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CONSTRUCTION
Construction sector is likely to continue with the subdued revenue growth
during Q2FY12, more so due to monsoon season. Revenues in our
construction universe are likely to grow by 9.8%YoY while operating
margins may decline by 25-50 bps for the companies. Net profit is expected
to decline by 22.5% YoY primarily due to higher interest outgo. Order
inflow for the sector has started showing signs of improvement and higher
traction is observed in road project awards. Government is confident of
meeting its target of awarding 7300 km of road projects during FY12.
Operating margins are likely to remain a mixed bag since companies have
diversified order book mix. Interest rates are still ruling at higher levels, so
we expect net profit growth to be impacted by higher interest outgo.
Though valuations have already come down to very attractive levels, we
continue to remain 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, Nagarjuna Constructions, Unity Infraprojects and Pratibha
industries. Key risks to our recommendations would come from lower than
expected revenue execution and higher than expected working capital cycle.
Key highlights during Q1FY12
Order inflow ramping up slowly
Order inflow for the sector has been witnessing improvement specifically in the roads
segment. Along with this, recent project bids and awards indicated lower competition
as compared to bids or awards seen during Q4FY11 and Q1FY12. Also, government
and NHAI are confident of meeting their target of awarding 7300 km of road
project awards during FY12. However, order inflow from sectors such as power, mining
and international continues to remain subdued due to issues related to coal
availability, mining ban and unrest in middle-east region, respectively. Building
projects specifically from government have also jumped up during Q2FY12. Among
several states, increased traction is witnessed from Gujarat, MP as well as Bihar
while order inflow from Maharashtra state remained subdued during Q2FY12 and is
likely to remain subdued for BMC related projects going forward also due to upcoming
BMC elections. Thus, we believe that lower than expected order inflow may also
result in downward revision in the future estimates for the companies post Q2FY12.
Revenue growth is expected to be impacted by monsoons
Revenue growth during Q2FY12 is expected to be impacted by monsoons as well as
lower execution. Interest rates continued to remain high during Q2FY12 so companies
may also witness delays in overall execution from sub-contractors. However, we
expect interest rates to peak out by Q3FY12 and with strong order books, we expect
execution to ramp up for companies from Q3FY12 onwards.
Operating margins to remain mixed bag
We expect operating margins to improve marginally during Q2FY12 due to fall in
commodity prices. Though margins would depend upon the projects executed in a
current quarter, but on a full year basis, companies expect margins to be maintained
at last year levels due to diversified order book. However for full year FY12, we
expect margins to correct by nearly 25-50 bps in view of increased competition.
Net profit growth is expected to be impacted by higher interest
outgo
Interest rates remained high during Q2FY12 and due to higher working capital requirements
of the construction sector, interest outgo is expected to remain high.
Thus net profit growth is expected to be impacted by low revenue growth as well as
high interest outgo.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
CONSTRUCTION
Construction sector is likely to continue with the subdued revenue growth
during Q2FY12, more so due to monsoon season. Revenues in our
construction universe are likely to grow by 9.8%YoY while operating
margins may decline by 25-50 bps for the companies. Net profit is expected
to decline by 22.5% YoY primarily due to higher interest outgo. Order
inflow for the sector has started showing signs of improvement and higher
traction is observed in road project awards. Government is confident of
meeting its target of awarding 7300 km of road projects during FY12.
Operating margins are likely to remain a mixed bag since companies have
diversified order book mix. Interest rates are still ruling at higher levels, so
we expect net profit growth to be impacted by higher interest outgo.
Though valuations have already come down to very attractive levels, we
continue to remain 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, Nagarjuna Constructions, Unity Infraprojects and Pratibha
industries. Key risks to our recommendations would come from lower than
expected revenue execution and higher than expected working capital cycle.
Key highlights during Q1FY12
Order inflow ramping up slowly
Order inflow for the sector has been witnessing improvement specifically in the roads
segment. Along with this, recent project bids and awards indicated lower competition
as compared to bids or awards seen during Q4FY11 and Q1FY12. Also, government
and NHAI are confident of meeting their target of awarding 7300 km of road
project awards during FY12. However, order inflow from sectors such as power, mining
and international continues to remain subdued due to issues related to coal
availability, mining ban and unrest in middle-east region, respectively. Building
projects specifically from government have also jumped up during Q2FY12. Among
several states, increased traction is witnessed from Gujarat, MP as well as Bihar
while order inflow from Maharashtra state remained subdued during Q2FY12 and is
likely to remain subdued for BMC related projects going forward also due to upcoming
BMC elections. Thus, we believe that lower than expected order inflow may also
result in downward revision in the future estimates for the companies post Q2FY12.
Revenue growth is expected to be impacted by monsoons
Revenue growth during Q2FY12 is expected to be impacted by monsoons as well as
lower execution. Interest rates continued to remain high during Q2FY12 so companies
may also witness delays in overall execution from sub-contractors. However, we
expect interest rates to peak out by Q3FY12 and with strong order books, we expect
execution to ramp up for companies from Q3FY12 onwards.
Operating margins to remain mixed bag
We expect operating margins to improve marginally during Q2FY12 due to fall in
commodity prices. Though margins would depend upon the projects executed in a
current quarter, but on a full year basis, companies expect margins to be maintained
at last year levels due to diversified order book. However for full year FY12, we
expect margins to correct by nearly 25-50 bps in view of increased competition.
Net profit growth is expected to be impacted by higher interest
outgo
Interest rates remained high during Q2FY12 and due to higher working capital requirements
of the construction sector, interest outgo is expected to remain high.
Thus net profit growth is expected to be impacted by low revenue growth as well as
high interest outgo.
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