CONSTRUCTION :Q4FY12 RESULTS PREVIEW :Kotak Securities PDF link

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http://www.kotaksecurities.com/pdf/dmb/MorningInsight10042012.pdf

CONSTRUCTION
Construction sector performance during Q4FY12 is expected to improve on a
sequential basis led by improvement in execution. Revenues are expected to
grow by 21% QoQ for construction companies in our coverage universe
while on yearly basis, revenue growth is expected to grow at a slower pace
of 7% due to lower than expected order inflows during current financial
year. Margins are likely to remain a mixed bag with some of companies
likely to improve their margins on a full year basis due to diversified project
mix while others may witness a decline in full year margins due to cost
overruns. Continued high working capital and higher interest rates are likely
to dent the profitability adversely.
During FY12, revenue growth of the companies was impacted due to lack of
order inflows as well as execution related issues. Cost overruns, delay in
payment from clients, increase in working capital and steep hike in interest
rates have impacted profitability of companies across the sector and
resulted in sharp increase in leverage. Thus, in order to bring down the
debt, companies have initiated the process of stake sale in the SPVs
executing road, power and real estate projects.
We would continue to look out for following parameters during Q4FY12/
FY13 which will give us an indication of future growth in the sector -
 Faster environmental clearance and land acquisition
 Improvement in order inflows across segments
 Decline in interest rates
 Fund raising or stake sale by companies at the SPV level
 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. We would also continue to maintain
our positive bias for Phoenix mills based on its strong rental revenue
stream, excellent margins as well as likely commissioning of market city in
Chennai and hotel Shangri-La.
Key highlights during Q4FY12
Revenue growth to witness improvement on sequential basis
Revenue growth of the companies during Q4FY12 is likely to be led by ramp up in
execution.  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 7% YoY only for our
coverage universe.
Operating margins for full year FY12 may be lower than previous
year
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.