>CONSTRUCTION QUARTER 3 REVIEW: Macro headwinds changing, impact to be limited

■ Order inflows scenario improved: Engineering & Construction (E&C) companies which had seen a gradual downward shift in the order inflows since the last two quarters, have seen a healthy revival this quarter. Mining, Water and Road orders contributed majorly to the revival. Total orders announced in Q3FY12E for PL Universe are close to Rs309bn (Overall: Rs400bn) which was up by 39% QoQ and 19% YoY. However, if one excludes NCC’s internal power order of Rs52bn then the growth would be 15% QoQ and flat YoY. Orders from the Gulf countries in the petrochemical segment have cooled off in Q3FY12 to Rs15-16bn from close to Rs67bn in Q2FY12. The total order inflow till now has been close to Rs115bn in Q4FY12.


■ Earnings in Q3, though, have not shown improvement: Sales growth stood at 17% YoY and higher by 20% QoQ (as Q2 is seasonally weak). However the ‘C’ segment was down by 9.1% YoY, where IVRCL’s sales were down by 15.3% YoY, whereas the ‘E’ segment stole the show by a 24% growth YoY and 20.9% QoQ. Sales growth for ‘C’ segment was mainly arrested by working capital constraints faced by mid-sized players. EBITDA grew by 2.8% YoY and flat QoQ, where barring L&T & EIL, all the players were in the negative territory. EBITDA margins (down by 120bps YoY) were down for all the companies which clearly shows the competitiveness and lower execution/higher fixed overheads is taking toll on the margins. Interest continues to haunt the companies growing by 30-40% YoY and 5-10% QoQ. Interest as a % to sales (excl. L&T & EIL) stood marginally lower QoQ at 5.2%. Overall, PAT grew by 8.1% YoY, mainly arrested by losses in Punj Llyod, NCC and HCC.


■ Risk reward ratio still not predictable: Markets have risen since the last quarter, particularly the Infrastructure sector, where the jump has been substantial, mainly in the last 30 days. However, the balance sheet profile, ROEs and moreover corporate governance issues still continue to haunt the prospects, which don’t make our view any positive on the fundamental side. With the run up to the 2014 elections and fresh orders from the 12th Plan, we expect a sharp revival in order inflows. Investment opportunities pegged at 9-10% of the GDP could bring out new projects worth US$1trn over 2012-2017, doubling the 11th plan estimates. However, we think that the onus will again fall on the private sector and with stretched balance sheets and liquidity crunch, only few players will be able to cash in on the opportunities. Only a potential dilution at the parent level and SPVs will bring some hope to ease the debt trap and working capital deadlock. However, due to overall improvement in the macro economic environment, there has been a re-rating in the sector. Our sector stance remains ‘Neutral’.


RISH TRADER