Special Report

A Slippery Bottomline

March 2011

The October-December 2010 quarter saw the highest growth in topline among the past five to six quarters, but profitability remained sluggish, with the quarter posting decline of five per cent in net profits. Rising input and financial costs have put a brake on the construction industry. However, the next quarter appears rosy, analyses Nitin Madkaikar, Economist at FIRST Infocentre.

Strong sales helped most companies in the construction sector to post a positive topline in the quarter ended October to December 2010. Nevertheless, a significant rise in input costs saw the bottomline shrinking vehemently. Last quarter (June-September) too had seen a similar phenomenon. Buoyant growth in the order book on the back of strong demand after the monsoon season enabled construction companies to post strong sales growth during the quarter.

Aggregate sales value of 44 construction and EPC companies was up 18 per cent in the quarter ended December 2010 while their net profits declined by over 6 per cent. Nearly half of these companies were in red during the quarter. The preceding quarter had seen sales grow by 7 per cent while profits were up by a mere 1.5 per cent. During the quarter under review, operating expenses increased sharply by 21 per cent, more than neutralising the top line gains. Raw material cost surged by nearly 32 per cent while employees' expenses were up 18 per cent. Other expenses, forming a major chunk of all expenses, also increased 16 per cent.

Increased capital cost further dampened the prospect of a modest profit margin. The interest outgo of these 44 companies totaled Rs 1,090 crore, up 36 per cent over the Rs 780 crore of October-December 2009 quarter. Reserve Bank of India's tight monetary policy stance, in its fight against inflation, and the resultant liquidity crunch in the banking sector led to a steady rise in lending rates in the economy and hence the interest costs of construction companies.

The economy's speedy recovery from the slowdown and an increase in private spending on construction activity through industrial capital expenditure were favourable for growth in the order book during the quarter. The growth in the industrial capital expenditure is partly because of the deferred capex plans of 2009. Increased government spending on infrastructure sector and growth in the pubic private partnership projects has also given a fillip to the sector.

The sector may maintain a stable profit margin in the coming quarters supported by a growth in order book and steady input prices. Although steel prices may rise because of an increase in the prices of iron ore and coking coal, its impact on the construction industry may be partly offset by a likely decline in the cement prices. Cement prices may fall in 2011 owing to overcapacity.

In the following pages, we have profiled nine fastest growing construction companies (in terms of sales growth seen in the first three quarters of 2010-11), categorised into three broad sizes. The large category includes companies with an annual turnover of more than Rs 1,500 crore, the medium category comprises companies with an annual turnover between Rs 600 crore and Rs 1,500 crore while the small category is made up of companies with an annual turnover of less than Rs 600 crore. We have also profiled the largest construction company in terms of sales in the quarter ended December 2010.

Largest Construction Company

Larsen & Toubro net profit rises 11%

Engineering and construction giant Larsen & Toubro posted a 11 per cent rise in its net profit at Rs 841 crore. However, excluding exceptional and extraordinary items for the quarter, the growth rose to 16 per cent. The company's topline jumped an incredible 40 per cent y-o-y to Rs 11,413 crore. During the quarter, the company received orders worth Rs 13,366 crore which took its outstanding order book to Rs 114,882 crore as of December 2010.

The dominant Engineering & Construction segment of the company achieved a sales growth of 45 per cent to Rs 9,831 crore for the quarter. But the segment's order inflow was Rs 11,762 crore during the quarter, lower than that in the same quarter a year ago. The slowdown is attributed to the deferment in awarding of contracts owing to a slower pace of activities in certain key and infrastructure sectors.

Large Category

1. Engineers India total revenue climbs 37%

State-run project implementation and engineering consultancy firm, Engineers India's total revenue rose 37 per cent to Rs 677.10 crore from Rs 493.83 crore in the corresponding quarter last year. However, in similar comparison, net profit growth was slower at 10 per cent from Rs 111 crore to Rs 122 crore in the current quarter. The value of the company share works out to Rs 3.63, down from Rs 9.89 per share a year ago.

During the quarter, revenue from lumpsum turnkey projects jumped 69 per cent to Rs 390 crore while that from consultancy and engineering projects was up 8.7 per cent at Rs 287 crore. Similarly, other expenses which include sub-contract payment, construction material soared 57 per cent to Rs 396 crore. Depreciation provisions too increased 40 per cent, limiting the profitability of the company.

In February, EIL entered into a Memorandum of Cooperation with Nuclear Power Corporation of India under which it will provide services and get associated for various nuclear projects of NPCIL. This contract is important as large investments are proposed in nuclear power generation and will boost Engineers India's topline and bottomline in the last quarter.

2. Gammon India net sales grows 35.23%

Construction major Gammon India's net sales / income from operations grew 35 per cent to Rs 1,374 crore for the quarter ended December 2010 from Rs 1,016 crore during the same period a year ago. The company's net profit, however, declined 51 per cent to Rs 10.16 crore for the quarter ended December 2010 from Rs 20.88 crore last year.

During the quarter, Gammon bagged a prestigious order for supply of 150 mw steam turbine and boiler for Nagai power plant valued at Rs 310 crore. The company also incorporated 11 new subsidiaries for various projects. These are Chitoor Infrastructure, Dohan Renewable Energy, Ghaggar Renewable Energy, Indori Renewable Energy, Kasavati Renewable Energy, Markansa Renewable Energy, Satyavedu Infrastructure, Sirsa Renewable Energy, Tada SEZ, Tangri Renewable Energy and Yamuna Renewable Energy.

Gammon also acquired 84.16 per cent share in Metropolitan Infrahousing, which had successfully bid and won the auction of 130 acre of land in Dombivli in Thane district to develop realty property.

In February, Gammon had an order book of Rs 3,070 crore comprising projects in the roads and bridges sector. The company was also expecting to bag an order worth Rs 570 crore to build 100 km Vadape-Gonde road section in Maharashtra.

3. Hindustan Construction Company net down 46%

HCC, the leading engineering, construction and infrastructure development company specialising in deploying new age construction technologies, posted a topline growth of 14 per cent in the quarter ending December 2010. Its revenue during the quarter totaled Rs 1,009 crore as against Rs 887 crore in the same quarter a year ago. However, net profits declined 46 per cent to just Rs 7.94 crore. The profitability was affected by over 20 per cent increase in raw material and employee expenses while interest outgo surged 50 per cent.

The company has its performance reflecting the slowdown in infrastructure activity. Several project orders were deferred by various governments and private sector due to delays in acquiring land and other related clearances. These deferments coupled with the growing reluctance of investors are some of the factors contributing towards the slowdown in core sector works.

Looking ahead, the company expects execution ramp up in new and key projects like Kishanganga HEP and NH-34 Highway project. Given the slowdown in the business environment, HCC will focus on judicious use of capital and improving recoveries with growth strategy focused on opportunities offered by the private sector and aggressively evaluating strategic activities in the thermal and hydrocarbon sectors.

Medium Category

1. ARSS Infrastructure operating income grows 14%

ARSS Infrastructure Projects engaged in construction of railway infrastructure, roads, highways, bridges and irrigation projects announced 14 per cent increase in revenue and 2 per cent rise in net profits during the quarter ended December 2010. While revenue touched Rs 303 crore, net profits were at Rs 26 crore. The company attributes the modest performance to the amount of orders mopped during the year.

The company was under severe pressure on the cost front. Its raw material expenses, the main among heads of expenditure, soared 41 per cent while employee expenses and other expenditure also grew by more than 40 per cent. Interest outgo more than doubled during the quarter.

Recently, the company bagged an order for two-laning of NH-44 with paved shoulders for a stretch of total 30.28 km from the Assam state government. The order was worth Rs 104 crore, to be completed in four years. With this, the orderbook size stood at Rs 5,400 crore.

2. Sadbhav Engineering net profit zooms 87%

Sadbhav Engineering was one of the few construction companies to have posted a robust performance during the quarter ended December 2010. Its profit rose 87 per cent on a revenue growth of 51 per cent. During the quarter, revenue totaled Rs 476 crore earning a net profit of Rs 26.38 crore. Thus, net profit margins inched up to 5.52 per cent from 4.41 per cent in the December 2009 quarter. However, expenditure continued to rise in line with the overall industry. Operating expenses totaled Rs 423 crore, up 47 per cent from the Rs 286 crore of December 2009 quarter.

In October, the company received orders worth Rs 1,411.36 crore from the National Highway Authority of India for two-laning of Multai-Chhindwara-Seoni section of NH-69A in Madhya Pradesh including construction and maintenance of Ring Road and connecting roads in Chhindwara city and Narsinghpur-Amarwara-Saoner section of NH-26B Maharashtra. The work includes rehabilitation and up-gradation with paved shoulders and maintenance.

In December, the company boasted an order book of Rs 7,800 crore, more than six times the previous financial year's total turnover.

3. BL Kashyap posts robust rise in profits

New Delhi based BL Kashyap and Sons saw its total income from operations rise 61 per cent and net profits soaring 40 per cent, pegging the company in the group of robust performing companies in the quarter ended December 2010. During the quarter, BL Kashyap posted a revenue of Rs 438 crore as against Rs 273 crore of the December 2009 quarter. Similarly, its net profits were at Rs 15 crore as against Rs 10.74 crore of 2009 quarter.

BL Kashyap's profitability was limited by the 70 per cent rise in wages and employee cost, which is a major portion of its total expenses. It spent Rs 142 crore on this head against Rs 84 crore a year ago. The company was also not spared by the rising financial costs. Its interest outgo increased 59 per cent to Rs 16.77 crore during the December 2010 quarter. Tax provisions were raised by the company by 65 per cent to Rs 9.14 crore for the quarter.

During the period October 2010 and January 2011, the company received fresh orders worth Rs 700 crore, taking cumulative fresh order intake for 2010-11 to Rs 3,000 crore.

Small Category

1. Supreme's topline and bottomline post strong growth

The diversified infrastructure firm Supreme Infrastructure, reported a 68 per cent rise in revenue and an equally faster rise of 65 per cent in net profits in the quarter ended December 2010. The third quarter of 2010-11 saw Supreme's revenue touch Rs 240 crore earning a net profit of 19 crore. However, revenue includes an exceptional item of Rs 4.06 crore, which is towards sale of fixed asset.

During the quarter, the firm forayed into the remunerative market of Eastern India, where it expects to add large contracts to the order book in the next 12-18 months. The company sees traction in the infrastructure space, and is optimistic about the growth in the execution for industry players and itself in the next 24 months.

The company added orders worth Rs 484 crore during the quarter in the bridges, roads and buildings segment taking the total order book to Rs 3,060 cr. These orders are expected to be executed over the next 24-30 months. The company emerged L1 for Ahemadnagar-Karmala-Timbhurni road BOT project, costing Rs 560 crore. The company also bagged the Panvel-Indapur section (84km) of NH-17 for four-laning worth Rs. 1,150 crore.

2. Tantia Constructions Q3 net profit up 48%

Kolkata based construction major Tantia Constructions saw a robust growth, both in the topline as well as the bottomline during the quarter ended December 2010. Revenues grew 44 per cent to Rs 159 crore while net profits climbed 47 per cent to Rs.8.28 crore during the quarter. Overall operating expenses increased 40 per cent to Rs 139 crore while interest outgo soared 20 per cent. The company has provided for higher taxation this quarter at Rs 4.16 crore from just Rs 1.10 crore a year ago. Depreciation provisioning inched up 4 per cent.

Tantia Constructions clinched an order worth Rs. 179.93 crore from Rail Vikas Nigam for designing and constructing PSC viaduct, embankment and stations including E&M works in connection with the extension of the metro railway line of Noapara-Baranagar-Dakshineswar of the Kolkata Metro. Recently, it bagged an order worth Rs. 24.11 crore from Eastern Railway for construction of a steel structural shed with foundation, building, path-way, drains, heavy duty flooring, pits, washing apron and other ancillary works at Liluah workshop.

As of February, the order book of the company stood at Rs 2,800 crore.

3. UB Engineering profit declines 70% despite rise in income

UB Engineering's net profit declined 70 per cent to Rs 2.06 crore in the December 2010 quarter from Rs 7.05 crore in the same quarter a year ago. The flagship company of UB Group's engineering business posted a modest rise of six per cent in its total income at Rs 107.04 crore.

In December, the company secured a Rs.10.77 crore worth order of Power Cycle Piping Package for Unit 2 of 2 x 600 mw North Chennai TPS, Stage II from Bharat Heavy Electricals. In the same month, the firm also bagged an order worth Rs. 20 crore for structural construction work and equipment erection work for various expansion projects of Usha Martin of Jamshedpur.

In November, it had bagged an order worth Rs 22.34 crore from UP Power Transmission Corp for constructing 132 KV substations at Kaithi and Garwara on turnkey basis. At the beginning of the quarter, UB Engineering secured an order worth Rs 38.12 crore from Roberts & Schaefer Engineers (India) for structural Supply, fabrication and erection work at Adani Mormugao Port coal handling Plant.