Q3FY2012 Construction earnings review ::ShareKhan PDF Link

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Q3FY2012 Construction earnings review  

Key points

• Stress continues; results below expectation: In Q3FY2012 the net profit of the engineering, procurement and construction (EPC) companies (ex Punj Lloyd) fell by 45% year on year (YoY; below our estimate) despite a decent revenue growth. This was mainly on account of a lower EBITDA margin and a higher interest burden. The revenue growth was decent across our universe except for NCC, IVRCL and Ramky InfraStructure (Ramky), which pulled down the cumulative revenue growth to 7.2% YoY (which was still marginally above our expectation). However, most EPC companies except Unity Infraprojects (Unity), Gayatri Infrastructure (Gayatri) and Ramky experienced pressure on their margins which caused our universe's (ex Punj Lloyd) EBITDA to fall by 5% YoY (below our expectation) in Q3FY2012. Further, the 42% year-on-year (Y-o-Y) rise in the interest cost (in line with our expectation) caused the stress to continue at the earnings level. 

In case of infrastructure developers, the aggregate revenue was up 44% YoY, in line with our expectation, on the back of the strong execution witnessed by IL&FS Transportation Networks (India) Ltd (ITNL). But on the margin front, while ITNL saw a contraction (as expected) due to a higher share of its revenue coming from its construction arms, IRB Infrastructure Developers (IRB) witnessed a stable margin (above our estimate), resulting in a cumulative 30% growth at the operating level. Despite a strong operating performance, the cumulative net profit was up by just 13% YoY on account of a high interest burden. However, it was better than estimated due to IRB's better than expected quarterly results.

• IRB, Unity and Simplex outperform: In Q3FY2012 IRB, Unity and Simplex Infrastructures (Simplex) outperformed with regards to ours as well as the Street's expectations while IVRCL, NCC and Ramky were the laggards. IRB outperformed on the back of an expansion in its operating profit margin (OPM) along with a lower both depreciation charge and tax outgo. Even Unity outperformed on the back of margin expansion, a stable interest cost and a lower depreciation charge. Further, Simplex saw a pick-up in execution which resulted in a buoyant revenue growth; this supported by a stable interest cost led to its outperformance during the quarter. Even Pratibha Industries (Pratibha) saw a very robust revenue growth which led to its marginal outperformance at the earnings level.

On the other hand, IVRCL saw poor execution due to delays in obtaining approvals and acquiring land which resulted in poor revenue booking and lower OPM. Even Ramky saw a poor revenue growth due to slower execution on account of adverse weather conditions in some parts of India. This along with a high interest burden led to Ramky's underperformance. NCC recorded a multi-year low OPM which along with a high interest burden led the company to report a loss at the earnings level. Punj Lloyd seems to have gained some traction on the execution front which is well reflected in its revenue performance over the last two to three quarters. However, its OPM continues to be under pressure which along with a high interest burden continues to result in a poor show at the net profit level.

• Outlook: For the EPC companies in our universe except IRB, we have marginally upgraded our estimates for FY2013 to factor in the better execution and higher margins as compared with our earlier estimates. However, we have revised our estimates downward for IRB to factor in the slower execution in a few of the company's projects and the substantial rise in the company's debt levels. The peaking of interest rates is a big relief for the sector and has led to a strong rally in the stock prices across the sector. The government is also slowly shedding its policy paralysis by taking a few initiatives. Now it remains to be seen when the government will speed up the decision making process in order to support the desired policy changes and will expedite the roll-out of the major projects as the same would boost investment in infrastructure. Quick policy actions will help the mid construction companies Like NCC, IVRCL to improve their execution and thus come out of the deep water. Till then we prefer being very selective and our top pick remains ITNL, Unity and Pratibha. 
  
  
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