December 2012 quarter will be yet another flop show from the infrastructure sector. Revenue growth is likely to be muted (single digits or early double digit) owing to weak execution. However, construction sector is expected to see an improvement but sequentially after execution picks up post monsoon.
However, power transmission companies are expected to continue reporting good topline growth led by pick up in order execution. Though operating profit margins is expected to remain stable to declining, net profit margin across the board is likely to suffer due to stretched working capital cycle and higher interest rates.
Order inflows have remained weak for most sectors mainly power equipment and roads. “The current crisis in power sector has slowed down order inflow for boiler-turbine-generator (BTG) and balance of plant players. BHEL and BGR have not announced any major orders in Q3,” says Dhirendra Tiwari, analyst, Antique Stock Broking. Awarding activity by NHAI has also been weak. Against the target of 8,500 kilometer, it has awarded only roughly 2,500 kilometer till date in FY13. Says IIFL in its preview note, “Industrial orders have also remained weak during the quarter with no recovery in the corporate capex impacted by sluggish demand outlook.” Significant drop in order inflow has resulted into slower growth in order backlog across the industry, it adds. This will continue to affect financial performance in the short to medium term.
However, there is hope. During the quarter, the government formed the "Cabinet Committee on Investments" earlier coined as the National Investment Board to reduce administrative hassles in award of large size projects and to expedite projects of over Rs 1000 crore in unit size that are delayed due to multiplicity of approvals/clearances. NIB, once set up, would provide a single window clearance to large sized projects which are stuck up and would result in improving order inflow scenario for the entire sector. Analysts have given thumbs up to the move, though how effective the CCI would be in reversing the downswing in investments remains to be seen.
But analysts continue to adopt a ‘wait and watch’ strategy especially for capital goods companies as government’s efforts to revive the infrastructure sector is not yet seen and RBI’s rate cuts (if any) is expected to be limited. Says Sanjeev Zarbade, analyst, Kotak Securities, “Virtual standstill continues in finalization of power generation projects. Concerns still prevail over slow pace of decision making at government level, delay in land acquisition and emerging resource crunch (Coal and Gas). We retain our cautious view on the capital goods space.” Adds Amit Mahawar, analyst, Edelweiss Securities, “The government’s recent pro-reforms initiative has so far been unsuccessful in improving capex on the ground. Also, we believe, it is a matter of time before RBI also joins in with a rate cut to provide the much needed fillip to stranded infra/ power projects.”
However, future is not so bad for the construction sector. Says Parvez Akhtar Qazi, analyst, Edelweiss Securities, “We continue to remain positive on the construction sector from the medium term perspective with interest rates expected to ease. We expect earnings growth to improve in FY14 due to likely lowering of interest rates and low base of FY13. An upcoming large opportunity for the sector is there in the form of the Dedicated Freight Corridor project for which we expect project award to begin during Q4FY13.We expect other segments of infrastructure to also pick up pace, given the increasing government focus on the same.” Power transmission line companies are already doing well thanks to robust awarding activity by power Grid. Competition has also reduced which augurs well for margins.
Larsen and Toubro, Cummins, KEC International and Havells are the top picks of the sector.
