Earnings preview: Construction firms may see muted profit growth

The financial performance of most construction and BOT (build, operate and transfer) companies is likely to be muted in the quarter to December 31, 2012.

Delays in payment from clients have hit execution plans of most construction companies, while scarcity of funds, lack of new projects and an inability to secure financial closure of BOT projects, all signal to a subdued growth in revenues for the December quarter.

Construction companies are expected to record a revenue growth of 12-13% and a net profit growth of 3-4% in the December quarter, compared with the year-ago period. The dismal growth in profits is primarily due to higher interest outgo. BOT companies should clock a revenue growth of 17-30% and a fall in net profit growth in the December quarter.

Over the past two quarters, construction companies have been battling delays in payment from their clients-—both private companies and the government agencies. Due to this securing additional cash for execution of projects has become tough for these companies.
Delays in clearances of projects due to land-related issues have also led to low revenue realisation. Hence, most of the companies are facing deterioration in the working capital front. Viewed against the backdrop of their high levels of debt, earnings growth of construction companies will be subdued in the December quarter.

The National Highway Authority of India, or NHAI, is expected to award 2,700 km of road work on an engineering, procurement and construction (EPC) basis in the next few months.

But there is bound to be stiff competition for these projects since orders from other sectors such as water infrastructure are few.

Mid- and small-cap companies such as Pratibha Industries, Supreme Infrastructure and J Kumar Infraprojects, with low levels of debt and superior execution capabilities are expected to bid aggressively for these projects.

For BOT companies, competition may be less aggressive this year than last year. According to estimates, the number of firms bidding for projects has come down to 10 from 25 in FY12.

One of the main reasons for this is most BOT companies are saddled with a sufficient number of road projects, of which most are yet to secure financial closure. Besides, most BOT companies are finding it difficult to raise funds through the equity route since there is a huge difference between the valuations they demand and the quotes put in by buyers such as private equity funds and financial institutions.

Banks are therefore very selective in lending to such construction companies. This means, companies that have secured financial closures for their existing projects and are placed better in terms of debt will face less competition in bidding.

The better placed companies include Sadbhav Engineering (with PE investors such as Xander/Norwest) and Ashoka Buildcon (with PE investor SBI-Macquarie), and IRB Infrastructure Developers. In the next four months NHAI is expected to award between 2,500 km and 3,000 km of road projects.