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Construction sector performance during Q2FY12 was largely in line with our
estimates. We had expected execution to remain impacted during Q2FY12
by monsoons while high interest rates continued to impact net profit
margins adversely. Working capital cycle remained stubbornly high led by
higher inventories as well as loans and advances which led to jump in
overall borrowings. Though interest rates are not expected to increase
sharply from the current levels, but working capital cycle may continue to
remain high for next few quarters till companies are able to raise funds at
subsidiary level. Companies continue to remain conservative in giving future
guidance and expect ramp up in execution and order inflows from Q4FY12
onwards.
We believe that near term stress may continue to impact FY12 earnings.
However, any fund raising done by the companies at SPV level or decline in
working capital cycle or interest rate cuts would be positive for the sector.
Thus in the current scenario, we continue to be selective in the construction
sector and would prefer companies where stock prices are already factoring
in these concerns and where Q2FY12 numbers are in line with our
estimates. We prefer IRB Infra, Unity Infra and Pratibha industries in the
current scenario.
Order inflows improve selectively but still below expectations
Order inflows have improved during Q2FY12 for most of the companies in comparison
with Q1FY12. However, they continue to remain lower than expectations due to
slow decision making from the government side, delayed environmental clearances
as well as land acquisition related issues. Key areas witnessing increased traction
include roads, buildings, urban infra and water supply. However, order inflow from
sectors such as power, mining and international continue to remain subdued due to
issues related to coal availability, mining ban and unrest in middle-east region respectively.
Along with this, on domestic front, order inflow from hydro power segment
remained lackluster and impacted order inflow of companies like Patel Engineering,
JP Associates and HCC. Though competition has come off a bit in the road
sector but other sectors continue to witness increased competition. This may result in
putting pressure on operating margins going forward.
Though current order books provide decent revenue visibility, execution may remain
slow in order to contain working capital cycle and maintain balance sheet strength.
Along with this, delayed financial closure of BOT projects may also impact revenue
growth going forward.
Operating margins may be maintained going ahead
Operating margins of the companies have improved for most of the companies under
our coverage on a yearly basis and companies expect margins to be maintained
at the current levels with price variations clauses already in place for a significant
proportion of order book. 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 for fixed price proportion of order
book. Along with this, margins may also come down due to change in the revenue
mix.
Sharp increase in borrowings and interest rates dented overall
profitability
Working capital requirement for the companies have witnessed a further increase
during Q2FY12 led by either higher inventories or loans and advances or high retention
money. This led to higher borrowings and steep increase in interest rates resulted
in denting overall profitability. Increase in borrowings also resulted in weakening
balance sheet strength and correspondingly low return ratios. We believe that
working capital requirements may continue to remain high in next quarter also.
However, any fund raising done at the SPV level will be positive for the companies
since it would help in reducing borrowings. Decline in interest rates would also be
positive for the companies.
Business restructuring announced by many companies
Several companies have announced restructuring of their business division to raise
funds to strengthen their highly leveraged balance sheets. JP Associates decided to
demerge Company's Cement Plants in Gujarat & Andhra Pradesh into its subsidiary
Jaypee Cement paving way for selling stake in the demerged company to raise
funds for debt reduction. IVRCL has also decided to merge the road assets of IVR
A&H with itself since IVR A&H was finding it difficult to avail funds from banks.
Company is in talks for monetizing Noida land parcel as well as stake sale in
projects like Jalandhar-Amritsar, Baramati-Phaltan and Indore-Jhabua which will help
in making IVR A&H a debt free company as against its present debt of Rs 7bn. Similarly,
Madhucon Projects is also close to finalizing fund raising at the SPV level to
meet equity requirements of its road BOT and power projects. NCC is also evaluating
divestment at the subsidiary level to meet equity requirements and reduce overall
borrowings going forward.
We believe that timely fund raising is necessary for these companies to reduce
stretched working capital of core companies.
Recommendation
Construction sector companies continue to trade at lower valuations despite some
improvement being witnessed in order inflows. This is due to continued high working
capital cycle as well as higher borrowings. Execution challenges are likely to reduce
going forward from Q4FY12 onwards.
We believe that near term stress may continue to impact FY12 earnings. However,
any fund raising done by the companies at SPV level or decline in working capital
cycle or interest rate cuts would be positive for the sector. Thus in the current scenario,
we continue to be selective in the construction sector and would prefer companies
where stock prices are already factoring in these concerns and where
Q2FY12 numbers are in line with our estimates. We prefer IRB Infra, 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 performance during Q2FY12 was largely in line with our
estimates. We had expected execution to remain impacted during Q2FY12
by monsoons while high interest rates continued to impact net profit
margins adversely. Working capital cycle remained stubbornly high led by
higher inventories as well as loans and advances which led to jump in
overall borrowings. Though interest rates are not expected to increase
sharply from the current levels, but working capital cycle may continue to
remain high for next few quarters till companies are able to raise funds at
subsidiary level. Companies continue to remain conservative in giving future
guidance and expect ramp up in execution and order inflows from Q4FY12
onwards.
We believe that near term stress may continue to impact FY12 earnings.
However, any fund raising done by the companies at SPV level or decline in
working capital cycle or interest rate cuts would be positive for the sector.
Thus in the current scenario, we continue to be selective in the construction
sector and would prefer companies where stock prices are already factoring
in these concerns and where Q2FY12 numbers are in line with our
estimates. We prefer IRB Infra, Unity Infra and Pratibha industries in the
current scenario.
Order inflows improve selectively but still below expectations
Order inflows have improved during Q2FY12 for most of the companies in comparison
with Q1FY12. However, they continue to remain lower than expectations due to
slow decision making from the government side, delayed environmental clearances
as well as land acquisition related issues. Key areas witnessing increased traction
include roads, buildings, urban infra and water supply. However, order inflow from
sectors such as power, mining and international continue to remain subdued due to
issues related to coal availability, mining ban and unrest in middle-east region respectively.
Along with this, on domestic front, order inflow from hydro power segment
remained lackluster and impacted order inflow of companies like Patel Engineering,
JP Associates and HCC. Though competition has come off a bit in the road
sector but other sectors continue to witness increased competition. This may result in
putting pressure on operating margins going forward.
Though current order books provide decent revenue visibility, execution may remain
slow in order to contain working capital cycle and maintain balance sheet strength.
Along with this, delayed financial closure of BOT projects may also impact revenue
growth going forward.
Operating margins may be maintained going ahead
Operating margins of the companies have improved for most of the companies under
our coverage on a yearly basis and companies expect margins to be maintained
at the current levels with price variations clauses already in place for a significant
proportion of order book. 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 for fixed price proportion of order
book. Along with this, margins may also come down due to change in the revenue
mix.
Sharp increase in borrowings and interest rates dented overall
profitability
Working capital requirement for the companies have witnessed a further increase
during Q2FY12 led by either higher inventories or loans and advances or high retention
money. This led to higher borrowings and steep increase in interest rates resulted
in denting overall profitability. Increase in borrowings also resulted in weakening
balance sheet strength and correspondingly low return ratios. We believe that
working capital requirements may continue to remain high in next quarter also.
However, any fund raising done at the SPV level will be positive for the companies
since it would help in reducing borrowings. Decline in interest rates would also be
positive for the companies.
Business restructuring announced by many companies
Several companies have announced restructuring of their business division to raise
funds to strengthen their highly leveraged balance sheets. JP Associates decided to
demerge Company's Cement Plants in Gujarat & Andhra Pradesh into its subsidiary
Jaypee Cement paving way for selling stake in the demerged company to raise
funds for debt reduction. IVRCL has also decided to merge the road assets of IVR
A&H with itself since IVR A&H was finding it difficult to avail funds from banks.
Company is in talks for monetizing Noida land parcel as well as stake sale in
projects like Jalandhar-Amritsar, Baramati-Phaltan and Indore-Jhabua which will help
in making IVR A&H a debt free company as against its present debt of Rs 7bn. Similarly,
Madhucon Projects is also close to finalizing fund raising at the SPV level to
meet equity requirements of its road BOT and power projects. NCC is also evaluating
divestment at the subsidiary level to meet equity requirements and reduce overall
borrowings going forward.
We believe that timely fund raising is necessary for these companies to reduce
stretched working capital of core companies.
Recommendation
Construction sector companies continue to trade at lower valuations despite some
improvement being witnessed in order inflows. This is due to continued high working
capital cycle as well as higher borrowings. Execution challenges are likely to reduce
going forward from Q4FY12 onwards.
We believe that near term stress may continue to impact FY12 earnings. However,
any fund raising done by the companies at SPV level or decline in working capital
cycle or interest rate cuts would be positive for the sector. Thus in the current scenario,
we continue to be selective in the construction sector and would prefer companies
where stock prices are already factoring in these concerns and where
Q2FY12 numbers are in line with our estimates. We prefer IRB Infra, Unity Infra and
Pratibha industries in the current scenario.
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