Industry and investors are looking forward to a boost for infrastructure investment in the Union budget. During the first nine months of fiscal 2011, most firms were plagued by a plethora of problems that included client-related delays, severe monsoons, rising interest rates and receivables, all of which impeded growth rates in revenue and net profit.
Performance for the December quarter was a mixed bag. Expectations were belied on orders, which were subdued, particularly in roads, water and irrigation projects. A report by Motilal Oswal Securities Ltd says, “Slow decision-making by government agencies has resulted in delay in project awards in key sectors like roads.” Contracts on water and airports were also affected.
On revenue, industry leader Larsen and Toubro Ltdposted a robust 43% increase. But mid-cap firms such as IVRCL Infrastructures and Projects Ltd, Nagarjuna Construction Co. Ltd (NCCL) and Simplex Infrastructures Ltd (SIL) clocked a moderate 10-15% growth in revenue.
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Land acquisition and payment delays led to slower than expected revenue rise. More importantly, rising interest rates and commodity inflation sucked out profits. Analysts say the sector posted an average year-on-year contraction of 10% in net profit as opposed to an estimated 19% growth, resulting in a slew of earnings downgrades for both fiscal 2011 and 2012.
Further, the outlook remains grim. In fact, external factors such as the political crises in the Arab countries could further affect revenue and earnings. Firms such as Punj Lloyd Ltd have nearly one-fourth of their order book from Libya.
Construction firms had ventured overseas to avail the opportunity of earning 200-300 basis points higher margins, along with a faster payment cycle. One basis point is one-hundredth of a percentage point.
But this step taken to diversify geographic risk seems to have backfired. Besides, most overseas orders are fixed contracts with no price-escalation clause. This means that rising commodity prices will threaten profitability.
No wonder shares such as NCCL, SIL and IVRCL have been battered, and they have underperformed the CNX Nifty index on the National Stock Exchange since April.
Infrastructure firms hope to get succour by way of budgetary sops in terms of reduced tax rates or tempering of inflationary pressures, probably because the economic advisory council report in its advance estimates for 2011-2012 has pegged the construction sector growth rate at 10.5% from 8% for the current fiscal.
Yet the key is not just order inflows, but also rapid execution. Analysts say that firms should deliver at least a revenue growth rate of 25% per annum for firms to meet increase in fixed and variable costs and deliver shareholder returns.
Graphic by Ahmed Raza Khan/Mint