A subdued December quarter for infrastructure firms
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The construction sector put up an unimpressive show, although on expected lines, in the December quarter. Undoubtedly, demonetisation hurt the sector in several ways.
One, engineering and construction work came to a standstill in November and December as the economy was hit by a cash crunch. Deferred payments to workers delayed execution and billing across infrastructure firms. The average net revenue of 156 firms in the mid- and large-sized category excluding Larsen and Toubro Ltd (L&T) fell by 8.9% year-on-year (y-o-y). L&T, too, posted marginal revenue growth.
Road construction firms with operational projects were worse off than the rest of the pack because toll collections were suspended for about three weeks. How this impacts earnings for the full year depends on when and how the expected government compensation for revenue loss will shape up.
Weak revenue trickled down to a similar performance on operating metrics. Firms such as IRB Infrastructure Ltd and NCC Ltd, that have been improving profitability, found the going tough, but were able to sustain profitability.
Adding to the quarter’s woes was the weak ordering activity across infrastructure segments. Save for a few orders in the capital goods space, there were hardly any big-ticket orders in power, roads and railways.
The only solace is that the large firms have put their house in order by deleveraging balance sheets, reducing indebtedness and optimizing cost structures.
Meanwhile, firms in power transmission such as KEC International Ltd and ABB Ltd put up a decent show during the quarter. In contrast, firms whose performance is linked to power generation paled in comparison.
The S&P BSE Infrastructure index has rallied sharply on hopes that the government will live up to its commitment of boosting investment in infrastructure.
So far, reality is far from it and, given the current pace of new projects tendered until February, it is likely that road sector will not meet the targets both in terms of fresh ordering and execution during FY17.