Improving project execution and new order inflows will help companies deliver better numbers.
The fortunes of the infrastructure construction companies are expected to change soon and for the better. The first three months of the current financial year were not impressive for these companies, considering that new order intake and execution of the existing ones were impacted by delays in the awarding of projects, particularly road projects, and also by the heavy rains.
Even the second-quarter results may not throw up surprises. Not surprisingly, the stocks of the major players have significantly underperformed the broader markets, especially in the last two months. But that could be history soon, with the trend seen reversing in the second half.
| HIGH VISIBILITY | |||
| PE (x) FY12E | OB* (x) | EPS^ CAGR | |
| HCC | 20 | 5.3 | 39.3 |
| IVRCL Infra | 13 | 4.2 | 24.7 |
| NCC | 11 | 2.8 | 24.7 |
| Gammon Ind | 12 | 3.3 | 22.3 |
| L&T | 23 | 2.9 | 25.0 |
| * OB stands for order book to sales(FY10) ^ In (%) over FY10-12 | |||
“The construction sector is coming out of the weak first half of the current financial year and would see robust activity in terms of the on-ground physical execution, as the order book to sales continues to be strong and the impact of the monsoon is over. This will also reflect in the financials of the companies, which we expect to improve in the coming quarters,” says R Murali Krishnan, head of research, Ambit Capital. Analysts also believe that with the availability of funds, both equity and debt, the companies are now in a better position to execute projects.
New business
Besides improvement in execution, the flow of new projects, too, is expected to increase as companies step up to meet year-end targets. “The macro environment is positive, with a strong order intake expected from sectors like roads, power, urban infrastructure, ports and irrigation. But due to the monsoon, order growth slowed in the second quarter of 2010-11. We expect it will pick up in the second half,” says Dhirendra Tiwari, research analyst, Motilal Oswal Securities, in his report on the sector.
High on visibility, low on valuations
The improvement in order intake will further boost the already strong order-book position of companies (it is now about 3-3.5 times of annual revenues), which could result in an earnings growth of 25-28 per cent over the next two years. However, the strong growth in earnings and the improving business environment are yet to be reflected in the valuations as most of the companies are trading at 8-12 times the forward earnings, which is at the bottom compared with historical valuations. “Valuations for the sector are attractive, given its significant underperformance in the last few quarters,” says Rajat Rajgarhia, director research, Motilal Oswal Securities.
Read on to know the prospects of the top companies in this space.
HCC
HCC, which is a diversified construction company, has seen its order book moving up 25 per cent in the June quarter. It stands at Rs 19,300 crore or almost five times its 2009-10 revenue, which is the highest in the construction space. From here on, improving execution, contribution from the real estate business and BoT (build-operate-transfer) road projects should help the company report strong revenue growth — its earnings are expected to grow about 35-40 per cent over the next two years. Further, the listing of Lavasa (Rs 2,000-crore IPO) could unlock value for the shareholders. Investors can buy the stock, which is valued at Rs 78-80 per share based on the sum of part valuations.
IVRCL Infra
IVRCL Infra, which is well diversified in terms of segments and regions, has suffered in the past due to slow execution in some of its projects, including in Andhra Pradesh. A strong order book and improving execution could see the stock get re-rated. The company has an order book of Rs 23,300 crore, which is over four times its 2009-10 revenue, thus providing strong visibility. In addition, its subsidiaries IVR Assets and Hindustan Dorr Oliver, too, are expected to do well, as a result of which the consolidated earnings could grow 25-30 per cent over the next two years. The stock is valued at about Rs 200-220 per share taking into account its stake in subsidiaries, which offers a good investment opportunity.
Nagarjuna Construction
Nagarjuna Construction, which is a leading player in the construction space, expects better execution in the second half of the current financial year. The company currently has an order book of Rs 16,000 crore or almost three times its 2009-10 sales, which should lead to an earnings growth of about 25-27 per cent over the next two years. This year, the company will commission its three BoT projects, which could contribute about Rs 155 crore in revenue next year. While its real estate project in Dubai has seen traction (the company has sold about 300 apartments) and should add to the overall revenue growth, its progress needs to be monitored. On the basis of the sum of part valuations, the stock is valued in the range of Rs 200-210 per share, which provides a good upside considering the current price of Rs 154.
