High interest rates may hit earnings of construction firms

Engineering and construction companies such as Larsen & Toubro (L&T) and Gammon Infrastructure may see a pressure on their earnings as working capital funds becomes expensive owing to higher interest rates, say analysts and the firms.

L&T and Gammon’s interest costs have jumped more than three-fold in the first six months of the current financial year, which could hurt profit before tax (PBT), besides a drop in order growth. “Sales growth is slowing down and if interest rates continue to remain high, earnings would get affected,” said Amar Ambani, vice-president of India Infoline, a financial services provider.

Gammon saw its PBT decline by 66 per cent in the quarter ended September as interest costs increased by around 300 per cent, while L&T’s PBT rose by 26 per cent to Rs 690 crore in the period. Large companies like L&T have able to handle the higher interest costs better as there sales growth has been robust till now.

Apart from analysts, companies too are concerned about the rising interest costs. “The rates at which banks are lending are as high as 13.25 per cent. Debt funding at these level is a serious issue and in some cases could make certain projects unviable,” said Virendra Maheshkar, chairman and managing director of IRB Infrastructure Developers.

Infrastructure companies have been urging the government to take urgent measures to prune interest rates.
 

UNDER PRESSURE
Company	Interest costs		%  change
	H1 FY08*	H1 FY09*
Larsen & Toubro	107.24	28.96	270.3
A B B	7.51	5.44	38.05
Crompton Greaves	6.1	12.55	-51.39
Bharat Electron	7.1	0.17	4076.47
Thermax	1.03	0.57	80.7
Areva T&D	13.29	2.79	376.34
Usha Martin	61.46	36.77	67.15
Gammon India	27.6	7.38	273.98
Elecon Engg	18.36	10.1	81.78
* H1 figures in Rs crore             Source: Companies

“Interest rates and liquidity are to be watched out for in the future,’’ said Parvez Umrigar, managing director, Gammon Infrastructure.Apart from rising interest cost, engineering and construction companies may also see a slower growth in orders as the interest cost and impending elections force several companies to defer projects.

“With the elections approaching, there could also be a slowdown in order inflows but most of the projects underway should continue,” Umrigar said.

The order books of most infrastructure-related companies have been growing at a brisk pace. L&T registered a 77 per cent growth in orders worth Rs 10,434 crore in second quarter of FY09, while Gammon had a total order book of Rs 9,387 crore in the same period. Power equipment firm Crompton too increased its order book by 72 per cent. Civil contractor Unity Infraprojects has Rs 3,200 crore worth of orders.