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Execution hurdles limit the revenue growth: In Q4FY2011 the revenue for the engineering, procurement and construction (EPC) companies (ex Punj Lloyd and Ramky InfraStructure [Ramky]) in the Sharekhan universe grew by a mere 6.5% as against our expectation of a 17% growth year on year (YoY). Though we had factored in some execution hurdles, all the players except Pratibha Industries (Pratibha) faced much severe execution slowdown on account of lack of timely approvals and clearances or delay in land acquisition at the project level which resulted in poor revenue bookings for the quarter. In fact, NCC (NCC) and C&C Constructions (C&C) posted a decline in their revenue. Pratibha, on the other hand, surpassed our estimate and grew by 30% YoY. Even Ramky surpassed our growth expectation and registered a 27% growth quarter on quarter (QoQ; year-on-year [Y-o-Y] comparison not available). Punj Lloyd, after six quarters of decline, reported a 29% Y-o-Y growth in the fourth quarter of FY2011, mainly on account of a low base. On the asset developers front, both IRB Infrastructure Developers (IRB) and ILFS Transportation Networks Ltd (ITNL) reported a good set of numbers. IRB grew by 53% YoY (much in line with expectation) on account of a robust 85% growth YoY in its EPC division whereas ITNL put on a good show registering a splendid 126% growth QoQ (yearly figures are not available) due to a 200% increase in the construction income of the company on account of booking revenue in the fourth quarter on new projects that had commenced construction earlier but that could not cross the threshold limit in the third quarter.
Even margin pressure was faced by a few: A few of the companies in our universe faced margin pressure which pulled down the overall margin for the EPC space (ex Punj Lloyd and Ramky) by 93 basis points as against our expectation of a flat margin. IVRCL, NCC and Simplex Infrastructure (Simplex) all of which faced major execution hurdles saw a dip in their margins while Pratibha?s margin got affected due to the poor performance of its pipe manufacturing division. Gayatri Infrastructure (Gayatri), Unity Infraprojects and C&C saw their margin expand in the range of 100-150 basis points. Even Ramky saw a 140-basis-point improvement in its margin sequentially. Punj Lloyd continued to see a lower single-digit margin at 3.4%, which was flat sequentially but better when compared to negative 25% in the same quarter of the previous year. For asset developers, IRB and ITNL?s margins contracted sharply by 500 basis points YoY and 390 basis points sequentially respectively because of an increase in the share of revenues from their respective low-margin EPC divisions).
Interest cost plays further spoil sport: The interest burden for the quarter rose by 55.6% for our EPC universe (ex Punj and Ramky) as against our expectation of 44%. The increase could be attributed mainly to a surge in the working capital requirement on account of poor execution along with the rising interest rates that pushed up the interest burden for these companies. Pratibha was the only company that saw its interest cost go down by about 14% YoY since it repaid its high cost debt of about Rs50 crore from the qualified institutional placement (QIP) proceeds.
As a result net profit came under severe pressure: The lower revenue growth along with the surge in the interest cost left little room for growth at the net profit level and the net profit shrank by 18.6% YoY for our EPC universe (ex Punj Lloyd and Ramky) as against our expectation of a 7% growth. In fact, IVRCL, NCC and Simplex reported a decline in the range of 20-50%. Ramky, on the other hand, continued with its stellar performance delivering a 44% growth sequentially. Punj Lloyd was a surprise as it reported a net profit of about Rs18 crore as against our expectation of a loss of Rs59 crore. On the asset developer side, ITNL saw its profit surge by 158% led by a revenue growth and a lower tax outgo. IRB, on the other hand, saw a flatter growth due to tax outgo at the rate of 24% as compared to a tax write-back in the same quarter of the previous year.
Outlook: For most of the companies in our universe, we have downgraded our estimates for FY2012 and FY2013 to factor in the delay in execution and the interest burden that was higher than our previous estimates. However, with the state elections now over, we expect the order inflows to pick up once again. We expect traction especially in the road and highway segment as the National Highways Authority of India (NHAI) plans to award about 7,300km over the next one year. Further, we expect the execution of projects to improve in FY2012 which might reduce the working capital pressure going ahead. This, in turn, will moderate the interest burden a little since the interest rates will continue to be high in FY2012. Given the recent steep correction in the sector and its underperformance, the valuations of the major companies in this space have turned very attractive. We like ITNL and IRB among the larger players given their strong financials and track record in the road build-operate-transfer (BOT) space. We like Pratibha among the smaller players.
