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CONSTRUCTION
We expect construction sector to post a subdued performance in comparison
with Q4FY11. Construction activity during Q1FY12 was to some extent
impacted by state assembly elections in eastern and southern region.
Revenues in our construction universe (exc Punj Lloyd) are likely to grow by
11.4%YoY while operating margins may decline by 25-50 bps for most of
the companies. Net profit is expected to decline by 3% YoY due to higher
interest outgo. As far as order inflow is concerned, companies have
mentioned that project bidding has increased in comparison with last year
but simultaneously competition has also increased, thereby impacting
margins or project IRR's. Though we expect order inflow to improve during
FY12, but we believe that next one quarter is extremely important to watch
out for order inflows. Lack of order inflow during H1FY12 may shift the
execution towards FY13 and may further impact the revenue growth during
FY12.
Operating margins are expected to be marginally lower than FY11 due to
higher competition as well as higher raw material costs. Though companies
are hedged to a larger extent with variable pricing clauses but fixed rate
contracts may be impacted by higher costs. Interest rates continue to stay
high so we expect net profit growth to be impacted by higher interest
outgo.
Though valuations have already come down to very attractive levels, we
would now be selective in construction sector and would prefer companies
with low valuations, higher revenue visibility or where order inflow is
expected to be very strong. Our top picks in the sector would be IRB Infra,
IVRCL infra, BGR Energy, Pratibha Industries and 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 Q1FY12
Order inflow ramped up only in selective segments
NHAI had come out with a monthly target for project awards but has till now lagged
behind its targets. During Q1FY12, only 4 projects worth Rs 55 bn have been
awarded as against its target of 14 projects worth Rs 185 bn. Out of these, one large
project for Ahmadabad-Vadodara stretch is awarded to IRB and another large project
for Beawar-Pali stretch is awarded to L&T. Other two projects were awarded to JMC
projects and KTG respectively. Award of two projects worth Rs 30 bn in West Bengal
got delayed due to state assembly elections and are expected to be awarded in next
few months. International segment awards especially from MENA region also remained
weak due to tensions prevailing in that region. Along with this, building segment
remained lackluster due to slow offtake from real estate sector while irrigation
segment is yet to show signs of pick up. In urban infra, few projects from metro
have picked up while in power segment, large contracts are still to be awarded.
Revenue growth may be impacted by lower order inflow during
FY11
Revenue growth during Q1FY12 is expected to be impacted by lower order inflow
witnessed during FY11. Along with this, construction activity was also impacted by
state assembly elections during Q1FY12 in southern and eastern regions. Though we
have already lowered down our forecast for FY12 revenues due to lackluster order
inflow in FY11, any further delay in ramping up of order inflows may further put a
risk on revenue growth during FY12.
Operating margins may go down in comparison with last year
We expect operating margins to go down marginally during Q1FY12. Although order
books of most of the companies have variable pricing clauses, but companies having
higher proportion of fixed price contracts may witness some margin contraction due
to hike in commodity prices. However for full year FY12, we expect margins to correct
by nearly 25-50 bps for FY12 to factor in increased competition as well as hike
in the commodity prices seen in past few months.
Net profit growth is expected to be impacted by higher interest
outgo
Interest rates continue to stay high during Q1FY12 and due to higher working capital
requirements of the construction sector, interest outgo is expected to remain high.
Along with this, interest outgo may also remain high for companies that have redeemed
their FCCB's during Q1FY12 (eg Punj Lloyd). Thus net profit growth is expected
to be impacted by low revenue growth as well as high interest outgo.
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