In Recovery Mode

The quarter ended March 2011 witnessed healthy growth in net profit but saw the lowest revenue growth in the fiscal. FIRST Infocentre aggregates... As execution gained momentum during the quarter ended March 2011, revenue of the engineering, procurement and construction (EPC) companies (34 companies under review) grew by 17 per cent YoY, and profits jumped to 15 per cent. During the first three quarters of 2010-11, the performance of EPC companies' was dismal on account of the prolonged monsoon and delay in awarding of infrastructure projects by the government, both at the centre and in the states. During this period, poor execution had resulted in a surge in working capital requirement across the construction industry. This, in turn, resulted in higher borrowings, which, along with the rising interest rates, led to a surge in the interest burden on the EPC companies. However, the last quarter was much better out of the four in terms of interest outgo. Interest payment was up by just 1.4 per cent for the 34 companies under review. The low rise in interest outgo was largely due to the negative Rs 124 crore interest expenses of construction major Gammon India. The company included an accrual of a one-time interest income of Rs 182 crore from a subsidiary company based on contractual terms. The interest expenses could have been even lower if the financial results of larger borrowers had been available. These included NCC Ltd, IVRCL Infrastructure, Simplex Infrastructures Ltd, Lanco Infratech Ltd and Punj Lloyd Ltd. Their interest outgo during the first three quarters ended December 2010 aggregated Rs 823 crore as against the Rs 881 crore they had paid in the corresponding period of 2009-10. The other increasing financial cost was depreciation provision. During the quarter of March 2011, the provisioning increased by 62 per cent as against just 18 per cent in the first three quarters. During the quarter under review, operating expenses also increased by around 19 per cent more than neutralising the top line gains. Raw material cost surged by nearly 8 per cent, while employees' expenses were up by 28 per cent. Other expenses, forming a major chunk, also increased by 22 per cent. For the fiscal year 2010-11 as a whole, its revenue of 34 companies increased by close to 20 per cent, while net profits grew by just 5.2 per cent, thanks to the mere 0.6 per cent growth in profits during the first three quarters of the year. The Indian economy experienced a more balanced and positive growth in the 2010-11 fiscal with a solid recovery in agriculture and the continued good performance of industry and services, though there has been a deceleration in industrial growth in the second half of the year and a further deceleration in the last quarter of 2010-11. The Indian economy is estimated to have grown by 8.6 per cent during 2010-11. Agricultural growth was above trend, following a good monsoon. The index of industrial production (IIP), which grew by 10.4 per cent during the first half of 2010-11, moderated subsequently, bringing down the overall growth for 2010-11 to around 7.8 per cent. The main contributor to this decline was a deceleration in the capital goods sector. However, other indicators such as tax collection, corporate sales and earnings growth, credit off-take by industry (other than infrastructure) and export performance suggest that economic activity was strong across sectors. Sectoral deployment of bank credit data showed significant increases in credit flow to industry and services. Within industry, credit growth to infrastructure was robust. Within services, credit growth accelerated to commercial real estate and non-banking financial companies. Housing and vehicle loans recovered strongly in 2010-11. Looking ahead, order inflows are expected to pick up once again in the next three to four months with the central and state governments' emphasis on infrastructure development, especially in the road and highways segment. The National Highways Authority of India (NHAI) plans to award approximately 7,300 km over the next one year. Water and irrigation, urban infrastructure and power sectors are also expected to witness a surge in new orders, given the government's focus on infrastructure development. Further, projects execution will improve in 2011-12, which will reduce the working capital pressure. This, in turn, will moderate the interest burden a bit since the interest rates will continue to be high. Economic growth is expected to be moderate in 2011-12 compared to its pace in 2010-11. First, notwithstanding the preliminary indication of a normal monsoon by the India Meteorological Department during 2011, growth in agriculture is likely to revert to its trend growth from the higher base of last year. Second, the pace of industrial activity has been slowing down mainly due to the impact of past monetary policy actions and high input prices. These moderate but positive factors would pace up demand for the housing sector, thus giving impetus to construction activity.