CW and EQUINOMICS RESEARCH offer a comparative evaluation of operating performance and reward to shareholders in the construction and allied sectors.
While global deflationary pressures continue to remain strong, on the domestic front, both the growth and Index of Industrial Production (IIP) of the eight core sectors remain quite weak. The corporate world is seeing near stagnation in profits over the past six quarters. Hence, the construction and allied sectors are also going through a tough time in terms of revenue and profit growth. In this difficult environment, we tried analysing the operating performance of listed companies falling in the construction and allied sectors for the latest quarterly period (October-December 2015) and for the cumulative period of nine months in the current fiscal (April-December 2015). We also tried comparing this operating performance with the performance of these companies on the stock markets. However, to evaluate the quarterly performance on shareholders´ wealth, we have taken the period of October 1, 2015, to February 15, 2016 - the period is extended by 45 days beyond the end of the December quarter, as the quarterly results are normally released within 45 days from the end of the quarterly period. This study throws up some interesting insights.
The real-estate industry went through a tough period in 2015. Last year, the residential segment saw the lowest number of new launches and sales volumes across the top eight cities of India since 2010. While sales volume during the year was similar to that in 2014, new launches fell sharply, by 21 per cent. Current unsold inventory levels stand at over 690,000 units. On the other hand, the office market witnessed severe shortage of good quality space, with demand consistently surpassing supply since 2014. Vacancy levels reached an eight-year low of 15.8 per cent in 2015 from 17 per cent in 2008.
Similar to 2014, demand surpassed new completions in 2015 as well. While 40.8 million sq ft of office space was absorbed in 2015, only 35.5 million sq ft was delivered. We took a review of 46 companies in the real-estate space, which are listed on the stock markets, for a comparative analysis of their operating performance and to evaluate their contribution to shareholders.
Cement and Products
In India, demand for cement emanates from four key segments: Housing, accounting for 67 per cent; infrastructure, 13 per cent; commercial construction, 11 per cent; and the industrial sector, 9 per cent. As most of these end-users were going through a tough economic environment, the cement sector has gone through contraction in its demand growth. For the period April to December 2015, cement production grew by a mere 2.2 per cent over the corresponding period the previous year. As the construction and real-estate sectors remained subdued, the cement product business was also severely affected in the current fiscal. Of the 31 companies considered from this sector for review, the top four companies account for 80 per cent of the total market cap. However, smaller companies have performed surprisingly well in terms of operating performance.
Global steel production in 2015 slipped back after five years of constant rises to 1.62 billion tonne, a decline of 3 per cent yoy. Last year, China, the world´s largest consumer and producer (accounts for around 50 per cent of world production), produced 803.8 million metric tonne (MT), down 2.3 per cent from 2014. The same trend was seen in Indian steel production, which declined by 2 per cent from April to December 2015. The steel industry in India has gone through tough times on account of Chinese steel firms dumping their production onto world markets at prices below cost. Owing to deflationary pressures, steel remained the most adversely impacted sector in India.
Tiles and Sanitaryware
This small segment with 10 companies has done well in Q3FY2016. It has improved its performance substantially in the latest quarter, as this quarter alone accounted for 44 per cent of the total net profits of nine months period.
The whole segment gave only 2 per cent rise in market caps.
This industry is uniquely positioned compared to other industries in the construction and allied sectors. As crude oil derivatives form a third of total raw material costs, this industry benefited significantly in terms of margin expansions owing to the oil price crash.
(View complete list of evaluated companies on www.ConstructionWorld.in)
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