| Summary of Contents
| SHAREKHAN SPECIAL Q1FY2013 Construction earnings preview
No respite yet Key points -
A pick-up in execution to support revenue growth but weakness at PAT level to persist: The first quarter of FY2013 will continue to witness poor results as the engineering, procurement and construction (EPC) companies have had to prolong their battle against the mounting interest burden. We expect the aggregate revenue of the Sharekhan EPC universe (ex Punj Lloyd) to grow by a good 16% year on year (YoY) led by some pick-up in execution across projects. However, the earnings are estimated to decline by 22% on the back of a marginal decline in the margins and a sharp jump in the interest burden. -
Asset developers to also witness pressure on earnings: Asset developers, which have otherwise outperformed the EPC players, would feel the pinch too due to the rising interest burden. IL&FS Transportation Networks Ltd (ITNL) is expected to post a robust growth of 19% YoY in its revenue on account of consistent execution, consolidation of the Chongqing project and some signs of traction in the Elsamex division. But higher depreciation and a rising interest burden would dent the earnings, which would degrow by about 13% YoY. IRB Infrastructure Developers (IRB) too would post a nearly 7% decline YoY in its earnings in spite of a 17% growth in its top line led by strong order execution and the start of construction activity at its mega highway project, viz the Ahmedabad-Vadodara project. -
Only small EPC companies might record positive earnings growth: In our universe, we expect smaller EPC players like Gayatri Projects (Gayatri), Pratibha Industries (Pratibha) and Unity Infra (Unity) to post a growth in their earnings led by the robust execution of their projects and sustained margins despite a high interest burden. This expectation is supported by their strong order book, which comprises smaller orders that normally do not get stuck for long for want of clearances or approvals. -
Outlook: situation likely to improve from H2: The construction companies are already witnessing an improvement in execution of projects. Going ahead, the policy action prompted by the direct intervention by the Prime Minister's Office (PMO) is expected to improve the situation further. Moreover, we expect the margin and the interest burden to also ease out on the back of the expected monetary easing by the Reserve Bank of India. However, the divergence in the performances of the construction companies would remain wide and it would be better to remain selective. We prefer companies that have relatively better order inflows and execution track record in the existing tough conditions. Hence, we maintain our bullish bias on ITNL, Unity Infra and Pratibha. Our bullish stance on IRB Infra is more of a tactical call to take advantage of the event-led wide gap in the valuations of IRB Infra and ITNL. | | Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a postition in the companies mentioned in the article. | | | | | |
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