The financial performance of companies in the infrastructure segment (construction, capital goods and power) is expected to disappoint in the January–March 2012 period, despite this historically being the busiest and most active quarter. The current trough valuation of around 14 times (average) 2012-13 estimated earnings already factors this in, analysts say.
The expected cut in interest rates at the Reserve Bank of India’s monetary policy review on Tuesday may not be steep enough for fuelling the growth in order inflows. Thus, the road ahead seems challenging. Says Nitin Arora, analyst, Angel Broking, “With no immediate signs of respite in sight for construction companies, the pain is expected to continue for some more time.”
Amit Mahawar, analyst, Edelweiss Securities, still avoids the generation equipment segment but believes ordering in transmission and distribution remains strong, though movement in raw materials, namely copper, aluminium and steel, is a key monitorable.
The other players in the capital goods space are suffering due to weak industrial activity and continued deferrals across infrastructural verticals. Adds Nalin Bhatt, analyst, Motilal Oswal Securities, “Power sector stocks have seen a significant de-rating in valuations due to concerns over fuel supply, project viability and state electricity boards’ financial health.” Till this continues, he prefers defensive bets like public sector units.
Sales growth
Sales growth of 30 companies (the top 10 in each of the above three segments) is expected to be tepid, led by capital goods and construction companies (excluding BHEL and L&T), despite a healthy order book position. Excluding BHEL, the sales growth of capital goods companies (34 per cent of universe sales) is expected to be a mere 1.6 per cent. Besides, issues related to the generation equipment segment, companies operating in power transmission and the distribution equipment sectors are also grappling with competition and those catering to private capex are hit by the slowdown.
So, too, is the case with the construction sector. Barring L&T, growth of the other construction companies is dismal at 1.8 per cent, due to a slowing in execution and the higher base of the same quarter last year for a few companies. However, this is unlikely to be the case in the power sector, where sales growth is expected to be better at 35 per cent (excluding NTPC), thanks to capacity additions by private companies.
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Margin pressure
The single-digit growth expected in overall operating profit would have slipped into the negative if growth in the power sector (46 per cent of the universe’s operating profit) would have been lower than the estimated 15 per cent. Range-bound coal prices that were impacted by the rupee movement and an improvement in the fuel situation are expected to aid the sector’s operational performance.
| WEAK OUTLOOK | ||||||||
| In Rscrore | Sales | % chg (y-o-y) | Operating profit | % chg (y-o-y) | OPM (%) | Chg (bps) | Net profit | % chg (y-o-y) |
| Construction | 35,055 | 10.0 | 5,048 | 7.6 | 14.4 | -29 | 2,172 | -7.1 |
| Capital Goods | 38,166 | 5.7 | 5,995 | -9.2 | 15.7 | -258 | 4,184 | -4.4 |
| Power | 38,865 | 20.0 | 9,375 | 15.0 | 18.2 | -114 | 4,620 | -0.3 |
| Aggregate (30 Cos) Key Stocks | 11.6 | 5.0 | -3.3 | |||||
| L&T | 18,195 | 18.3 | 2,493 | 6.5 | 13.7 | -151 | 1,597 | 3.9 |
| BHEL | 20,140 | 10.0 | 1,753 | -1.2 | 21.1 | -229 | 1,174 | 7.6 |
| NTPC | 16,718 | 4.6 | 4,016 | -6.1 | 24.0 | -275 | 2,664 | -4.2 |
| For quarter ended March 2012 Source: Analyst reports | ||||||||
Companies in the capital goods space are expected to witness the biggest decline of 258 basis points in operating profit margin. BHEL,which forms 70.8 per cent of the segment’s operating profit, faces competition and the other companies are going through extremely tough times, leading to an unfavourable revenue mix.
The construction sector, however, provides relief on this front, as overall operating profit margin is expected to slip by only 30 bps, despite L&T’s decline of 151 bps. Higher depreciation and interest charges are likely to eat into the net profit of almost all companies. Analysts expect NTPC and BHEL to report a decline of 150 bps and 30 bps, respectively though others may report a bigger drop of 240 bps.
Outlook
Most companies are expected to end FY12 on a lacklustre note and FY13 offers little hope, too. Order inflow and its growth are likely to remain muted, except in a few sectors such as roads and power transmision. Manish Sarawagi from Edelweiss Securities does not see any perceptible change in order inflows from other segments.
Says Dhirendra Tiwari from Motilal Oswal Securities, “High capital costs are holding back investment and the capital goods index continues to remain volatile, with a negative bias. In the power sector, the fuel supply issue continues to derail capacity addition programmes and, in turn, performance of companies. Hence, stock prices and, in turn, valuation of infrastructure companies across the board will remain depressed.”