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India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
● With successive interest rate hikes over the last 18 months and
slow pace of policy reforms resulting in a slowdown in industrial
and infrastructural capex, we believe existing macro environment
remains extremely challenging for the construction sector.
● Working capital cycle has deteriorated for most construction
players over the last several quarters. Further balance sheet
weakening is visible as, in absence of operating cash flow
generation and lack of equity/PE funding, most players have been
forced to resort to debt funding to meet their equity investment
commitments for Infra BOT projects. Resultantly, high interest
costs are expected to continue to impact sector profitability ahead.
● We cut our FY12 and FY13 EPS estimates by 14-58% and 18-
60%, respectively, for our coverage as we build in muted sales
growth on deteriorating order inflows, lower margins, high working
capital cycle and rising interest costs. We cut our TP by 8-60%
across the sector and with a weak near-medium term outlook, we
downgrade IVRCL, NCC and Gammon India to NEUTRAL.
Macro environment challenging, unlikely to recover soon
With successive interest rate hikes by the RBI over the past 18
months, continued downward revisions to economic growth
projections and no near-term respite in sight, the existing macro
environment remains extremely challenging for the construction sector.
As a result of high interest rates, corporate and government capex is
being delayed, leading to muted order inflows for construction cos.
Apart from slowdown in industrial capex, infrastructural capex is also
witnessing a slowdown. Power sector, which has been one of the
major drivers of order inflows for the construction sector so far with
huge investments planned towards capacity additions, is witnessing
delayed investments on account of the structural issue of domestic
coal deficits impacting viability of several projects.
The only other sector witnessing some traction has been roads,
however, we expect NHAI to miss its FY12 target of awarding projects
for 7,300 kms considering that only 1,835 kms were awarded during
Apr-Aug 2011. Even if the NHAI were to achieve its FY12 award
target, a major portion of projects shall be awarded towards the end of
FY12 and, with at least six months needed for financial closure,
impact on earnings is unlikely to be visible before 2HFY13.
High working capital cycle impacting sector profitability
Working capital cycle has deteriorated for most construction players
over the last several quarters, resulting in high interest cost to service
the floating rate short-term debt taken to meet working capital
requirements. Further, lacking operating cash flow generation and
lack of equity/PE funding, most players are forced to resort to debt
funding to meet their equity investment commitment for Infra BOT
projects (in SPVs) leading to high gearing. Resultantly, we expect high
interest costs to continue to substantially eat into operating profits.
Cut earnings estimates, downgrade IVRCL, NCC and
Gammon India to NEUTRAL
We cut our FY12 and FY13 EPS estimates by 14-58% and 18-60%,
respectively, for construction companies under our coverage as we
build in muted sales growth on deteriorating order inflows, lower
margins, high working capital cycle and rising interest costs.
Additionally, for JPA, we build in lower capacity utilisations in its
cement business. Consequently, we cut TPs by 8-60% for CS
coverage and downgrade IVRCL, NCC & Gammon India to NEUTRAL.
Construction sector has underperformed the broader market by 30%
and 43% over the last six months and 12 months, respectively,
implying weak fundamentals could be already priced in. However, we
do not expect core construction companies to significantly outperform
or their trading multiples to expand even at the onset of interest rate
cycle reversal as pick-up in ordering activity shall be the key trigger
ahead, which, in turn, shall largely be determined by pace of reforms
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
● With successive interest rate hikes over the last 18 months and
slow pace of policy reforms resulting in a slowdown in industrial
and infrastructural capex, we believe existing macro environment
remains extremely challenging for the construction sector.
● Working capital cycle has deteriorated for most construction
players over the last several quarters. Further balance sheet
weakening is visible as, in absence of operating cash flow
generation and lack of equity/PE funding, most players have been
forced to resort to debt funding to meet their equity investment
commitments for Infra BOT projects. Resultantly, high interest
costs are expected to continue to impact sector profitability ahead.
● We cut our FY12 and FY13 EPS estimates by 14-58% and 18-
60%, respectively, for our coverage as we build in muted sales
growth on deteriorating order inflows, lower margins, high working
capital cycle and rising interest costs. We cut our TP by 8-60%
across the sector and with a weak near-medium term outlook, we
downgrade IVRCL, NCC and Gammon India to NEUTRAL.
Macro environment challenging, unlikely to recover soon
With successive interest rate hikes by the RBI over the past 18
months, continued downward revisions to economic growth
projections and no near-term respite in sight, the existing macro
environment remains extremely challenging for the construction sector.
As a result of high interest rates, corporate and government capex is
being delayed, leading to muted order inflows for construction cos.
Apart from slowdown in industrial capex, infrastructural capex is also
witnessing a slowdown. Power sector, which has been one of the
major drivers of order inflows for the construction sector so far with
huge investments planned towards capacity additions, is witnessing
delayed investments on account of the structural issue of domestic
coal deficits impacting viability of several projects.
The only other sector witnessing some traction has been roads,
however, we expect NHAI to miss its FY12 target of awarding projects
for 7,300 kms considering that only 1,835 kms were awarded during
Apr-Aug 2011. Even if the NHAI were to achieve its FY12 award
target, a major portion of projects shall be awarded towards the end of
FY12 and, with at least six months needed for financial closure,
impact on earnings is unlikely to be visible before 2HFY13.
High working capital cycle impacting sector profitability
Working capital cycle has deteriorated for most construction players
over the last several quarters, resulting in high interest cost to service
the floating rate short-term debt taken to meet working capital
requirements. Further, lacking operating cash flow generation and
lack of equity/PE funding, most players are forced to resort to debt
funding to meet their equity investment commitment for Infra BOT
projects (in SPVs) leading to high gearing. Resultantly, we expect high
interest costs to continue to substantially eat into operating profits.
Cut earnings estimates, downgrade IVRCL, NCC and
Gammon India to NEUTRAL
We cut our FY12 and FY13 EPS estimates by 14-58% and 18-60%,
respectively, for construction companies under our coverage as we
build in muted sales growth on deteriorating order inflows, lower
margins, high working capital cycle and rising interest costs.
Additionally, for JPA, we build in lower capacity utilisations in its
cement business. Consequently, we cut TPs by 8-60% for CS
coverage and downgrade IVRCL, NCC & Gammon India to NEUTRAL.
Construction sector has underperformed the broader market by 30%
and 43% over the last six months and 12 months, respectively,
implying weak fundamentals could be already priced in. However, we
do not expect core construction companies to significantly outperform
or their trading multiples to expand even at the onset of interest rate
cycle reversal as pick-up in ordering activity shall be the key trigger
ahead, which, in turn, shall largely be determined by pace of reforms
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