The earnings outlook for construction firms is grim. Reflecting this, stock prices have been beaten down to less than half of their year-ago levels.
A consistent flow of orders would at least have offered solace to investors about the performance outlook for ensuing quarters. But unfortunately, after a marginal pickup in the March quarter, orders have been sluggish again. A report by Sharekhan Ltd says June quarter inflows for large construction firms covered by it were around Rs 39,500 crore, almost 32% down from a year ago and 40% down from the preceding quarter. Market leader Larsen and Toubro Ltd (L&T) is the only exception.
Evidently, mega infrastructure contracts pertaining to power, railways, water supply and irrigation were hit by political instability and state elections over the last six months.
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Roads, where action was expected, disappointed as the National Highways Authority of India awarded only four of the 14 projects scheduled for the quarter. The rest seem to have been deferred by a few months.
Also, rising interest rates and inflation led to a slowdown in building projects—commercial, residential and industrial.
Against these odds, some companies—NCC Ltd, IVRCL Ltd, Madhucon Projects Ltd and IRB Infrastructure Developers Ltd—are likely to register a modest growth in revenue as efforts to ramp up execution will shore up billing. But earnings are unlikely to grow as the sector, which is highly leveraged, has to battle interest costs, too. “This increase in debt levels—above comfortable limits—is mainly on account of increased working capital requirement and equity infusion in subsidiaries to support revenue growth for the parent construction arm,” says a report by Angel Broking Ltd.
Unless cost pressures ease, most construction firms are estimated to post flat earnings for fiscal 2012 (FY12), despite the relatively low base of FY11. A few that may report reasonable order inflows and have lower leverage, such as L&T and mid-sized player Sadbhav Engineering Ltd, may be able to contain these headwinds.
That said, most of these negatives along with another round of interest rate increases have been factored into the prevailing market prices of construction stocks. Most of them are trading at less than eight times FY12 valuations and close to book value. Yet, the woes of the sector are likely to keep investors away, at least for the next six months.
Graphic by Yogesh Kumar/Mint