Construction stocks on a dream run

Strong order book, impressive results in March-ended quarter are fuelling a boom in construction sector stocks. Net profit of nineteen construction firms increased by 143 per cent to Rs 104.69 crore in March quarter against Rs 43.16 crore reported in the previous comparable quarter.

In the last two months, market capitalisation of 51 construction stocks appreciated by 20 per cent, from Rs 8,783.80 crore on March 31 to Rs 10,521.55 crore on Tuesday.

The Bombay Stock Exchange's (BSE) Capital Goods index, which includes construction stocks, outperformed the Sensex during the period. It appreciated by 12.64 per cent compared with just 3.42 per cent rise in Sensex in the period.

Ansal Infrastructures share price almost doubled from Rs 111.95 on March 31 to Rs 217.20 on Tuesday. Unitech appreciated by 46 per cent to Rs 492.75 from Rs 337.35 on March 31, 2005.

During the same period, Simplex Concrete Piles appreciated 31 per cent to Rs 658.85 from Rs 502.40, Nagarjuna Constructions stock appreciated by 23 per cent to Rs 773.60 from Rs 630.25 (with 108 per cent rise in net profit to Rs 23.62 crore), Gammon India spurted by 28 per cent to Rs 281.89 from Rs 220.20 after the company announced 37 per cent growth in net profit to Rs 14.31 crore.

D S Kulkarni Developers stock surged to Rs 95.95 (Rs 29.70), Petron Engineering to Rs 196.10 (Rs 126.15), Arihant Foundation to Rs 93.40 (Rs 35.04), Ansal Housing & Constructions to Rs 81.45 (Rs 44.85) and Ansal Buildwell to Rs 44.42 (Rs 21.35) are the other few stocks appreciating more than 50 per cent in the last two months.

According to a sector analyst with a domestic broking firm, the current boom in infrastructure spending would translate into new construction orders worth Rs 4,09,400 crore during FY04-08, a sharp rise over the previous five-year period.

With construction firms' order books already at 2-3 times their current year's revenues, growing order flows would reduce competitive pressure in the industry thereby keeping operating margins stable. A robust order book position and stable margins will be driving up earnings at a compounded annual growth rate of 33 per cent in FY06, the analyst added.

A fund manager with a domestic mutual fund said, "The order books for leading construction companies are full for the next three years and most of these companies have started refusing fresh orders."

This situation is also going to result in strong revenue growth for the industry over the next 2-3 years. Revenues of leading players such as Gammon India, HCC, Jaiprakash Industries (JIL) and Larsen & Toubro will rise at an annualised 25 per cent rate.

With easing competitive pressure, operating margins would improve across the industry. Though the presence of too many players may spoil the party. But analysts are confident that organised players will emerge winners in the long haul as a company's experience and size become important for bagging large contracts.