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India Equity Research Reports, IPO and Stock News
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CONSTRUCTION
Construction sector performance during Q3FY12 is expected to improve on a
sequential basis led by improvement in execution. Revenues are expected to
grow by 17% QoQ for construction companies in our coverage universe
while on yearly basis, revenue growth is expected to grow at a slower pace
of 15% due to lower than expected revival in order inflows during current
financial year. Though margins are expected to remain stable but steep
increase in working capital requirements as well as borrowings are expected
to dent the profitability on yearly basis. In terms of order inflow, building
sector continued to witness improved activity while traction has improved
for road sector also in current fiscal. However, sectors such as power,
mining, irrigation and from international segment continued to witness
lackluster activity.
Order inflow was expected to improve during FY12 but it has failed to
revive across sectors and has impacted revenue growth. Along with this,
some companies have witnessed slowdown in execution due to very high
interest rates or lack of funding to achieve financial closure. We thus expect
revenue growth for the sector to witness significant improvement only after
we witness revival in order inflows as well as decline in interest rates.
Following are the key parameters which we would look out for during
Q3FY12 and which will give us an indication of future growth in the sector
q Faster environmental clearance and land acquisition
q Improvement in order inflows across segments
q Decline in interest rates
q Fund raising or stake sale by companies at the SPV level
q Financial closure of pending projects
Till that time, we continue to remain selective on the sector and would
prefer companies with healthy order book, improved execution and
attractive valuations. We would thus prefer IRB Infrastructure, Unity
Infraprojects and Pratibha Industries.
Key highlights during Q3FY12
Revenue growth to witness improvement on sequential basis
Revenue growth of the companies during Q3FY12 is likely to be led by ramp up in
execution after witnessing lull in H1FY12. However, revenue growth is not expected
to jump up sharply despite healthy order book for the companies in order to contain
working capital cycle and maintain balance sheet strength. It is expected to grow
by 15% YoY only for our coverage universe.
Operating margins to stay strong
Operating margins of the companies are expected to be a mixed bag depending
upon the contracts executed in the current quarter. We expect full year FY12 operating
margins 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.
Net profits to be impacted by higher interest outgo
Aggregate net profit of companies in our coverage universe is expected to decline
by 6% YoY for Q3FY12 led by steep increase in interest outgo. Companies were
planning to raise funds by selling stake in SPV's to meet the equity requirement of
new projects and to repay high cost debt. However, due to lack of fund raising during
Q3FY12, borrowings and working capital cycle may continue to remain high and
thus interest outgo is also expected to remain high for H2FY12. This will impact the
net profits adversely.
Remain selective on the sector in lieu of execution and order inflow
related concerns
Thus in lieu of lower than expected order inflow, possibility of slower growth in execution
to maintain working capital cycle and higher interest rates, we continue to
maintain our selective stance on the 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, 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.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
CONSTRUCTION
Construction sector performance during Q3FY12 is expected to improve on a
sequential basis led by improvement in execution. Revenues are expected to
grow by 17% QoQ for construction companies in our coverage universe
while on yearly basis, revenue growth is expected to grow at a slower pace
of 15% due to lower than expected revival in order inflows during current
financial year. Though margins are expected to remain stable but steep
increase in working capital requirements as well as borrowings are expected
to dent the profitability on yearly basis. In terms of order inflow, building
sector continued to witness improved activity while traction has improved
for road sector also in current fiscal. However, sectors such as power,
mining, irrigation and from international segment continued to witness
lackluster activity.
Order inflow was expected to improve during FY12 but it has failed to
revive across sectors and has impacted revenue growth. Along with this,
some companies have witnessed slowdown in execution due to very high
interest rates or lack of funding to achieve financial closure. We thus expect
revenue growth for the sector to witness significant improvement only after
we witness revival in order inflows as well as decline in interest rates.
Following are the key parameters which we would look out for during
Q3FY12 and which will give us an indication of future growth in the sector
q Faster environmental clearance and land acquisition
q Improvement in order inflows across segments
q Decline in interest rates
q Fund raising or stake sale by companies at the SPV level
q Financial closure of pending projects
Till that time, we continue to remain selective on the sector and would
prefer companies with healthy order book, improved execution and
attractive valuations. We would thus prefer IRB Infrastructure, Unity
Infraprojects and Pratibha Industries.
Key highlights during Q3FY12
Revenue growth to witness improvement on sequential basis
Revenue growth of the companies during Q3FY12 is likely to be led by ramp up in
execution after witnessing lull in H1FY12. However, revenue growth is not expected
to jump up sharply despite healthy order book for the companies in order to contain
working capital cycle and maintain balance sheet strength. It is expected to grow
by 15% YoY only for our coverage universe.
Operating margins to stay strong
Operating margins of the companies are expected to be a mixed bag depending
upon the contracts executed in the current quarter. We expect full year FY12 operating
margins 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.
Net profits to be impacted by higher interest outgo
Aggregate net profit of companies in our coverage universe is expected to decline
by 6% YoY for Q3FY12 led by steep increase in interest outgo. Companies were
planning to raise funds by selling stake in SPV's to meet the equity requirement of
new projects and to repay high cost debt. However, due to lack of fund raising during
Q3FY12, borrowings and working capital cycle may continue to remain high and
thus interest outgo is also expected to remain high for H2FY12. This will impact the
net profits adversely.
Remain selective on the sector in lieu of execution and order inflow
related concerns
Thus in lieu of lower than expected order inflow, possibility of slower growth in execution
to maintain working capital cycle and higher interest rates, we continue to
maintain our selective stance on the 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, 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.
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