
front, given the increasing share of captive orders.
Construction stocks under our coverage have corrected by
6-35% YTD (except SEL) vs. the 5% decline registered by the
Sensex. On adjusted P/E basis, stocks on which we have a Buy
recommendation are trading at 6-9x FY2012E and 4-8x
FY2013E (except L&T and JAL). These valuations are attractive
on a long-term basis. Nonetheless, we adopt a stock-specific
approach and prefer companies with a relatively strong balance
sheet and visibility on the execution front. L&T, IVRCL and NCC
continue to be our top picks in the sector.
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