Infrastructure players who stole the Q2FY18 show
Our analysis of results of infrastructure/construction companies largely brings out three key trends – improvement in execution that drove topline performance and resulted in benefits of operating leverage, lower financial leverage, and finally, a better order book visibility. It is, therefore, worth taking a note of the winners in the space.
Despite hiccups due to implementation of the GST and impact of monsoon, most of the companies reported improved execution. On average, there was a 4 percent increase in the sales turnover of the 14 mid and small size construction companies that reported results so far. The biggest movers were Dilip Buildcon, Sadbhav Infra and Ramky Infra.
Dilip Buildcon, which is sitting on huge order book of close to Rs 14,000 crore or 2.3 times its revenues, reported strong 72.6 growth in revenues as a result of faster execution, which helped in boosting operating margins by 106 basis points to close to 18 percent, one of the highest margins in the industry.
Ramky Infra, which reported a net profit of Rs 3.3 crore as against a loss of Rs 41.5 crore in corresponding quarter last year, also benefited because of higher execution kicking in operating leverage.
However, the scenario was completely opposite for NCC, whose profits declined by a steep 60 percent as a result of 33 percent decline in net sales. While explaining the steep decline, the company in its statement said, “the major reason for the steep decline of turnover in second quarter is due to GST issues. The supplies from vendors were affected due to GST implementation, besides the delay in billing process and payments by clients due to lack of clarity as majority of the clients are Government clients.”
Nevertheless, except few companies all have managed well as far as execution is concerned. Out of 14 companies that we analysed only 4 reported decline in sales and most of them reported improvement in the margins as a result of operating leverage. For instance, KNR Construction saw 50 percent jump in earning before interest, tax, depreciation and amortisation (EBITDA) to Rs 82.5 crore on a revenue growth of mere 5 percent in Q2FY18. Excluding IRB Infra, the companies that we analysed have seen 11 percent jump in EBITDA.
Reduction in working capital and debt
What is interesting to note is that 10 of these 14 companies have reported decline in interest cost. That’s good sign indicating that companies are able to gradually improve on their financial leverage. Our interactions with the companies suggest that pickup in execution and improvement in the payment cycles is helping in generating more cash thus reducing their reliance on the working capital debt.
Companies like IRB Infra have successfully transferred substantial amount of their debt through the InvIT helping company to report 31 percent decline in its interest cost. This was helpful as despite 13 percent year-on-year (YoY) drop in IRB’s sales, it reported 65 percent increase in profits. IRB Infra’s sales were hit largely on account of muted growth in its construction revenues because of the monsoon and impact of GST on its toll revenues.
Sadbhav Engineering, whose debt to equity stood at 1.1 times, is also cutting down its debt aggressively. During first half of current financial year, it reduced debt by Rs 200 crore to Rs 1,420 crore. This helped in 3 percent reduction interest cost adding to profitability. Its revenue grew by 13 percent but because of the lower cost, better operating efficiency and tax credit the company managed to grow profits by whopping 80 percent.
Like Sadbhav, most of the companies in the transport segment witnessed good traction whereas the diversified players or companies which presence in some of the sticky segments like real estate, buildings, hydrocarbon, industrial and others are yet to show healthy growth.
Companies like Punj Lloyd continues to demonstrate financial stress with the interest cost going up by 23 percent to Rs 271 crore in Q2FY18. Higher cost on a muted revenue growth (mere 1 percent revenue growth) widened its losses further to Rs 248 crore as against a loss of Rs 226 crore in the corresponding quarter last year.
Order book: Revenue visibility improving
Most of the companies in the sector are sitting on order book of close to 2.5 times their revenues, which provides good revenue visibility. Companies like NCC, which is a diversified player has got highest visibility with the order book of close to Rs 28,100 crore or almost 3.6 times it revenues. However, one needs to see if the company can improve execution in the coming months.
For others, largely in the road segment, order pipeline is strong and companies like Dilip Buildcon, IRB Infra, KNR, Sadbhav Engineering, which have balance sheet strength and execution capabilities should continue to deliver good performance.