BackInfrastructure: Road ahead clears up for construction firms
The biggest positive is the small but steady rise in order inflows during the quarter
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Infrastructure companies that construct roads, ports, bridges and other turnkey projects did well in the December quarter as concerns over traffic growth, tolling, project delays and payment issues slowly receded.
Revenue rose, albeit marginally for frontline firms on the back of income from completed projects.
Those in roads did better than the others as tolling revenue improved and traffic on most routes was better than in the preceding quarter. Explaining this, a note by ICRA Ltd says the efforts made by the government to clear the bottlenecks in the execution of road projects that comprise most of the business for infrastructure firms have started yielding results—a 45% increase in the pace of execution to 4.96km/day during April to November 2015 from 3.41km/day during April to November 2014.
The biggest positive is the small but steady rise in order inflows during the quarter. Again, most firms into road construction enjoy a healthy order book of twice to thrice fiscal 2015 revenue. Those in power and ports are yet to see a strong traction in orders. States such as Andhra Pradesh and Telangana contributed by awarding water and irrigation projects.
Meanwhile, firms have trimmed project-related expenses to at least sustain operating margins, if not better them. Debt restructuring in some and repayment in others led to improved interest cover ratio, compared with both the year-ago period and the preceding quarter, in the mid-sized firms.
But the larger ones are saddled with unfinished projects. Some are unable to cover interest costs on borrowed money through the profit generated.
Analysts worry about the stretched working capital cycle, too, which is yet to peak out. Awarding contracts after 80% of the land and right of way is secured and the hybrid annuity model in road construction are measures to ease stress on the infra firms’ balance sheets. Measures to make it easier for companies to exit troubled projects is improving appetite for infra construction among private builders.
However, the Nifty infra index continues to underperform the broader benchmark Nifty, although the gap has reduced. The prolonged losses posted by infra firms has hurt investor confidence, except towards larger firms such as Larsen and Toubro Ltd. Even this company’s operating margins took a beating in the quarter, given the high fixed costs and slow pace of project execution.
That said, the sector is on the path of regaining its lost sheen.
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