Infrastructure: Monsoon plays spoilsport
Infrastructure construction companies that have so far declared their September quarter results have put up a disappointing show.
Analysts had already watered down year-on-year growth forecasts due to monsoon rains that disrupted construction.
Revenue growth was poor and fell below the average Street estimates.
NCC Ltd, for instance, posted a 7.5% revenue growth, while Sadbhav Engineering Ltd (SEL) posted a revenue that was 20% lower than Bloomberg’s analysts average.
Obviously, the operating profit took a beating in most cases.
After all, infrastructure companies have fixed overheads that cannot be trimmed suddenly.
Yet, after the long drawn downtrend experienced a few years ago, most firms had cut down overheads.
The September quarter saw the benefits of this. Operating margins were flat and in line with expectations despite low revenue traction.
Meanwhile, interest costs continue to remain high, either due to a delay in execution of legacy projects and the cost overruns associated with these or due to high debt. Some such as SEL are aggressively restructuring high-cost debt to trim interest costs, while others such as GVK Power and Infrastructure Ltd and GMR Infrastructure Ltd are trying to sell assets to raise funds for debt repayment.
Still, the debt:equity ratio across the sector did not show signs of easing in the quarter.
Be that as it may, net profit for most firms contracted when compared with the year-ago period, even after adjusting for new accounting norms.
The BSE Infra index has been very volatile in the past month. The stock price erosion in the past couple of weeks factors in the loss of toll revenue due to demonetisation. The government has waived toll fees to ease the liquidity crunch in the system. While the loss is to be compensated by the National Highways Authority of India or NHAI, any adversity would risk future private sector participation.
A report by Care Ratings also adds that a slowdown in economic activity post-demonetisation will perhaps hurt toll collection as traffic is likely to decrease.
What could offset these concerns is increase in order inflows for infrastructure firms and lower interest rates that would minimize the burden on the balance sheet. For now, the stocks would muddle along until the toll revenue issues are addressed.