Infrastructure: Outlook remains strong
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The September quarter saw infrastructure firms in a mixed light. Like the earlier quarters, the action continues to be in firms with a focus on roads and some action in railways and water in terms of order inflows. Revenue growth was hit, but firms posted decent margins.
Road firms such as PNC Infratech Ltd, Ashoka Buildcon Ltd and KNR Constructions Ltd reported lower-than-expected revenue. Even Larsen and Toubro Ltd, the largest and well-diversified infrastructure conglomerate, reported weak single-digit revenue growth, citing delays in clearances and lack of clarity in the new goods and services tax (GST). Most of the problems stemmed from the need to restate and work out changes in contracts, if any, on account of GST transition.
However, a few like Dilip Buildcon Ltd posted stellar revenue growth, with early project completion a bonus, too. Firms with toll collections from road projects saw higher revenue accretion when compared with the June quarter when traffic was affected due to GST migration.
But the fact that most road developers sailed through the quarter, maintaining profitability at levels of the earlier quarters, was commendable. Tight cost and working capital control helped.
The managements of most firms indicated in their analyst calls that the second half would be better and revenue growth for the full year ended March 2018 would be in line with earlier estimates.
The only concern is in terms of fresh order inflows. L&T for instance drastically cut back order flow guidance from 12% to nil growth. That said, the recently announced Bharatmala programme for developing the country’s road network is likely to bring momentum in orders.
A report by Motilal Oswal Services Ltd says bottlenecks in terms of clearances, funding and execution hurdles are now behind the sector.
“The National Highways Authority of India would award over 31,000km of road projects executable over FY 2017 and 2021, entailing an estimated investment of Rs3.6 trillion (civil construction works). We expect awarding activity to stabilize at 15,000km per year, and execution activity to pick up—9,300km in FY19 and 10,000km in FY20,” it estimates.
The quarter witnessed some firms kick-starting projects after completion of financial closure, under the hybrid annuity model (HAM). Further, there were fresh orders in building and maintenance of railway network, which mid-sized and large-sized civil construction firms cashed in on.
From an investor standpoint, however, most stocks have run up after a lull between July and September, when GST uncertainty loomed over market sentiment.
The potential for revenue and profit growth is good for infrastructure firms, given that most of them have order books that are two to three times their FY17 annual revenue. Retail investors may do well, too, if they focus on firms that have a reasonable mix of engineering, procurement and construction (EPC) orders, as billing cycles are more predictable when compared with BOT (build, operate, transfer) projects.