The two have been able to keep a check on both fixed and variable costs, leading to improvement in the margins. Also, unlike the Street’s fear of a sharp drop in profits, both have done well. On an average, analysts had expected IRB to report a nine-plus per cent fall in net profit, while ITNL’s was estimated to fall by a little over 12 per cent. Notably, since the execution and order book remains strong, analysts believe both have good near-term prospects.
“We have a ‘buy’ rating on both companies. The IRB valuations are relatively more attractive,” said Amit Srivastava, analyst with Nirmal Bang Equities.
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After its results announcement on Thursday, ITNL’s share price spiked 10.5 per cent to close at Rs 120.20 on the BSE exchange. In the June quarter, the company reported a 2.3 per cent year-on-year rise in net profit to Rs 125 crore, despite a 29 per cent surge in interest cost. This is in sharp contrast with IRB, which saw its profit declining five per cent because of higher interest cost. ITNL’s better show can be attributed to higher operating profit margins, which jumped almost 500 basis points to 37 per cent, due to higher contribution from the engineering consultancy business.
“Margins are up because of higher income from our engineering business and lower income from construction (business), due to an early monsoon. But we intend to maintain our margins at around 32 per cent,” said Mukund Sapre, executive director, ITNL.
Analysts were expecting a 12-13 per cent fall in profits at ITNL. Meanwhile, the impact of a slowing in the traffic is reflecting in the revenue growth of both companies. Due to this, ITNL reported a decline in its revenue for the June quarter by eight per cent to Rs 1,451 crore, while IRB’s top line grew by just five per cent. The revenue decline for ITNL was consequent to the contraction in construction revenue, which declined 15 per cent compared to the year ago quarter. This is reasonably higher compared to the 3.7 per cent decline in construction revenue in the case of IRB Infra. ITNL, however, hopes to see a pick-up in revenue of the construction business in the coming quarters. Thankfully, the company is sitting on an order book of Rs 13,855 crore, as against one of Rs 7,663 crore, which points to good medium-term visibility in the business.
The June quarter performance should provide some respite to the stocks of the two companies, given their recent decline, as well as underperformance versus broader markets. Larger gains, though, might come only after clear signs of a pick-up in economic activity and fall in interest rates.