 "Urban infra starting to shimmer")
If road contracts were the biggest beneficiaries of government spending in 2015-16, urban infrastructure also gained. The latter encompasses segments such as housing, schools, hospitals and waste management, among others.
A recent report by Emkay Global Financial Services says projects awarded in segments such as water supply and housing rose 51-64 per cent over a year before in 2015-16. Compared to the traction seen in roadways contracts where orders worth nearly Rs 50,000 crore were awarded (up 108 per cent year-on-year), order awards in urban infra (Rs 43,000 crore) were close behind. Orders worth Rs 12,000 crore and Rs 18,000 crore were awarded in water contracts and in housing and government buildings, respectively. Those in hospitals and other community services were down 39 per cent but contracts of Rs 8,000 crore were awarded.
Given the necessity for India to strengthen its urban infrastructure and the government focus on 'smart cities', expect the amount of orders to increase. Going by the healthy order flows, ignoring this space might not be wise. For instance, Ahluwalia Contracts and J Kumar Infra registered order inflow of Rs 200 crore and Rs 133 crore, respectively, in the March quarter itself, after big orders they got in the December 2015 quarter. NCC and ITD Cementation, with 17 per cent and 20 per cent exposure to this sector, also stand to gain.
However, all this might take a few quarters to reflect in earnings of these companies, given the systemic problem of slow execution. In the case of J Kumar, its December quarter revenue at Rs 310 crore was flat year-on-year due to delay in execution. Likewise, for Simplex, analysts at Karvy Broking reduced their earnings per share estimate by 36 per cent for FY17, due to execution overhangs caused by a stressed working capital cycle (224 days in the quarter. Even then, the lowered estimates still indicate that net profits of these companies will grow at a robust pace in FY17.
High leverage is another issue for this sector but there is visible progress. Still, investors will need to keep an eye on the success of measures taken to cut debt levels. HDFC Securities says the ongoing asset monetisation of NCC should aid growth. In the case of J Kumar, it says funds raised though qualified institutional placement (QIP) had helped pare debt. ITD Cementation claims settlements with state governments for projects worth Rs 100 crore and QIP proceeds should help. For Simplex, high debt (estimated at Rs 930 crore in FY16) could remain a stress, as the average borrowing cost stands stiff at 10.88 per cent. For others, it has moderated to nine per cent.
J Kumar ran into new trouble, with the likelihood of the civic body in Mumbai, the BMC, blacklisting it. J Kumar’s management has said such a step would not impact its order book significantly, as BMC accounts for a tenth of its orders. And, that BMC’s action will not affect the Mumbai Metro project, where J Kumar is understood to be among the lowest bidder for projects worth Rs 5,000 crore. However, its stock has fallen 17 per cent since the news came out on April 25.
"The news impacted J Kumar's stock sentimentally", says Adhidev Chattopadhyay of Elara Capital. But he insists that as orders from BMC are not material and it would not have an implication on the Mumbai Metro project there is not much to worry.
A recent report by Emkay Global Financial Services says projects awarded in segments such as water supply and housing rose 51-64 per cent over a year before in 2015-16. Compared to the traction seen in roadways contracts where orders worth nearly Rs 50,000 crore were awarded (up 108 per cent year-on-year), order awards in urban infra (Rs 43,000 crore) were close behind. Orders worth Rs 12,000 crore and Rs 18,000 crore were awarded in water contracts and in housing and government buildings, respectively. Those in hospitals and other community services were down 39 per cent but contracts of Rs 8,000 crore were awarded.
Read more from our special coverage on "INFRASTRUCTURE"
Given the necessity for India to strengthen its urban infrastructure and the government focus on 'smart cities', expect the amount of orders to increase. Going by the healthy order flows, ignoring this space might not be wise. For instance, Ahluwalia Contracts and J Kumar Infra registered order inflow of Rs 200 crore and Rs 133 crore, respectively, in the March quarter itself, after big orders they got in the December 2015 quarter. NCC and ITD Cementation, with 17 per cent and 20 per cent exposure to this sector, also stand to gain.
However, all this might take a few quarters to reflect in earnings of these companies, given the systemic problem of slow execution. In the case of J Kumar, its December quarter revenue at Rs 310 crore was flat year-on-year due to delay in execution. Likewise, for Simplex, analysts at Karvy Broking reduced their earnings per share estimate by 36 per cent for FY17, due to execution overhangs caused by a stressed working capital cycle (224 days in the quarter. Even then, the lowered estimates still indicate that net profits of these companies will grow at a robust pace in FY17.
High leverage is another issue for this sector but there is visible progress. Still, investors will need to keep an eye on the success of measures taken to cut debt levels. HDFC Securities says the ongoing asset monetisation of NCC should aid growth. In the case of J Kumar, it says funds raised though qualified institutional placement (QIP) had helped pare debt. ITD Cementation claims settlements with state governments for projects worth Rs 100 crore and QIP proceeds should help. For Simplex, high debt (estimated at Rs 930 crore in FY16) could remain a stress, as the average borrowing cost stands stiff at 10.88 per cent. For others, it has moderated to nine per cent.
J Kumar ran into new trouble, with the likelihood of the civic body in Mumbai, the BMC, blacklisting it. J Kumar’s management has said such a step would not impact its order book significantly, as BMC accounts for a tenth of its orders. And, that BMC’s action will not affect the Mumbai Metro project, where J Kumar is understood to be among the lowest bidder for projects worth Rs 5,000 crore. However, its stock has fallen 17 per cent since the news came out on April 25.
"The news impacted J Kumar's stock sentimentally", says Adhidev Chattopadhyay of Elara Capital. But he insists that as orders from BMC are not material and it would not have an implication on the Mumbai Metro project there is not much to worry.