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Infrastructure – Eyeing a sea of red
For 1QFY2012, we expect our coverage universe to post
top-line growth on account of a gradual pick-up in execution.
However, on the earnings front, we expect a decline for most
companies under our coverage universe, primarily on account
of higher interest costs. For 1QFY2012, outperformers from
the earnings point of view are JAL and SEL.
1QFY2012 expectations
CCCL (CMP/TP: `31/–) (Rating: Neutral)
Consolidated Construction Consortium (CCCL) is expected to
post poor numbers for 1QFY2012. We expect mere 10.0% yoy
top-line growth, given the slow-moving infra and commercial
orders (41% of the order book). On the EBITDA front, we expect
the company to register a dip of 237bp to 5.9% (8.3%), owing
to low-margin orders (`1,150cr) in the final stages of completion
and fixed price contracts in which rise in material prices is above
the company’s estimates, leading to margin pressure. Against
this backdrop, the bottom line for the quarter is expected to
decline by 57.1% yoy to `7.7cr (`17.9cr).
HCC (CMP/TP: `32/–) (Rating: Neutral)
For Hindustan Construction Company (HCC), we project modest
11.5% yoy growth in revenue for 1QFY2012 to `1,110cr
(`995.4cr), which would be led by execution of road projects.
We project flat EBITDA margin at 12.7%. However, on the
bottom-line front, we expect a steep decline of 73.8% to mere
`7.4cr (`28.3cr) due to its escalating interest cost and subdued
top-line growth.
IRB Infra (CMP/TP: `173/`191) (Rating: Accumulate)
IRB is expected to continue its robust performance on a quarterly
basis. We expect 61.6% and 14.5% yoy growth in C&EPC
(`533.5cr) and BOT (`233.1cr) revenue, respectively, leading
to an overall top-line (`766.5cr) growth of 49.7% for the quarter.
The C&EPC segment is expected to get a boost from
Surat-Dahisar and Kolhapur road projects, which are nearing
completion. On the BOT front, Mumbai-Pune expressway has
witnessed a toll hike of 18% effective from April 2011, which
will drive growth for the quarter. We expect EBITDA margin at
42.3%, registering a yoy decline of 250bp, mainly on account
of change in revenue mix and contraction of C&EPC margins
as compared to last year's blockbuster C&EPC margin of 28.8%.
We project net profit before tax and after tax (and minority
interest) at `168.1cr and `117.8cr, respectively, factoring a
tax rate of 27.9% for the quarter.
IVRCL (CMP/TP: `70/`100) (Rating: Buy)
We expect IVRCL to post moderate revenue growth of 10.0%
yoy for 1QFY2012 to `1,217cr. On the EBITDA margin front,
we expect a marginal dip of 20bp at 8.9% (9.1%). On the
earnings front, we expect a decline of whopping 43.3% for the
quarter to `15.9cr, primarily on account of higher interest cost,
which is expected to rise by ~50% yoy for the quarter.
JAL (CMP/TP: `81/`108) (Rating: Buy)
We expect Jaiprakash Associates (JAL) to post modest top-line
growth of 11.6% yoy to `3,588cr (`3,215cr) for the quarter.
We expect marginal growth of 2.0% in C&EPC revenue to
`1,466cr. For the cement segment, we expect JAL to post
revenue of `1,487cr – volume of 4.2mt with realisations of
`3,622/tonne for the quarter. The real estate sector is expected
to continue its robust performance and post healthy top-line
growth of 60% yoy to `585.8cr. Overall, we expect JAL to post
EBITDA margin of 24.0%, a jump of 274bp yoy, owing to
increased contribution from the high-margin real estate
segment. The bottom line is expected to come in at `199.3cr,
registering a yoy jump of 88.4% (adjusting for extraordinary
post tax gain of `410cr in 1QFY2011) for the quarter.
L&T (CMP/TP: `1,823/`2,030) (Rating: Accumulate)
We expect Larsen and Toubro (L&T) to record revenue of
`9,938cr, a robust jump of 26.0% yoy, for 1QFY2012.
This growth is on account of its large order book (~`1.4trillion)
and low base. On the EBITDA front, we expect margin to be
lower at 11.6% as against 12.8% in 1QFY2011, in line with
management's commentary, to factor in higher commodity prices
during the quarter. We project net profit at `674cr, an increase
of mere 1.2% yoy, mainly on account of the expected margin
compression. We believe the company would end the quarter
with a total order inflow of `16,000cr (`15,626cr) for the quarter,
which is good, even though it is lower than its yearly guidance
of 15-20%, considering the overall gloomy macro environment
on the order inflow front for the sector.
MPL (CMP/TP: `88/`117) (Rating: Buy)
Madhucon projects (MPL) is expected to post decent yoy
top-line growth of 18.0% to `480.7cr for 1QFY2012, which
would be on the back of its strong order book. We expect EBITDA
margin to be under slight pressure and register a yoy dip of
55bp to 10.1%. Earnings are expected to be under pressure
on account of higher interest cost for the quarter and are
expected to post a decline of 12.7% yoy to `11.7cr.
NCC (CMP/TP: `81/`109) (Rating: Buy)
We expect Nagarjuna Construction (NCC) to post poor numbers
for 1QFY2012. On the top-line front, NCC is expected to post
modest growth of 7.6% yoy to `1,169.5cr. EBITDA margin is
expected to be flat at ~9.7%. However, a shocker should come
on the earnings front, as we expect the company to post a
decline of 38.9% yoy/29.0% qoq to `25.3cr for the quarter.
This would be primarily on account of burgeoning interest cost
(jump of ~96.3% yoy), led by elongated working capital cycle.
The financial closure status for the 1,320MW power plant, which
was guided by the company to be achieved in March, would be
another important development for the quarter.
SEL (CMP/TP: `134/`161) (Rating: Buy)
We expect Sadbhav Engineering (SEL) to post robust 54.0% yoy
growth on the top-line front, owing to pick-up in the execution
of captive road BOT projects. EBITDA margin is expected to
witness a fall of 220bp yoy to 9.7% (11.9%) on account of
higher sub-contracting charges for the quarter. On the earnings
front, despite lower margins, the company is expected to post
decent growth of 18.7% yoy to `30.3cr (`25.5cr).
Simplex (CMP/TP: `268/`404) (Rating: Buy)
For Simplex, we project flat top-line growth of 6.3% yoy to
`1,251cr for 1QFY2012. This subdued performance would be
mainly on account of slowdown faced by the company on the
international front. It should be noted that during the last quarter
order awarding activity had picked up on the international front,
but we believe it would take time for the same to get converted
into revenue. We expect EBITDA margin to remain stable at
10.2%, in line with management's guidance. However, the
bottom line is expected to be under pressure due to increased
interest cost (yoy expected jump of ~41%), resulting in a yoy
decline of around 10.1% to `32.5cr for the quarter.
Key developments on the road front
Awarding activity picks up and is expected to continue: NHAI
has begun FY2012 on an aggressive note by awarding projects
of ~481kms (~10% of the total orders awarded in FY2011) in
April 2011. This is in line with the aggressive targets set for the
year – 1) BOT toll basis: Projects worth ~7,994kms; and
2) Annuity/EPC basis: Projects worth ~1,000kms.
Further, there has been an increase in the targets for NHAI with
the intervention of PMO. Against this background, NHAI has
further added 20 NH projects connecting 2,071kms. These
additional projects will require investments worth `16,000cr.
We believe these targets are aggressive considering NHAI's past
performance and its capacity constraints.
Policy changes come to the fore: NHAI has recently introduced
an important change by which there would be annual
pre-qualification for bidders, as against each project basis,
which we believe is not only logical and economical but would
also lead to shortening of the time cycle (by 2-3 months) in
awarding projects. Further, it plans to introduce e-tendering
and e-toll collection in the near future. We believe these changes
are taking the sector forward in the right direction and would
lead to enhanced participation and transparency.
Outlook remains bleak
Era of scorching debt levels…: There has been an increase in
debt levels of most companies (except L&T and SEL) over the
last three years. This increase in debt levels – above comfortable
limits – is mainly on account of increased working capital
requirement and equity infusion in subsidiaries to support
revenue growth for the parent construction arm. The standout
performers among these companies are L&T and SEL, with net
D/E levels at comfortable levels in spite of building an impressive
asset portfolio.
…With high interest rates: The RBI, on June 16, 2011, had
increased the repo rate by 25bp (as expected) from 7.25% to
7.50%, with a similar increase in the reverse repo rate from
6.25% to 6.50%. The RBI has raised policy rates for the tenth
time in the last 15 months. This move, aiming to kill inflation,
would come at the cost of growth and is very well acknowledged
by the RBI. We believe this was not the last round of hikes,
given that inflation is expected to remain high (with high global
commodity prices and food prices). However, we believe that
interest rates are nearing peak levels and 2HFY2012 is expected
to better off on the interest and inflation fronts.
Order awarding takes a backseat: There has been a
considerable slowdown in order awarding activity across sectors
on account of various factors (such as environment clearance,
lack of stable leadership in various PSUs, state elections and
land issues). The only silver lining has been pick-up of awarding
activity in the last couple of months from NHAI's end, although
it is leading to intense competition and creating doubts over
the profitability of these projects.
Earnings to remain under pressure: For FY2012, we expect a
moderate show on the top-line front, while margins will continue
to remain under pressure due to high commodity prices and
inflationary pressures. Against this background, spiraling interest
cost will lead to flat/lower performance on the earnings front
for FY2012 despite the benefit of low base effect of FY2011.
Valuations attractive post deep correction
On account of cheaper valuations post the correction in
construction stocks and taking into account FY2013E earnings
growth outlook, we remain positive on companies having
1) less dependence on capital markets for raising equity for
funding projects (L&T and SEL); 2) strong order book position
(IVRCL and SEL); 3) superior return rations (L&T and SEL);
4) comfortable leverage position (L&T, NCC and SEL); and
5) inexpensive valuations (IVRCL and NCC). We maintain L&T,
IVRCL and SEL as our top picks in the sector.
We have valued construction companies on an SOTP basis.
For the core construction business, we have assigned earnings
multiple in the range of 8-11x (excluding L&T), based on certain
quantitative and qualitative factors. The listed/unlisted
subsidiaries of construction companies are valued at 20%
discount to their CMP/1-1.5x book value.
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