Schneider

Special Report

Will the Industry Bottom Out?

December 2010

The June-September 2010 has been the worst quarter for construction industry. Prolonged monsoon and heavy precipitation have impacted operations of infrastructure projects while governments, both at Centre and states, were slow in awarding new contracts, analyses Nitin Madkaikar, Economist at FIRST Infocentre.

Prolonged and heavy monsoon dogged the construction activity in the quarter ended September 2010. Further, the government’s indecision, both at the Centre and states, on infrastructure projects impacted overall performance of construction companies.

On the operation front, higher input costs and interest expenses deflated margins. June-September is usually a low key quarter for the construction industry and accounts for just 22 per cent of the industry’s annual sales as most operations are affected by rains.

This quarter was unassumingly poor for the construction industry. Results of 46 construction companies for the June-September 2010-11, indicate that revenues grew by a mere 6.6 per cent over the same quarter of 2009-10. In the same steam, net profits plunged 15 per cent. Quantitatively, netting out the price inflation in major inputs like cement and steel, the real revenue growth works out to a negligible 3 per cent.

Last year, the same quarter had posted 18 per cent growth in revenues and 29 per cent jump in net profit. That quarter, was undoubtedly plagued with global economic recession and possibly government’s stimulus package had provided respite to construction activity.

Majority of orders under execution were booked in 2009-10 were mostly in second half and particularly in the March 2010 quarter. Order inflows are likely to be muted in Q2 FY11 due to sluggish progress in power capacity additions and NHAI’s awarding of road projects. While the first quarter (ending June 2010) was benign in terms of lower input costs and interest expenses, the same has apparently reversed in Q2, thanks to rally in commodity prices particularly steel and cement due to the weak dollar and general bias towards tightening of interest rates in India.

How the top ten performed?

L&T’s net profit rises 32 per cent
Engineering and construction major, Larsen and Toubro reported a 32 per cent rise in net profits at Rs 765 crore for the quarter, compared to Rs 580 crore in the previous corresponding quarter. The top line increased 18 per cent to Rs 9,342 crore, while the order book grew 11 per cent. Thus, the total order booked in the first six months stood at Rs 115,393 crore, up 29 per cent from the same period of 2009-10.
For the main breadwinner for the company, engineering and construction segment, sales grew 18 per cent to Rs 7,861 crore, while that from the machinery and industrial products rose 37 per cent to Rs 681 crore. Earnings per share went up from Rs 9.90 in the previous corresponding quarter to Rs 12.65 in the three-month period ended September 2010.
L&T is hopeful of more orders from a host of sectors, but higher inflationary trends are a major challenge. It, however, believes that revenue growth would be sustained in the near-to-medium term.

Jaiprakash Associates’ construction revenue grows 49 per cent
Gross revenue of the Jaiprakash Associates registered an increase of 63 per cent at Rs 3,017 crore for the quarter ended September 2010. This included Rs 1,570 crore from construction business, which posted an increase of 49 per cent. The consolidated expenses (excluding interest and depreciation) increased 69 per cent primarily on account of increase in turnover and higher input costs. Gross profits from construction business jumped 80 per cent to Rs 327 crore.
During the quarter FCCBs aggregating €25,00,000 [out of total FCCB-II of €165 million due 2013] were converted into 1,798,549 equity shares of Rs 2 each at a predetermined price of Rs 74.5031 per share, thereby increasing the paid up share capital by Rs 35,97,098 and securities premium by Rs 130,400,378.

Nagarjuna Construction net profit up just 5 per cent
Nagarjuna Construction achieved a turnover of Rs 1,201 crore (excluding other income) for the Q2 of 2010-11 as against Rs 1,067 crore in the corresponding quarter of the previous year. Thus it registered a growth of 13 per cent over the previous period. The company reported a net profit of Rs 45.98 crore which was just 5 per cent higher than the net profits of same quarter of 2009-10. The slower increase in net profit reflects the 32 percent increase in raw material costs and 45 per cent rise in employee expenses. While tax provision rose 38 per cent, the company provided 30 per cent increase in depreciation.
On a consolidation basis, the company has reported a turnover of Rs 1,512 crore, registering a growth of 7 per cent over the previous period. The company reported a net profit of Rs 63.48 crore, growing by 25 per cent. The company’s EPS stood at Rs 2.47 as against Rs 1.98 in the corresponding quarter of the previous year. Overall, revenue and PAT are above market estimates.
During the first six month of 2010-11, the company secured orders worth Rs 3,495 crore and the order book stood at Rs 16,075 crore as at the end of the quarter.

Gammon India profit hit by rising expenses
Gammon India’s Q2 bottom line declined 45 per cent to Rs 24.01 crore while top line rose 25 per cent at Rs 1,180.66 crore. The fall in net profits was due to 41 per cent increase in other expenses and 35 per cent rise in staff expenses. High cost of borrowing too impacted bottom line of the company. Interest outgo increased 45 per cent at Rs 42.70 crore for the company. Although tax provision was lower this quarter, depreciation increased 29 per cent.

Lanco net hit by high interest depreciation charge
Lanco Infratech reported (standalone) net profit of Rs 45.79 crore in Q2 of 2010-11 as against Rs 127.38 crore last year, implying a sharp decline of 64 per cent. This was despite the company provisioning a lower amount for tax. Sales too declined 26 per cent to Rs 1,095 crore. On the expenses side, interest outgo zoomed 88 per cent to Rs 88.13 crore. According to J Suresh Kumar, CFO of Lanco Infra, since the company follows an accelerated depreciation policy, it takes a charge of almost 14.5 percent as against the normal norm of 5 per cent. This extra charge resulted in lower bottom-line, but the cash profits were pretty healthy in terms growth.

IVRCL Infrastructure’s disappointing numbers
The company reported disappointing numbers for Q2, much below the market’s expectations. The disappointment on the top line led to the higher-than-expected decline in the bottom-line. On the top line, the company posted 12 per cent fall due to loss of revenue on account of prolonged monsoon. The below-par performance on the top-line and operating fronts led to a staggering 52 per cent decline in net profits for the quarter.
The management has lowered its top line guidance of Rs 6,700 - 7,100 crore to Rs 6,500 crore, which implies growth rate of 47 per cent for the second half on the back of excellent execution track record and robust order book-to-sales ratio. In FY2011, all its old BOT projects would start generating revenues which would help fund its future investments.

Punj Lloyd’s lowest quarterly top line
Punj Lloyd has reported the lowest (standalone) quarterly sales number seen in the past 10 quarters in Q2 2010-11. The top line declined 43 per cent to Rs 1,052 crore while net profit stood negligible at Rs 1.25 crore down 97 per cent from Rs 41.88 crore in the same quarter last year. Although operating margins improved in this quarter (from 8.39 percent to 11.33 per cent), net profit margins took a severe beating due to higher outgo on interest and depreciation charges. However, as of November 1, 2010, it had a hefty order book of Rs 25,470 crore.
During the quarter, Punj Lloyd bagged the prestigious contract worth Rs 539 crore from GAIL for seven out of 10 spreads of gas pipeline from Dabhol to Bengaluru. Overseas, Dayim Punj Lloyd secured an order from Saudi Aramco for EPC of off site pipelines for the Yanbu’ Export Refinery in Saudi Arabia while PL Engineering signed an MOU with Nuvia India Pvt Ltd, subsidiary of Nuvia, a French major providing engineering and technical support for the nuclear power sector to offer nuclear engineering and support services.

Simplex Infrastructures’ flat top line
Simplex Infrastructure’s Q2 2010-11 revenues were up 2.6 per cent at Rs 1,051 crore while net profits declined 4 per cent to Rs 26.87 crore. Revenues were impacted by a 54 per cent decline in overseas revenues while domestic revenues grew 23 per cent. On the expenses front, although interest costs were stable, it was a cause of concern due to rising debt level (up 10.5 per cent during first six months of 2010-11). Increase in working capital cycle from 103 days in 2009-10 to 124 days now had necessitated the higher borrowings.
Order inflow was quite strong at Rs 2,230 crore helped by Rs 500 crore order for its captive BOT road project. In which it has a 26 per cent stake. The company expects new orders will be driven by the power, urban infrastructure, building, industrial and road sectors.

HCC’s rising interest expenses dents earnings
HCC’s Q2 2010-11 revenue increased 13 per cent to Rs 885 crore while net profits jumped 120 per cent to Rs 12.14 crore during the quarter. However, the overall results were as expected by the markets, but profits were way behind. The under-performance on the profitability front is being attributed to higher than expected interest expenses. Operations were impacted due to various reasons including slow decision-making by government in states and Centre on various infrastructure projects. In case of Andhra Pradesh, the state government had listed a series of projects in water and irrigation on which the progress remained slow. Further, heavy and prolonged monsoon impacted execution. Interest was high due to intake of a few high value orders like NH-34 road package of Rs 2,800 crore, Kishanganga HEP of Rs 25,700 crore, which resulted in increased advances attached with high interest rates. Debt also increased from Rs 2,500 crore as of March 2010 to Rs 3,370 crore as of September 2010.
Going ahead, execution is expected to pick up on the back of a strong order book of Rs 19,735 crore and ramp up on two key orders worth Rs 5,585 crore. Also, listing of Lavasa and improvement in working capital management would push HCC’s performance.

Era Infra Engineering’s flat performance
Era Infra reported flat but a slightly subdued performance during Q2 2010-11. Both revenues and net profit were down 3 per cent at Rs 810 crore and Rs 61.79 crore respectively. Operational efficiency was the only saving grace as margins improved from 19.26 per cent last year to 22.16 per cent this quarter, as there was no trading income booked for the second consecutive quarter, leading to savings in direct expenses. Consequently, operating profits for the period surged 12 per cent to Rs 180 crore. Nevertheless, bottom line was impacted by higher interest and depreciation charges.
During the first half of 2010-11, the company bagged a major order worth Rs 1,720 crore of Bareilly Sitapur road BOT project on NH24, taking its total asset ownership portfolio to Rs 5,100 across six projects.