Infrastructure: it’s roads all the way
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The June quarter performance of construction firms continued the trend set over the past few quarters. The action is mainly concentrated on construction of roads, given that there has been limited ordering out in other areas of infrastructure such as power and ports.
Within this universe, mid-sized firms such as NCC Ltd, KNR Constructions Ltd and IRB Infrastructure Developers Ltd continued to fare better. Ashoka Buildcon Ltd, a strong player in roads and in power transmission contracts, disappointed due to slow execution. Otherwise, most firms’ revenue moved up in high double-digits from a year ago. This was due to a combination of higher construction revenue and toll collections—a function of higher traffic movement.
The June quarter saw fresh order inflows, taking the total order backlog to about 2.5-3 times the net sales of FY16. This implies strong revenue growth at least for the next eight quarters. Meanwhile, the operating margin across firms was in line with brokerage estimates for the June quarter. That is perhaps why the BSE Infra index has risen steadily since April.
Of course, there are a few rotten apples in the basket of infra firms. Typically, these are firms that are saddled with stuck legacy projects and, therefore, reel under a huge debt burden and weak operating cash flows. Investors must steer clear of these, although the government’s recent proposal to settle disputed projects where there is a hearing in the developer’s favour, set these stocks on fire. However, it may be many quarters before their balance sheets turn favourable enough to lure investors.
For example, the one-time hot favourite on the bourse, IVRCL Ltd, which outperformed street expectations year after year for over a decade, is weighed down by interest costs that are about one-fourth of its net revenue. The June quarter revenue contracted from the year-ago period for some firms with legacy projects due to weak execution.
But the quarter’s robust net profit traction among the mid-sized road construction firms has raised investor hopes for FY17. The reason is that traffic movement and toll revenue will move up on the back of rising traffic movement as the economic recovery gathers speed.