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Pressure on earnings to continue We expect the earnings of companies in the infrastructure sector for the quarter ended September 2011 to remain flat because of suppressed operating margin and higher interest costs. Net sales of companies in our coverage universe are expected to rise 29%YoY, primarily driven by outperformance of companies like GMR Infrastructure, IRB Infrastructure, and Reliance Infrastructure. However, higher revenue growth would be offset by pressure on EBITDA margin and a sharp rise in interest costs. Subsequently net profit would remain flat YoY and decline by 11% QoQ. We believe IRB Infrastructure would outperform with 47% revenue growth and 13% earnings growth. Revenue growth of 29% to be driven by infrastructure developers’ performance: For 2QFY12, we expect the companies in our coverage universe to report revenue growth of 29% YoY, primarily driven by strong performance of infrastructure developers. The strong performance will be on the back of 54% YoY growth of GMR Infrastructure, 47% YoY growth of IRB Infrastructure and 27% YoY growth of Reliance Infrastructure. Pure EPC players - HCC is expected to report a growth of 7% and IVRCL Infrastructure 20% (due to low base in 2QFY11), as seasonally this is the weakest quarter because of the monsoon. EBITDA margin to be under pressure: EBITDA for our coverage universe is expected to grow by 26% YoY, but EBITDA margin is likely to decline by 50bps to 17.6% because of a rise in commodity prices and increased contribution from the low-margin segments to revenue. The growth in EBITDA is expected to witness contribution to the extent of 44% by GMR Infrastructure (driven by robust performance of its airport vertical), 32% growth of IRB infrastructure (driven by its EPC segment) and 47% from IVRCL because of a low base. High interest rates to restrain net profit growth: To curb rising inflation, the Reserve Bank of India (RBI) raised its repo rate by 350bps to 8.25% in the past two years, which has increased average interest costs for companies to 11-12% and impacted the sector’s profitability. We expect net profit of companies in our coverage universe to remain flat YoY and decline 11% sequentially. Outlook: For FY13, we expect the infrastructure companies to report an improvement in earnings growth, driven by ongoing concerns waning (slower order inflow, rising interest rates, regulatory issues, delay in project execution) and the low base of FY12. Apart from all this, the current valuation indicates that all risks and concerns have been factored in and the investor sentiment towards the sector is at its lowest level. Hence, we expect a re-rating of the sector. Based on the risk-reward structure, the infrastructure sector provides a good investment opportunity and we maintain our positive view on sector. Our estimates vs consensus: Our estimates are broadly in line with consensus expectations, except for HCC and IVRCL. For HCC, net loss would be higher by Rs75mn due to assumption of higher interest costs. For IVRCL, net profit would be higher by Rs97mn, driven by 12.5% higher revenue than consensus estimate.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Pressure on earnings to continue We expect the earnings of companies in the infrastructure sector for the quarter ended September 2011 to remain flat because of suppressed operating margin and higher interest costs. Net sales of companies in our coverage universe are expected to rise 29%YoY, primarily driven by outperformance of companies like GMR Infrastructure, IRB Infrastructure, and Reliance Infrastructure. However, higher revenue growth would be offset by pressure on EBITDA margin and a sharp rise in interest costs. Subsequently net profit would remain flat YoY and decline by 11% QoQ. We believe IRB Infrastructure would outperform with 47% revenue growth and 13% earnings growth. Revenue growth of 29% to be driven by infrastructure developers’ performance: For 2QFY12, we expect the companies in our coverage universe to report revenue growth of 29% YoY, primarily driven by strong performance of infrastructure developers. The strong performance will be on the back of 54% YoY growth of GMR Infrastructure, 47% YoY growth of IRB Infrastructure and 27% YoY growth of Reliance Infrastructure. Pure EPC players - HCC is expected to report a growth of 7% and IVRCL Infrastructure 20% (due to low base in 2QFY11), as seasonally this is the weakest quarter because of the monsoon. EBITDA margin to be under pressure: EBITDA for our coverage universe is expected to grow by 26% YoY, but EBITDA margin is likely to decline by 50bps to 17.6% because of a rise in commodity prices and increased contribution from the low-margin segments to revenue. The growth in EBITDA is expected to witness contribution to the extent of 44% by GMR Infrastructure (driven by robust performance of its airport vertical), 32% growth of IRB infrastructure (driven by its EPC segment) and 47% from IVRCL because of a low base. High interest rates to restrain net profit growth: To curb rising inflation, the Reserve Bank of India (RBI) raised its repo rate by 350bps to 8.25% in the past two years, which has increased average interest costs for companies to 11-12% and impacted the sector’s profitability. We expect net profit of companies in our coverage universe to remain flat YoY and decline 11% sequentially. Outlook: For FY13, we expect the infrastructure companies to report an improvement in earnings growth, driven by ongoing concerns waning (slower order inflow, rising interest rates, regulatory issues, delay in project execution) and the low base of FY12. Apart from all this, the current valuation indicates that all risks and concerns have been factored in and the investor sentiment towards the sector is at its lowest level. Hence, we expect a re-rating of the sector. Based on the risk-reward structure, the infrastructure sector provides a good investment opportunity and we maintain our positive view on sector. Our estimates vs consensus: Our estimates are broadly in line with consensus expectations, except for HCC and IVRCL. For HCC, net loss would be higher by Rs75mn due to assumption of higher interest costs. For IVRCL, net profit would be higher by Rs97mn, driven by 12.5% higher revenue than consensus estimate.
IRB Infrastructure: The company is expected to report a 47% growth in revenue to Rs7.19bn, primarily driven by 61% growth in the EPC segment and 19% growth in BOT revenue. The EPC segment’s revenue is primarily driven by contribution from new projects like Tumkur Chitradurga and the momentum in existing projects like Jaipur-Deoli, Amritsar-Pathankot and Amravati-Talegaon. BOT revenue is driven by commencement of collection from Tumkur Chitradurga project and toll revision for the Mumbai-Pune Expressway and Bharuch-Surat. EBITDA is expected to grow 32% YoY to Rs3.1bn and EBITDA margin to 43.5%. Net profit growth is likely to be subdued (over 13% at Rs1.12bn) due to increase in interest costs by 61% to Rs1.17bn. Reliance Infrastructure: The company is expected to report net sales growth of 27% to Rs51.2bn, primarily driven by growth in the EPC segment and toll collection. The EPC segment is expected to report robust growth of 180% to Rs19.2bn and toll revenue by 892% to Rs1.2bn. EBITDA is expected to grow 14% to Rs 7bn and EBIDTA margin to decline by 160bps to 13.7% because of an increase in the contribution of the EPC segment, which has lower margin. Net profit is expected to grow 9% to Rs3.9bn because of lower EBITDA margin and increase in interest costs by 57% to Rs2.38bn. GMR Infrastructure: The company is expected to report revenue growth of 54% to Rs18.7bn, primarily driven by growth in airport revenue by 86% to Rs8.9bn (driven by commercialisation of T3, or terminal 3, at Delhi International Airport Ltd and the inclusion of Male airport). EBITDA for the quarter is expected to grow 44% to Rs5.12bn, driven by significant contribution from the airport vertical. Due to commercialisation of T3, the interest costs are expected to increase by 42% to Rs3.5bn and depreciation to rise by 44% to Rs2.86bn, which would lead the company to report a net loss of Rs777mn.
HCC: The company is expected to report muted revenue growth of 7% to Rs 9.4bn due to subdued project execution during the monsoon season and lack of incremental order inflow. EBITDA margin is expected to be flat at ~12.8%. We expect the company to report a net loss of Rs124mn due to lower revenue growth and rising interest rates. Interest costs are expected to increase by 43% to Rs960mn in 2QFY12 from Rs671mn in 2QFY11 because of a rise in average interest rate and increased working capital requirement. Looking at the recent development in Lavasa (no environmental clearance for Phase I of the project), we have cut Lavasa valuation by Rs2/share (from Rs8/share to Rs6/share) and target price from Rs33 to Rs31, maintaining our Hold rating on HCC.
IVRCL: The company is expected to report revenue growth of 20% YoY to Rs12.6bn, EBITDA growth of 47% to Rs1.04bn and improvement in EBITDA margin by 150bps to 8.2%, on a low base, for 2QFY11. However, due to increase in interest costs by 36% to Rs655mn (63% of EBITDA), net profit is expected to decline by 39% to Rs141mn. During the quarter, the company won an order worth Rs7.5bn, while IVRCLAH has bagged one road BOT project of Rs15bn for which the construction work would be executed by IVRCL.
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