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CONSTRUCTION SECTOR REVIEW - Q1FY12
Construction sector performance during Q1FY12 was impacted by challenges
in execution of current order book coupled with lower than expected order
inflows and steep increases in interest rates. Sector posted lower than
expected numbers for Q1FY12 largely on the profitability front. Revenue
growth for some of the companies in our construction universe was
impacted by tighter fund availability which resulted in slowdown in overall
execution. Operating margins continued to remain mixed bag but
companies expect full year margins to be maintained at last year levels due
to diversified order book. However, net profits were adversely impacted by
higher interest outgo due to continued high working capital requirements
and higher interest rates. Companies expect this scenario to prevail for next
one-two quarters till the time interest rates remain high. Hence, most of the
companies have refrained from giving full year guidance due to
uncertainties associated with the execution of the current order book itself.
Due to decline in the asset valuations, companies are finding it difficult to
raise funds at the subsidiary level which is impacting the financial closure of
the existing projects. In the current scenario we would prefer to be cautious
and selective in the construction sector and would prefer companies where
stock prices are already factoring in these concerns and where Q1FY12
numbers are in line with our estimates. We prefer IRB Infra, Nagarjuna
Constructions, Unity Infra and Pratibha industries in the current scenario.
Key highlights of the sector during Q1FY12
New order inflows remain weak and challenges came up with
execution of current order book during Q1FY12
Order inflow during Q1FY12 has remained below our estimates for most of the companies.
Due to delays in financial closure of in house road or power projects, order
inflow from internal SPV's also remained muted. Companies have also indicated
that competition has increased significantly in bidding process and along with this,
finalization of bids is also taking longer. We expect sectors such as roads, water
supply and urban infra (metro) to witness increased traction going forward.
Revenue growth of some of the companies continue to face challenges despite excellent
order inflows seen in FY11 (eg Simplex Infra) or having a robust diversified
order book (IVRCL Infra). These issues are related to higher interest rates affecting
the sub-contractor's execution or delays in payments from the clients. For some companies,
orders in the current order book are impacted by issues in the middle-east
region (Simplex Infra, Punj Lloyd). So execution of the existing order book itself is
getting slowed down. Thus, due to these uncertainties, companies have refrained
from giving future guidance or have further reduced their revenue growth guidance
going forward despite having strong order books.
Along with this, improvement in the order inflows till Q1FY12 was also lower than
our expectations. We thus reduced our revenue growth estimates for most of the
companies going forward to factor in execution issues seen in current order books
itself
Operating margins remain a mixed bag in terms of our expectations,
though remained lower than last year
Operating margins continued to remain mixed bag but companies expect full year
margins to be maintained at last year levels due to diversified order book.
However, going forward, we expect operating margins for the full year to come
down by 25-50 bps in comparison with last year due to increased competition as
well as higher raw material prices. Along with this, margins may also come down
due to change in the revenue mix.
Steep increase in interest rates dented profitability adversely
Working capital requirements of the companies continued to remain high either due
to higher advances to sub-contractors or suppliers. Loans and advances to subsidiaries
also stayed at higher levels, thereby keeping working capital cycle and thus borrowings
higher. This coupled with higher interest dented profitability adversely during
Q1FY12 for most of the companies. We expect working capital requirements to stay
high for next few quarters till fund availability remains tight or execution stays lower.\
Recommendation
Valuations of construction stocks have come down steeply. Valuation multiples have
also witnessed a de-rating due to lack of growth in profitability as well as execution
challenges. Rerating of multiples would happen only when interest rates start coming
down or execution ramps up sharply from the current levels. Along with this, due
to decline in the asset valuations, companies are finding it difficult to raise funds at
the subsidiary level which is impacting the financial closure of the existing projects.
Thus, in the current scenario we would prefer to be selective in the construction
sector and would prefer companies where stock prices are already factoring in these
concerns and where Q1FY12 numbers are in line with our estimates. We prefer IRB
Infra, Nagarjuna Constructions, Unity Infra and Pratibha industries in the current scenario.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
CONSTRUCTION SECTOR REVIEW - Q1FY12
Construction sector performance during Q1FY12 was impacted by challenges
in execution of current order book coupled with lower than expected order
inflows and steep increases in interest rates. Sector posted lower than
expected numbers for Q1FY12 largely on the profitability front. Revenue
growth for some of the companies in our construction universe was
impacted by tighter fund availability which resulted in slowdown in overall
execution. Operating margins continued to remain mixed bag but
companies expect full year margins to be maintained at last year levels due
to diversified order book. However, net profits were adversely impacted by
higher interest outgo due to continued high working capital requirements
and higher interest rates. Companies expect this scenario to prevail for next
one-two quarters till the time interest rates remain high. Hence, most of the
companies have refrained from giving full year guidance due to
uncertainties associated with the execution of the current order book itself.
Due to decline in the asset valuations, companies are finding it difficult to
raise funds at the subsidiary level which is impacting the financial closure of
the existing projects. In the current scenario we would prefer to be cautious
and selective in the construction sector and would prefer companies where
stock prices are already factoring in these concerns and where Q1FY12
numbers are in line with our estimates. We prefer IRB Infra, Nagarjuna
Constructions, Unity Infra and Pratibha industries in the current scenario.
Key highlights of the sector during Q1FY12
New order inflows remain weak and challenges came up with
execution of current order book during Q1FY12
Order inflow during Q1FY12 has remained below our estimates for most of the companies.
Due to delays in financial closure of in house road or power projects, order
inflow from internal SPV's also remained muted. Companies have also indicated
that competition has increased significantly in bidding process and along with this,
finalization of bids is also taking longer. We expect sectors such as roads, water
supply and urban infra (metro) to witness increased traction going forward.
Revenue growth of some of the companies continue to face challenges despite excellent
order inflows seen in FY11 (eg Simplex Infra) or having a robust diversified
order book (IVRCL Infra). These issues are related to higher interest rates affecting
the sub-contractor's execution or delays in payments from the clients. For some companies,
orders in the current order book are impacted by issues in the middle-east
region (Simplex Infra, Punj Lloyd). So execution of the existing order book itself is
getting slowed down. Thus, due to these uncertainties, companies have refrained
from giving future guidance or have further reduced their revenue growth guidance
going forward despite having strong order books.
Along with this, improvement in the order inflows till Q1FY12 was also lower than
our expectations. We thus reduced our revenue growth estimates for most of the
companies going forward to factor in execution issues seen in current order books
itself
Operating margins remain a mixed bag in terms of our expectations,
though remained lower than last year
Operating margins continued to remain mixed bag but companies expect full year
margins to be maintained at last year levels due to diversified order book.
However, going forward, we expect operating margins for the full year to come
down by 25-50 bps in comparison with last year due to increased competition as
well as higher raw material prices. Along with this, margins may also come down
due to change in the revenue mix.
Steep increase in interest rates dented profitability adversely
Working capital requirements of the companies continued to remain high either due
to higher advances to sub-contractors or suppliers. Loans and advances to subsidiaries
also stayed at higher levels, thereby keeping working capital cycle and thus borrowings
higher. This coupled with higher interest dented profitability adversely during
Q1FY12 for most of the companies. We expect working capital requirements to stay
high for next few quarters till fund availability remains tight or execution stays lower.\
Recommendation
Valuations of construction stocks have come down steeply. Valuation multiples have
also witnessed a de-rating due to lack of growth in profitability as well as execution
challenges. Rerating of multiples would happen only when interest rates start coming
down or execution ramps up sharply from the current levels. Along with this, due
to decline in the asset valuations, companies are finding it difficult to raise funds at
the subsidiary level which is impacting the financial closure of the existing projects.
Thus, in the current scenario we would prefer to be selective in the construction
sector and would prefer companies where stock prices are already factoring in these
concerns and where Q1FY12 numbers are in line with our estimates. We prefer IRB
Infra, Nagarjuna Constructions, Unity Infra and Pratibha industries in the current scenario.
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