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Lower input costs do not offer relief for construction firms

Many construction firms have been in the red the last two quarters as skyrocketing interest costs eat into profits
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First Published: Thu, Mar 28 2013. 03 19 PM IST
There is little investor interest in the construction sector and most stocks are down 50-70% compared with even a year ago. Photo: Indranil Bhoumik/Mint
There is little investor interest in the construction sector and most stocks are down 50-70% compared with even a year ago. Photo: Indranil Bhoumik/Mint
Updated: Thu, Mar 28 2013. 10 33 PM IST
One would expect construction companies to turn in better profits in the March quarter, what with the drop in key input costs. Steel prices have been rolling downhill the past four quarters and weakness in cement prices set in during January. But, a picture of gloom persists for the sector.
Recovery in profitability seems to be a few quarters away, given that delays in project execution the past four quarters have snowballed into poor billings. Revenue growth for the March quarter is likely to be subdued compared to the year-ago period, in line with the single-digit revenue growth posted in the December quarter.
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Delayed billings also translate into cost overruns on projects and higher interest cost on funds borrowed for the project. Examples are evident in the recent performances of IVRCL Ltd, Simplex Infrastructures Ltd and Gammon India Ltd. These companies registered a sharp drop in operating profits in the December quarter from a year earlier. This was despite the 5% year-on-year drop in steel prices and moderation in cement price rise. Firms have also streamlined labour costs and other contracting expenses to hold out through these challenging times.
The story is likely to continue in the current quarter. A report by Crisil Research forecasts that operating margin for the March quarter is likely to be 80 basis points lower than the year-ago period for its universe of 38 construction firms. This could be due to weak revenue ramp-up, cost increases on existing projects and higher share of low-margin projects in the overall business, which is due to the rising competition in the last two years. Crisil estimates an average operating margin of 11.7% for its universe, which is a tad better than that in the December quarter.
Needless to say, many construction firms have been in the red the last two quarters on account of skyrocketing interest costs eating into profits. Lower interest rates along with revenue increases are imperative for firms to post profits at the net level, which are unlikely until at least the second half of fiscal 2014. Not surprising then that there is little investor interest in this sector and most stocks are down 50-70% compared with even a year ago.
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First Published: Thu, Mar 28 2013. 03 19 PM IST
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