Saturday, January 7, 2012

>Infrastructure Project Status Analysis – Q3FY12 (Dec’11 Ending)

Trend in investment capex reflects stress in macro environment

 Drop in new projects and announcements confirm our cautious view on the sector – Q3FY12 CMIE project data backs our view made in Q2FY12 note (link) that Indian construction industry was witnessing a slowdown in activity with ”New Projects” at Rs1,878bn, lower by 28% QoQ and 39% YoY. Announcements for the quarter at Rs55,413bn, showed a decline of 16% QoQ and 5% YoY. However, shelved projects for the quarter at Rs358bn, rose 70% YoY but declined 50% QoQ.

 Quarterly average of completed projects drops.– One point to note from the analysis is that the quarterly average completion of projects stood at Rs284bn a fall of 53% QoQ and 50% YoY, lowering comfort on revenue growth capability of construction companies. Unless this part of the investment capex picks-up, it is difficult to take a positive view on the growth prospects for the sector.

 Reasons for declining trend not new to investors - Macro headwinds (domestic and overseas), policy hurdles, fuel (coal) issues for power, delays in environmental clearances, land acquisition and high interest rates among others, have impacted the Indian investment capex. This can also be ascertained from the cautious to negative comments of industry players. The key triggers would be momentum in order-tendering of sectors (ex-Highways), stable government, and regulatory policies among others.

■ No comfort on revenue generation capacity of construction companies – From the investment capex environment analyzed above, we believe, near term challenges remain for growth of construction companies as it is the most linked sector. We too remain cautious on the revenue generating capacity of the construction sector as lower order-tendering and execution visibility pose risks to profitable growth. Our estimates are below consensus and we believe that near term pain (for at least 6months) will persist for the sector.

 Maintain cautious stance on the construction sector with no triggers in the up-move of investment capex cycle - We are cautious on the impact of macro concerns on construction companies as it is directly related to the investment capex in India. We are evaluating revision in estimates of coverage companies &; ratings (post correction in stock prices) and this will be published in our Q3FY12 preview note.

To read the full report: INFRA INSIGHTS